This recent and nationally representative AMD.com comment reflects a general lack of housing understanding in the United States.

6/11/2009 8:58 AM  really wrote:

”Why buy a house when you can rent one…
Why buy a car when you can lease one….really??!!

All these don’t buy, prices are going to fall through the floor/roof makes me laugh.
If you plan to live in a house for more than 10 years or (drive a car for more than 5) it absolutely makes no sense to rent /lease.

A car’s value depreciates and it still makes sense to buy.
Unless you are in San Fransisco, Las Vegas, or on a Florida beach (i.e. 99% of America that is not these places ) you can at least expect home values from 2009 not much below what it will be in 2019.”


The AMD.com Thoughtful and Insightful Response:

With all do respect, I have to challenge each of your assertions.

Houses = Cars

Your comparison of houses to cars demonstrates a fundamental lack of understanding.

A car is by definition a “Depreciating Asset”.  A buyer purchases a Depreciation Asset to consume the benefits the resource provides with the expectation/knowledge that the value of the asset will decline with use.

If you can afford to buy a car and have need for one, knock yourself out.  In fact, this would be a great time to buy a used (and maybe a new) car given market conditions.

A house, throughout history and at least for the last 60 years in the U.S., has been an appreciating asset during good times and at minimum a store of value during bad times.  How many people have you met during your lifetime that purchased a home with the expectation that its value would decline with use?

The two are not comparable. 

The average American can engage in no more financially disastrous activity than borrowing a large sum of money to buy a depreciating asset in a highly leveraged transaction.

If you need a house, can afford a house and are unconcerned about the possibility of that asset’s value declining precipitously, then I have no problem with you or anyone else making an informed purchase.  But how many American’s are truly informed about the financial risks of such a transaction?

I am not anti-homeownership.  I simply recognize that homeownership only makes sense when you don’t dramatically overpay for the asset relative to its fundamental value or your personal financial situation.

Rigid Axioms

You are wrong in stating that “if you plan to live in a house for more than 10 years it makes no sense to rent”.  You have stated a rigid axiom that does not always apply in dynamic circumstances.

Just because something has been so historically, does not mean that it will continue to exist in the future.  See Lehman Brothers.  Throughout the Housing Bubble your logic was used to proclaim that Housing Prices could not fall nationally because they never had.  Houses were perceived to be riskless based on 60 years of history. 

I note that following the Japanese Housing Bubble home values fell annually for 15 straight years and are likely to continue their decent given Global and Japan-specific economic conditions.

I guarantee you (to the extent that one person can guarantee something to another) that people who relied on your baseless assertion and bought homes during 2004 – 2006 in San Francisco, San Diego, Miami, New York, Boston, Tampa, Sacramento, Phoenix, Las Vegas and Naples will not recoup their purchase values in real terms within the decade. 

You may be right about purchases today or in other areas of the nation working out 10 years from now, but your logic is baseless.

Finally, even if we accepted your assertion as fact you seem to be ignoring the reality than many people buy a home with the expectation of living in it for less than 10 years.  What advice would you offer these people in an environment where prices are collapsing but still wildly overvalued relative to historically verifiable valuation relationships?

If the more transitory Americans decided to sit out this market, the price collapse would really get interesting.

Stating the Obvious

I note that Florida and California by themselves constitute in excess of 18% of the U.S. population.  While not every house in these states was affected by the Housing Bubble and its present collapse, you are out of touch to believe that only 1% of the U.S. population is taking on considerable financial risk through home purchases.

Furthermore, I don’t think you have considered how debilitating or restrictive being underwater on your mortgage can be.  Few people can predict with certainty their lives over a 10 year period.  If an underwater homeowner wants or has to sell his house, options are limited.  These include becoming a cash-flow negative landlord, foreclosure or writing a considerable check at closing the size of which few Americans can afford.