Monday, April 4, 2011

Misconstruing the American Dream

My jaw dropped; I couldn't believe the words I was hearing – Pop culture and self-proclaimed financial guru, Suze Orman, advising people that it no longer makes good financial sense to own your own home! It's Okay to be a renter for the rest of your life, she now says.

Now to be blunt, I’ve never put any stock into Suze Orman or any of the pop media “financial advisers” blather. Others often tout the importance of having savings, even when holding high credit card or other debt. You do the math: which has the highest financial return, aggressively paying down outstanding credit balances on your 14% interest credit card, for example, or putting that cash into savings account which only may be earning a measly percent or two?

Orman did admit that her opinion of home ownership has taken a 180 degree reversal. But this idea that our home as an "investment" in the traditional sense of the term, is only a fairly recent phenomenon. I recall the “American Dream” being instead the comfort and security that comes from home ownership in your retirement years – not viewing your residence as a big ATM machine. I would love to ask Orman just how much more retirement income should you plan to earn to pay for ever-increasing rent?

The reason most people (including me) chose to purchase our homes was, at some point in our lives, hopefully about the time one expects to retire, the mortgage is paid off and your remaining cost of housing drops down to a more affordable property tax and insurance. In our case, we were only able to retire because we no longer have housing costs (mortgage). There is no way we could afford to retire if we had to pay rent to some landlord. Did Orman forget that housing costs are the most significant portion of one's living expenses?

I’ve been listening to these so called media financial adviser shows for decades. Interestingly, in all that time, I have NEVER heard any of these advisors recommend for people to invest in real estate. Though its taken us decades, my wife and I did just that; pulled some equity from our home to invest in rental properties. Over time we were eventually able to shift our home mortgage over to the rentals which meant that our renters essentially purchased our properties and paid our mortgage for us. You will never hear such advice from financial "gurus" like Orman.

There is another advantage to owning your own home, particularly as one enters retirement age. Some of our friends have actually turned their homes into monthly income by taking out “reverse mortgages” on their paid off homes. In a reverse mortgage, one actually sells the equity in their home to a financial institution and so receive a monthly income. The owner is allowed to live in the house indefinitely. You can't do that if you rent all your life.

The prospect of being a permanent renter may have some short term benefits for a few. But I still see home ownership as an American Dream to the extent that, once owned outright, one can retire comfortably on a reduced income. The prospect of paying ever-increasing rent as a retiree appears downright frightening.

Because I'm a Skeptic I take the advice of “experts” with a generous dose of doubt. I like to ask the question, “who stands to benefit”? In most cases that turns out to be the person giving the advice. Besides, whether renter or owner, you still have to live somewhere.


The Mother said...

I would love to know on what basis she makes this proposal.

I looked at these numbers just last year when my son started grad school on his measly stipend--even at his pay grade, it made sense to buy (we didn't, though, because we couldn't find anything in his price range in a reasonable area).

DJan said...

I'm a little embarrassed to say I've never owned a home, have been a renter my entire life. It used to be frowned upon, but I could never find a way to make the large payments required to purchase a home. I pay a reasonable portion of my retirement money for rent every month, so I'm not hurting. I have annuities that doubled my monthly retirement income.

But if I could have afforded it, I would have purchased a home. My wandering days would have had to come to an end. BTW, it's good to have you back, Robert!

Rain said...

I've heard of her name but didn't know what she usually espoused more than stumbling across and occasional article by her that I quickly forgot what it advised. It sounds like I have missed nothing. I agree with you that purchasing a home is a better investment for quality living than renting somewhere. It teaches responsibility for the land and it never used to be that you did it to get a big payoff when you sold it. It was as you said, to be able to afford to retire. Pffft on her. She sounds like a shill for corporate masters-- keep those people satisfied with less and less.

John Myste said...

I have actually considered the wisdom of she said before. I did not read her article, but I know the total cost of housing is substantially more now that I own a home. If I were to rent, and save the difference, I once determined that in 30 years I would have far more cash than the value of the home will be. I purchased a 136,000.00 house, but I will have paid something like half a million for it (or would have. I refinanced at much better rates, so that is probably much less). At the time having several hundred thousand dollars was better than having a 136,000.00 home.

The trick, of course, is will you save that extra money? If not, then purchasing a home makes more sense. If one could do it, I think saving the cash and paying for a home interest free when they retire would be the best option.

I have not done the math recently and my match could easily be fault, as could my memory. I am just saying that I do see the argument for not owning a home. I would not want to go back to renting, though, because I want to be able to do with the home as I wish.

