GATES: What you’re saying is logical, but for some (whether age 22 or 32 or 52), commiting isn’t so scary. Yes; there’s a risk. There’s a risk when you buy a home anytime. There’s a risk when you marry. There’s arisk when you get into your car and turn the key. But there are inherent upsides to those of us mature enough to man-up and live within our means.

You’re going to have to duke it out with Yale’s Robert Shiller on this one. He wrote the book on this one and even provides his datasets on-line.

His inflation-adjusted numbers would argue with the “up” direction and are referenced by Jim in the original post.

Homes are not equally likely to be worth either more or less over time. They are vastly more likely to be worth more over time.

Again, please feel free to argue Shiller’s work.

I think you’re misunderstanding capital appreciation vs. payment of principal vs interest.

You are correct. I’ll re-iterate the statement thusly: payment of principal in the first five years of a typical 25-year mortgage is basically nil. Particularly after overhead fees associated with home ownership transfer.

The capital appreciation is arguably also nil, basically averaging inflation.

Gates, I’m gonna guess you also rail against owning stocks too since we recently underwent a market correction.

No it’s still all sitting there. Stocks have their own completely mis-understood risk issues, but they’re not related to buying a home in your first five career years.

Over time, real estate is an absolutely incredible investment…

Obvious blanket statement, just like the one you accused Jim of making. Let’s just talk to the guys who ran the Silverdome.

For those of you that have delayed or continue to delay, in 5 years if you’re still in the same location and don’t intend on moving, and home prices are up 20% from here…

OK, can we cycle back to reality here.
- People in the first 5 years of their career probably don’t know if they’re going to move in the next 5 years.
- It’s unlikely that prices will jump 20% in the 5-year period after you graduate and if they do, it’s likely that they’ll revert downwards at some point. If inflation-adjusted prices jumped 20% in 5 years, much of the young population would be completely priced out of a home in 15-20 years. It’s not like North America is really have a space crisis here.
- The first five years of a professional career typically mark the largest percentage jump in salary for the growing worker. A 5-year worker is likely to be able to afford a house that they simply could not in their first year.
- The average US student graduates with several years of debt to their name. Adding more debt in the form of a house magnifies their financial risk.

You can use 5:1 leverage, realize upside in capital appreciation based and actually OWN something as opposed to being owned by your landlord.

Yes, b/c a student fresh out of college needs 5:1 leverage. Again, the average student is graduating with several years worth of debt. 5:1 leverage is really not terribly important here.

And being owned by your landlord? Really? The contract I signed with my landlord didn’t involve any transfer of ownership rights. At worst, it is a trade (money for lodging) on par with a typical employment contract (time for money).

My renter’s contract has a significantly shorter duration than a mortgage. Relative to a mortage, it carries almost zero liability and zero downside risk outside of an initial deposit and maybe a lease period (which can typically be sublet in most states).

Given the significant liability risks that come with home ownership, I think it’s pretty obvious that being owned by your landlord is far less relevant than being owned by your home/mortgage.

“Because in most cases capital appreciation on homes is very slow at the start. ” I think you’re misunderstanding capital appreciation vs. payment of principal vs interest. In the early part of a conventional mortgage, the principal portion of the loan is small and builds over time as interest declines due to the way loans are amortized. However, capital is the increase in home value itself due to market rates. There is absolutely no difference (or way to predict) what housing markets are going to do in relation to how early you are in a loan. i.e. you increase value through 2 sources – capital appreciation and principal payments which reduce your loan amount.

On statements regarding income, signing bonuses, etc., forgive me, my comments were geared toward the professional/degreed segment of Americans. You rightly point out that white collar roles only represent a portion of America.

Gates, I’m gonna guess you also rail against owning stocks too since we recently underwent a market correction. Many of our friends and colleagues moved all their money out of equities at the worst possible point – the bottom. They went into money markets and CDs in early 2009 and since then, they’ve made 1% while US equities have returned over 60%. My 401K is now back to its old levels while theirs are 50% off.

What’s my point? People tend to make serious errors in their financial decisions based on recent events only without regard for the long-term historical performance of an asset class.

Over time, real estate is an absolutely incredible investment. You can use 5:1 leverage, realize upside in capital appreciation based and actually OWN something as opposed to being owned by your landlord.

For those of you that have delayed or continue to delay, in 5 years if you’re still in the same location and don’t intend on moving, and home prices are up 20% from here, will you still be saying “yeah, great move. I’m so glad I rented that apartment for the past 5 years. I’ve had so much flexibility, it’s just great. Who needed that large equity/capital build for a new down payment on a larger home now that I have two kids and need something larger?”.

