Graham Stephan and Ramit Sethi: Why Buying a Home Is a Bad Idea
When it comes to housing, the conventional wisdom is that buying is better than renting. Most people assume that buying a house will result in increased property value and more equity. While this has been true for many years, the recent state of the housing market has brought this idea into question.
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Recently, New York Times bestselling author and YouTuber Ramit Sethi released a video in which he details why he doesn’t own a house despite being a multi-millionaire — and why he thinks renting is a better option than buying. Successful real estate agent and fellow YouTuber Graham Stephan responded with his own video to discuss where he agrees and disagrees.
The American Dream
In his video, Sethi was quick to bring up the American Dream and how it isn’t as relevant as it used to be. He said that the goal of buying a single-family home with a white picket fence and having 2.5 kids and a dog is the product of decades of marketing. It shouldn’t be seen as the only measure of success.
Sethi went on to say that the housing market has changed, making the traditional American Dream more difficult to attain. A decade ago, a house broke down to:
2.5 times your annual income
20% down payment
30% of your gross income toward monthly payments
Sethi pointed out that these numbers don’t add up in today’s market. However, Stephan replied that Sethi is omitting the fact that interest rates could be as high as 18% at the time of his example — when interest rates get cheaper, housing gets more expensive.
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Real Estate Prices Always Go Up
The common assumption about real estate is that the value is constantly increasing. Sethi bluntly said that this is not always the case. He pointed to the 2008 financial crisis, when housing prices fell significantly.
Stephan conceded that Sethi is right about a nationwide drop in housing value between 2008 and 2012. However, he pointed out that this was the only instance of a reduction in value across the U.S. in the past 100 years. On a national level, housing prices have seen an average increase of 2% to 3% over that span.
People Overlook Phantom Costs
If a monthly rental price and a monthly mortgage are the same, you might assume that buying is the better option, as you’ll gain equity. Sethi has researched and determined that owning a property instead of renting can amount to paying 2.2 times the price. This is due to “phantom costs,” such as:
Taxes
Insurance
Closing costs
Maintenance and repairs
Time spent
Opportunity costs
Stephan completely agreed with this point. He said that if you assume a 2% increase in value per year, you should plan on 1% of it going to these phantom costs. Stephan also pointed out that in today’s market, you could rent for half the price of owning and invest the difference into treasuries, with the profits covering your rent.
Another point that Sethi made is to include future costs in the equation, as well. While they might not average into your monthly home ownership costs from the start, you may have a sudden $25,000 roof repair expense 11 years from now.
Stephan related, noting that some of his rental properties recently had various unexpected expenses. Recently, he had to spend $4,000 to replace doors on one property due to rain. He needed to pay out $2,500 on a new wall heater on another rental property. The expenses can come out of nowhere, and if you want to own, you’ll need the capital to weather the storms.
Tax Deductions
According to Sethi, tax deductions are another area in which people are overly optimistic. He pointed out that the government reduced tax deductions from housing as recently as 2018.
Stephan agreed with this point, as well. The government now caps state and local tax (SALT) deductions at $10,000, which makes it pointless if you live in a high-income state like New York, California or New Jersey. You can also deduct mortgage interest up to $750,000 — if you itemize your deductions, rendering it useless for those who use standardized deductions.
Stephan explained that you need to know the nuances of home ownership to really take advantage of the tax benefits. He believes that many people don’t know them.
When To Buy a House
Another point that Sethi and Stephan agree on is when buying a house is a good idea. Sethi warned that buying property as an investment isn’t a magic way to get rich. However, he said that it can be a good financial decision if you’re planning on buying a house as a place to live.
From 2016 to 2020, he often advocated that you should buy a house if it met the following criteria:
It’s below your budget.
You can fix it up and make some money.
It’s cheaper than the actual market value.
If you purchased the property under these conditions in the past and the market dipped, you would break even. If the value increased, owning is much cheaper than renting, and you could make a profit despite closing costs and fees.
Today, however, Stephan agreed that the current market isn’t the best time to buy a house as an investment. To him, renting is cheaper than owning, unless you plan on living in the property for the next 15 years or longer.
The Verdict
Overall, Stephan found Sethi’s words valuable. While they didn’t agree on everything, there was a lot of alignment between their opinions and much wisdom for prospective buyers to consider. According to Stephan, this isn’t the best time to buy a house as an investment property, but it can be beneficial if you plan to live in it for the long term.
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