Kay Dennison said...

I have read one of her books and a decided her her acquaintance with reality is a nodding one. I wish I owned my own home but am practical enough to know that since I am physically unable to do most maintenance, it's probably best that I don't.

Robert the Skeptic said...

Dr. Mom With Oregon State University in town, we are know of many students whose parents have purchased condos, townhouses or smaller homes to house their students until they graduate. In fact that is the case with out next door neighbor where four students are currently living. It remains to be seen if the parents can get their money back from the sale after their kids graduate. Very common in town.

DJan you are fortunate that your annuities have done so well. We have friends who took their retirement in lump from their employer, invested it, and lost half in the big crash. If you have the income to support your housing costs, that is a good thing. For many, their lifestyle precludes being able to purchase, it's not for everyone.

Robert the Skeptic said...

Rain Yes there are more than strictly financial concerns to be weighed here also; ownership allows you to customize your home, remodel, essentially do what you wish with your living space. Renting is tenuous, a landlord can easily uproot you on a whim. I would not find that comforting.

John You are right, after adding interest one will pay about three times the original cost of the home. In recent years people did not worry about that because they were "banking" on the continual appreciation, expecting to "flip" the house for a higher amount - considering their house almost like a stock.

As for the discipline of saving the money one would save by renting, I think human nature would easily find a way to suck that into consumer goods instead.

The home purchasing advice often was to buy the most expensive house you could afford. We didn't do that, we bought what we could afford, usually a smaller home, so our mortgage was not a killer expense to our budget. Essentially we bought two smaller homes rather than one large one - the renters essentially purchased the second house for us. For a number of years we basically lived below our means which enabled us to afford to retire.

Robert the Skeptic said...

Kay In actuality, a lot of Orman's advice is just "common sense", something a lot of people lack. We are such a "consumer culture" and there are constant pressures that desire to separate us from our money.

I am a pretty good handyman, so the costs of maintenance is not a problem for me, I can do a lot of things. But if one had to pay for all repairs and maintenance, that is a valid consideration.

My issue with Orman is that she has characterized home ownership from being a good thing to a bad thing. As commenters have pointed out, different people have different living situations; her blanket dismissal of home ownership seems not well thought out.

Wow, that was awkward said...

Seems like a knee jerk reaction. When the economy recovers and the real estate market improves, she will flip flop again. The whole key with owning real estate is being able to ride out the bad times.

Robert the Skeptic said...

Awkward I agree 100%. Donald Trump made his millions in real estate as have others. My wife calls it a "get rich slowly" scheme.

What I keep waiting to hear is that investment types are buying up all these foreclosures and turn them in to rentals. I confess I wish I had the resources to do that myself.

Vagabonde said...

I always heard that buying a home made sense. My father immigrated to France with little money but he invested in real estate and when he passed away he had several houses and businesses. My daughter on the other hand bought a condo and it is worth less now than what she owes on it so it all depends on the market. My home is paid for and that is a relief now that I am retired.

billy pilgrim said...

owning a home with a tax deductible mortgage makes a lot of sense as long as your mortgage goes down a little each year rather than going up a lot.

i think you would really enjoy reading the big short by michael lewis.

John Myste said...

Let us not forget that if we can write off 10,000.00 and get 2000.00 back, then what this means is that we paid 8000.00 in gross income to interest, which is we do not get back. The sooner we lose the tax deduction, the better. If we made 2000.00 on the interest deduction, we are saying the glass is 20% full. What really happened is we lost 8000.00 on interest.

Nance said...

Like you, we worked to pay that mortgage off so that we could retire. We're grateful that it worked out, because an expected income stream from my personal investments did not. There's just about ZIP these days that one can feel confident investing in for reliable income for the long haul.

The downside for us is that this is a twenty year old home that, along with a yard, requires exhausting maintenance. We made as many of the big fixes as possible (roof, for example) just before retirement, but an old home is always in need of something.

Therefore, we need to sell and get into a condo. And there hangs a tale...

I agree entirely with your analysis of the pop financial advice. Thanks for this! I fear that much of my kids' generation will never own their own homes.

secret agent woman said...

I recently read n article about this very idea (not by Orman) and had the same reaction. I'll keep paying my mortgage, thanks.

adrielleroyale said...

I really tend to shy away from blanket statements anymore... I know my husband and I could not be those who save what they would have spent on house repairs and what not. It seems whatever we save, we spend on something else... It's a work in progress. Hence the illegitimacy of blanket statements so many times.

Antares Cryptos said...