If you KNOW you’re going to move, obviously it doesn’t make sense to buy. Everyone knows this.

The first 5 years are the most volatile years of a modern career (some would argue the first 10). And normal 20-year mortgages are basically just a risk for the first 5 years. Especially on any house you can afford in the first 5 years of a new career.

I think your points dance around a central theme, which is really that buying a home is a risk. In fact, buying a home is a significant risk.

- It’s potentially a locational tether. Such a tether can costs thousands in future earnings.
- It requires regular time-consuming maintenance, just to maintain its basic value. – It doesn’t appreciate faster than inflation and it may be “cheap” when you need it to be “rich”.
- It’s subject to multiple over-heads: taxes, “condo fees”, insurance, etc.
- It carries an interest risk, you could fail to “lock-in” at the right time or you could “lock-in” at a rate that really wipes out any appreciation in the home value.

And these risks work against young grads and people starting on new careers. Accumulating a safety net and building up savings and “human capital” is far more important in the 20s that making early payments on a mortgage.

However, what I am seeing are lots of 20-somethings getting in to homes primarily b/c these are the lowest prices they’ve seen since they could even think about buying a home. It’s unfortunate, b/c homes are still above historic averages, but sometimes the drive to get place just beats out the logic.

Personally, I’m looking 10 years down the road and really wondering what housing will look like when all of the boomers want to down-size?

And that’s really a key takeaway. The “average” person is just a likely to go “nowhere” or “down” in the first five years as they are to make any real headway on the mortgage.

Why would you pay rent when you could be building equity (with potential for capital appreciation)?

Because in most cases capital appreciation on homes is very slow at the start. For the first 5 years or so (of a typical 25-year mortgage), you earn very, very little capital. The value of the homes is likely to be equal to or less than the amount you paid for it (averages again) and you’ve been dumping money on property taxes and home repairs, just to maintain the value of your home.

On average, the first 5 years of home ownerships are at best break-even. And there’s a carrying risk in owning the home that you will have to take a loss on your house if you need to move.

Why would you pay rent when you could be building equity (with potential for capital appreciation)?
- Rent can often be cheaper and I can save the difference. Especially true when home prices have risen dramatically and people bought rental units for way cheaper than I could get them today.
- I don’t run the risk of suffering capital losses if I have to move.
- I don’t have home maintenance risk against the capital value of the house.
- I minimize my location risk.
- I save a lot of valuable time on maintenance, time that is likely better spent on continuing education (or just putting in some extra hours early on in the learning curve).
- I have more flexibility in managing my monthly costs. If I need to down-size my rental place because of changing life situations, I have that option readily available. Down-sizing your house is a non-trivial task that carries a lot of cost in both money and personal time.

While it may not be right for a lot of people, to make a blanket statement that you shouldn’t buy a house through most of your 20s just doesn’t sit right with me.

Look it’s obvious from your comments that you don’t really understand averages or median.

I see people jumping jobs for a 5K raise which makes no sense to me.
The median household income in the US is $44.5k. A 5k raise represents more than a 10% increase for the typical household (not just person, but household).

A good job offer that requires a move would not only have a full relocation package, but also a signing bonus.
Only in some mythical world of people with really in-demand skills. Ask the plumbers and McManagers of the world if their job offers came with signing and relocation bonuses. Those are the median income earners and they’re not getting signing bonuses when they need to move from Detroit to Texas to find their next job.

Now, I will agree, there are exceptions to this rule. Some people will get lucky (you obviously did). But most people will, inherently, not get lucky, and this “blanket advice” is very good for those people b/c it correctly delays the very heavy risk that comes with owning a home early in your working career.

However, I am a stability person. I love to travel, but I love coming back home and having a place to call my own. I work for myself and am confident in my ability to do so. I have another, more office job (but similar field) that provides a more constant paycheck. I went into my house knowing I could afford the payments, and got a fixed rate.

Not everyone wants that type of stability. Or the hassle, but for me, it was worth it.

Exactly! And a house may be great investments in aggregate, but one particular house may not be for your situation.

In my many years in the mortgage business, it was clear that not everyone is meant to buy a house. So many people buy for all of the wrong reasons. Most I think buy for investment reasons (even though they plan to live in it), and buy for fear of missing out.

I understand the time value of money, but if a house is a great investment now, it will be in five years, so there’s no rush. Your own personal circumstances are more important than what’s happening in the market, and that’s where your advice becomes critical. A few things need to be established before buying a house.