Why Ramit Sethi Believes This Housing Advice Is ‘Financial Propaganda’

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The personal finance advisor often challenges conventional wisdom about housing.

Key points

  • Ramit Sethi says the idea that house prices are always rising is financial propaganda.
  • He also disagrees with those who say renting is a waste of money.
  • Simplifications like these give people inaccurate ideas about buying a home.

“House prices are always going up. You’re wasting money renting and paying your landlord’s mortgage while you’re at it.” Chances are you’ve heard this oft-repeated financial advice before.

To Ramit Sethi, author of I will teach you how to be rich, this is not financial advice. This is financial propaganda. He says renting can be a better choice than buying a house, and house prices don’t always go up. Recently, he compared buying a house to buying a car, because the minute you make the purchase, you’re underwater.

Considering how often we hear about the importance of owning a home, Sethi’s grasp might seem like a long way off. But it does make some good points that are worth considering, especially if you’re wondering whether to buy or rent.

House prices don’t always go up

It’s amazing how widely accepted it is that real estate prices will still go up when we just had a real estate crash less than 20 years ago. Real estate, like any other market, has its ups and downs. Some experts even say that we are currently in a real estate recession.

Now, it could be argued that given enough time, real estate prices will rise. That’s true, but there’s a counterpoint homebuyers need to be aware of.

The real estate market may increase as a whole, but it varies a lot from house to house. Some homes could double in value over the next decade. Others might only increase by around 10% or not increase in value at all.

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That’s the problem with the idea that house prices are always going up. It can give you a false sense of security in what you are buying. When you own a home, it’s not the whole market that matters, it’s the value of your particular home. To come out on top, you need your home to increase in value by more than it’s costing you in maintenance, repairs, interest to your mortgage lender, and so on.

“As soon as you buy a house, you are under water”

A common saying about buying a new car is that as soon as you take it off the lot, you’re underwater. It’s not new anymore, so it’s worth less. If you paid for it with a car loan, you may have more debt than the current value of the car.

Sethi applied the same logic to buying a home, although it’s not a perfect comparison. Houses don’t immediately lose value like a new car, so you’re not underwater because your house has lost value. What gets you underwater are the closing costs you pay when buying a home. According to Zillow, these normally correspond to 2% to 5% of the purchase price of the house.

As you increase the equity in your home, it balances out and exceeds the extra fees you paid. Assuming the value of your home increases enough, you will eventually get to a point where you can make money selling it.

It doesn’t happen overnight, however. Sethi recommends buying a house only if you plan to live there for at least 10 years. The reality, as he puts it, is that “if you’re buying for a short time, when you factor in all the costs, you’ll almost certainly lose money.”

There’s nothing wrong with renting or buying

Sethi is sometimes pushed back because he is against buying a house, but that’s not really true. He’s one of the most prominent financial figures to go against some common advice, but he also says there’s nothing wrong with buying a home. What is important is to see if it suits your financial situation and your lifestyle.

Specifically, here are five guidelines Sethi recommends for deciding you’re ready to buy a home:

  1. You will live there for at least 10 years. If so, you are much less likely to lose money when selling your home after taking into account all the costs involved.
  2. Your total monthly housing costs will be less than 28% of your gross monthly income. If they are higher, you could be overwhelmed with expenses. Sethi says there are a few exceptions to this guideline, such as if you live in an area with a high cost of living.
  3. You saved a 20% deposit. It’s possible to buy a house with less, but Sethi recommends this number so you get into the habit of saving and avoiding private mortgage insurance (PMI).
  4. Everything is fine if the value of your home drops. The price of your home may go up, but if your main goal is to invest, an index fund could offer a much higher return.
  5. You are excited about buying a home. Buying a home should be something that makes you happy. If you’re doing it because people are pressuring you, it’s better to keep renting.

If you want to buy a house and this fits your situation, great! But if you’re perfectly happy with the rental, or if it suits you better right now, there’s nothing wrong with that either. Base your decision on what’s best for you, not on clichéd advice or what others think you should do.

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