I haven't watched her show, but if she meant it as an overgeneralized statement, then it fails to take individual circumstances into consideration.

For those in certain demographics and geographic locations home-owner ship can lead to unmanageable debt, which is what may have triggered current events.

Even real-estate investments can turn into disaster, overall they are "safer" than stocks. It really depends on the individual.

Robert the Skeptic said...

Vagabonde Those who bought during the height of the market rush are indeed in properties which have likely lost value. The conventional wisdom, however, is that the market will eventually again appreciate. But for some, walking away is their only option. Sad.

Billy They are talking about taking away the tax deduction on mortgages - dumb move. But yes, fixed rather than adjustable mortgages, are a safer bet. The balance does eventually get paid off. I'll look for the book.

John Yes, but that is what interest is all about; using someone else's money for your gain now. The alternative is to try to "save" to buy a house outright, that never was a practical option.

Robert the Skeptic said...

Nance Yes, all the big investment firms, which we used to trust as being "safe" and secure, now have blood on their hands. In many ways, I feel much safer having my money in paid-off real estate than sitting in some account that some financial planner is now playing with.

Yes, an old home does take more maintenance. But at our age, the idea of selling and moving to like a condo or townhouse (where exterior maintenance is often provided) might be a good strategic move.

SecretAgent I'm with you on that, for sure!

Robert the Skeptic said...

Adrielle The realities of life always intrude into our (savings) plans. We did have to refinance when we had kids in college, though we could not pay their entire way, we could only help. But yes, real estate is tangible, you can see it, touch it, you know it is "real". I have far more confidence in this than a statement from AIG which I would always wonder is doctored now.

Cryptos Well exactly... like they say, "your mileage may vary". There are so many variables; income security, likelihood of relocation, the amount of debt to income a household enters into - all of those things and more need to be considered. That is why I was so surprised when Orman made such a sweeping statement, as though it was good advice for everyone across the board.

Marylinn Kelly said...

It seems that many professional experts offer advice that is one-size-fits-all, while our circumstances are all over the place. There are ideals, of course but sometimes the ends just do not meet, we do what we can. I will admit prejudice but experts who turn up on Oprah make me suspicious.

Paul said...

Robert, this woman burns my butt ! She acts as if she's all that and she is a pop financial advisor or whatever. The sheep out there will listen to her. However, it's to be expected. The same sheep bought pet rocks and ouija boards for heavens sake.

These gurus keep making the do-re-me off of the backs of fol like you and me.

Robert the Skeptic said...

Marylinn Indeed, I am not sure how useful this generalized advice is to people unless the advisor can examine the individual's personal income/expense situation.

I heard a financial advisor give advice on a call-in program; the poor person had moved, lost her job, was sharing an apartment with her mother whose social security income was paying the rent. All of the adviser's advice fell flat - she wanted this caller to "save" yet she didn't even have enough to buy groceries.

Where these pop financial advisers shine is, as you say, on shows like Oprah where upper middle class women are blowing husband's salary on shoes and clothing. It sickens me.

Paul She does indeed, as if she is the end-all for all things financial. She is arrogant and over confident which I think viewers find attractive and viewers are drawn to. And, as I say, they NEVER tell you any REAL secrets on how to make real money.

Antares Cryptos said...

I wonder what her demographic is.

Robert the Skeptic said...

As I responded to Marylinn, I guess her demographic are white upper middle class stay-at-home mom's who have closets full of shoes and purses and SUV their kids to soccer practice... when they are not watching Oprah.

Antares Cryptos said...

Unless she is speaking to the lower financial demographic, her advice (on real estate) makes no sense.

I do think that the problem of people who spend more than they can ever afford begins with a lack of education, be that shoes, purses or superfluous gadgets. It amazes me how people think credit cards are there for reckless spending.

Paul said...

Robert : They don't tell us how to make real money, because they are winging it as they go. Suze Orman makes me want to throw up. It says something about us (Americans) that some of our people put stock in what this woman says !

GutsyWriter said...

I know that in Europe, especially Paris, many rent and that's not considered an evil thing, however, there are pensions over there that we don't seem to have here unless you're a government employee, or you put your own money aside, which is often not easy for people to do. So perhaps Suzie Orman is becoming French.

Robert the Skeptic said...

Cryptos We live where 70% of the economy depends on consumer spending. We are DELUGED with messages all our waking hours that tell us our lives will be better, we will be more sexy, we will even "save" if we just part with our money and trade it for "stuff". The only place I don't see advertising yet is on toilet paper, otherwise you can't avoid it.

