Mortgages, Renting and "Dead Money"
Why Renting Isn't "Dead Money"
Been a lot of comments and articles lately about the housing market in the USA and the bubble in prices that has developed in certain areas.
Two excellent articles from Gary North spelling out the economics of the market very clearly - "The Marginal Home Buyer" and "Should You Sell Your Home?"
Anyway, back to the title of this post. It always infuriates me when some moron in the real estate business or, even worse, a supposed financial commentator refers to rent as "dead money" and implies that anyone who rents rather than buys is completely stupid.
There are many good reasons for owning your own home. The "dead money" argument is fallacious and here's why.
Suppose you buy a house on an interest only basis with 100% finance. And also suppose that someone else rents an equivalent house where the rental payments are the same as the payments on the mortgage in the first case. At the end of any period of time that you care to choose, who is better off? Answer, nobody. They are both in the same position. The person with the mortgage still doesn't own the property.
What people don't seem to understand is that mortgage payments are made up of two components - the interest on the outstanding loan plus the principal repayment. It's only this last element that is actually going towards creating an asset. The interest itself (initially, the largest part of the payment) goes to the financier and is "dead money" in the same sense that rent is.
Now, as I said, there may be very good reasons to buy your own home. However, the economics are not always as straightforward as real estate promoters like to make out.
Been a lot of comments and articles lately about the housing market in the USA and the bubble in prices that has developed in certain areas.
Two excellent articles from Gary North spelling out the economics of the market very clearly - "The Marginal Home Buyer" and "Should You Sell Your Home?"
Anyway, back to the title of this post. It always infuriates me when some moron in the real estate business or, even worse, a supposed financial commentator refers to rent as "dead money" and implies that anyone who rents rather than buys is completely stupid.
There are many good reasons for owning your own home. The "dead money" argument is fallacious and here's why.
Suppose you buy a house on an interest only basis with 100% finance. And also suppose that someone else rents an equivalent house where the rental payments are the same as the payments on the mortgage in the first case. At the end of any period of time that you care to choose, who is better off? Answer, nobody. They are both in the same position. The person with the mortgage still doesn't own the property.
What people don't seem to understand is that mortgage payments are made up of two components - the interest on the outstanding loan plus the principal repayment. It's only this last element that is actually going towards creating an asset. The interest itself (initially, the largest part of the payment) goes to the financier and is "dead money" in the same sense that rent is.
Now, as I said, there may be very good reasons to buy your own home. However, the economics are not always as straightforward as real estate promoters like to make out.
posted by Kevin Francis at
3:29 pm