I don't think education is that effective; we try to sooth what ails us with consumer goods, and if we are still unhappy, then we aren't spending enough.

The problem now is that Corporate America has laid off most of their consumers.

Paul Suze has made a niche for herself; the shallow media pays her to give us what we crave, quick and simple answers to our complex problems. Lots of people make good money shilling crap like that, Suze is just one.

Gutsy Americans live in mortal terror of the "state" ever providing any form of SOCIALISM in this country - Instead, we are all rugged individuals and are supposed to look out for ourselves. If someone can't cut it, it must be either their fault or they are somehow undeserving. [I think our national motto should be: "We are all in it alone."]

OnsenZen said...

My advice was to play Monopoly with real houses - it seems to have gotten us to early retirement!

Paul said...

Very true Robert-point taken...:-) What drieves me to distraction are these 25 year old experts who are going to show me how to live and do this or that. The ink isn't dry on there college diplomas yet for crimminy sakes !!

Anonymous said...

The new reality is that home ownership (aka the American Dream) is no longer a wise financial decision.

The American Dream and homeownership also included that fact that one worked for one employer for most of their adult life. You got a job, got married, had kids, got promoted, bought a house, got promoted, retired, and died in your home.

How many Americans today find themselves working for the same company their whole career? How many Americans find themselves working in the same town, the same state, their whole career?

If every change of job requires a sale of a home and the purchase of another then the benefits of home ownership which are tied to long term ownership are migated.

For those of us who bought a home 15 to 20 years ago, and have enjoyed the luxury of not having to move for our career and or sale our home we do believe in the American Dream and the value of home ownership.

The trouble is most young people are lucky to spend 2.5 years at any one employer....

We have actually become a society of migrants....and we actually have citizens who live in trailers and travel from job to job nowadays.

Robert the Skeptic said...

TAO You make several good points, things today are not as they were 30 years ago. I have seen stories in the news about unemployed workers who were unable to accept employment due to barriers in relocation because they were unable to sell their home.

And it is true that people can now expect to have many different employers during their working lifetime.

I have likewise seen stories about people who live in essentially recreational vehicles where they can up and relocate to where the jobs are.

Again, my issue was Orman's broad dismissal of home ownership in entirety. Clearly, the context in which the individual or family finds themselves is a mitigating factor.

KleinsteMotte said...

I think it makes sense to own a home but one ought to take a small one and pay it off quickly. Using the sale profit of that move to a medium sized place and pay it off fast. Finally move to a place of comfort, mortgage free, that you arrive at by investing carefully in purchases and sales.
To have a mortgage till retirement could mean you may have payed way too much interest and helped make someone else a richer.
It is so vital to plan purchases carefully so that they can be paid for fast. Often people will share their first investment in a home by renting out a portion. Over years some even keep their paid for homes and rent them out while moving themselves to a smaller place, using their rental income as income and saving taxes by writing off expenses on their property.
We are renting now but that is only because of the house fire. We shall be buying a small place soon. Renting is a way for many to live but it does limit growing assets over the long term.
The media tends to sell us what they want and it's not in our favour.
I was told by my accountant that using the equity in a home to take out funds becomes an issue when the property becomes part of an estate once the owners are dead. The heirs lose a considerable sum to the bank who issued the deal. Read the fine print very carefully.

Entre Nous said...

I'd buy an AirStream but I think they have to be plugged in......

Robert the Skeptic said...

Entre Nous If you have an AirStream you have a treasure... they are quite valuable today, they may even appreciate in value due to their rarity.

KleinsteMotte I am in complete agreement. We have "inheritance tax" in this country but it only effects a few billionaires.

Anonymous said...

I heard Suze Orman make that comment too and I'm still scratching my head about it. the only thing I can figure is that maybe she knows more than we do? That the housing market isn't going to recover? That the banks will saturate the market once they realease the foreclosures they've been holding onto. I hope that's not the case.

This was the same lady who once said that you can't live in a stock portfolio and recommended buying a home.

Maybe she was speaking to people who don't have a house, and not people like myself who own their houses outright?

If for no other reason, this is the reason why I would want to be a homeowner: where I lived before, there was a nice family living next door to me with 2 kids and they were renting. All of a sudden, after several years, they got a letter from the owner telling them that they had 30 days to vacate the property because she wanted to let her son live there. The upheaval in their lives was enormous with such little notice.

Robert the Skeptic said...

Anonymous I completely agree, I never liked the idea of being dependent on the whims of a landlord and the restrictions with personalizing our living space.

Very astute comments, thanks.