Own vs. Rent? Ramit 'I Will Teach You to Be Rich' Sethi Thinks Buying Your Home Is a Terrible Idea
And guess who is behind the housing crisis? Your parents and neighbors.
This is the full interview from my conversation with Ramit Sethi on renting vs. owning a home, which was the basis of a story for Salon.
Vanessa McGrady: Was it ever smart to buy a home in recent American history?
Ramit Sethi: Yes, absolutely. It has been a good financial decision to buy a house for many decades. Houses were relatively affordable for a long period of time in many cities. However, things have changed in a couple of ways. First in high cost-of-living cities, prices have eclipsed what would make buying a good financial decision. These are cities like New York, San Francisco, Los Angeles. And second, that dynamic has now spread to 100% of the top 50 US metro cities, where it is more expensive to own than to rent. So, housing prices are historically high, and that really calls into question whether buying makes financial sense for millions of Americans right now. The answer is, no.
VMc: Do you ever see that changing? I don't, but I'm sure you think about this a lot. Will there ever be a time where people could spend a reasonable 20% of their income on housing?
RS: Well, the guideline is typically 28% of gross income or less on total housing expenses. I do think there's a future where in some cities it will become much more affordable. In fact, we're already seeing double digit price decreases in cities like Austin, Texas. Even cities like Santa Monica have seen 7% decreases in rent. However, without massive changes to zoning laws, which are really the primary reason that housing is so expensive, we will not see widespread affordability for a very long time.
VMc: It also seems like permitting seems to be a problem for people. I guess that's also zoning, but permitting is slow too. It takes a really long time to get your house built or an ADU built.
RS: That's not an accident, that is intentionally done. We should, we should talk about who the real perpetrators are of housing unaffordability in America. It's not some scary bureaucrat in Washington. The real perpetrator of expensive housing in America is your neighbors and parents. It is the people who bought their house 50 years ago, 30 years ago, 10 years ago, and once they bought it, they became the landed gentry in America, which is homeowners. And homeowners do one thing: they become NIMBY [not in my backyard]. They pulled up the drawbridge behind them and said, “You're not allowed to build more housing in this town.” That means that in most cities across America, it is illegal to build large amounts of new housing. It is illegal to build duplexes, triplexes, skyscrapers, row houses, and apartment buildings. Guess what happens when you limit how much supply can be built.
This is really hard for people to believe they think there must be some murky government conspiracy. No, it's actually your neighbors and parents who have conspired to rig local governments across every city in America to make it incredibly hard to build housing. It's as simple as that.
VMc: They also don't like unhoused people, but they don't like Supportive Housing either.
RS: They have been using the same arguments for over 70 years. We don't want traffic. We don't want to cast a shadow from 10:03 am to 10:06 am on our kids’ playground. We don't have the infrastructure to support more housing, and we don't want homeless people, but of course, we should help them, just not in this town. NIMBYs are one of the most dangerous groups of people in America. I have very little sympathy for them.
VMc: They're also organized, and they show up at city council meetings.
RS: That's correct. When you're 78 years old and you've owned a house for 40 years, guess what? Guess what time they schedule these meetings to happen? On Wednesday at 2 pm. Who can show up to that? Except a retiree, the exact type of person who does not want any more housing built because they don't like change. There are structures that have been put in place systematically and intentionally to stop new housing from being built—even the time of meeting—they’ve decided to prevent younger people who want more housing, who want apartments and row houses and smaller housing options and flexible housing, they cannot even get in the same room because of the time of meeting.
VMc: Or they do it when you're putting your kids to bed.
RS: Exactly. That's the other one. You’re well informed on this.
VMc: I've been working on this stuff for like, a couple decades. Full disclosure, I am a property owner and a landlord, but I'm really nice. I wouldn't want Zillow to be my landlord. I think Zillow buys a lot of homes in bulk, also putting the prices of single-family homes up. And, you know, these large, not just Zillow, but large corporate landlords. So I think people are at the mercy of a corporate landlord that is basically using AI to set housing and algorithms to set housing prices. So when one goes up, they all go up.
There are so many drawbacks to renting, but also drawbacks to owning. What is a good situation like? What should people strive for in their housing search?
RS: In cities where housing is allowed to be built, corporate landlords have to drop their prices. Just because you're a corporate landlord doesn't mean you have some magical ability to charge whatever you want. People get distracted by the idea of these big corporate landlords—just like McDonald's or just like a grocery store, or just like any company—companies can only charge what the market will bear. The problem is not corporate landlords. The problem is that there is no supply. So any landlord, whether they're a mom and pop or a corporation is rationally going to raise their prices. That's the system that has been created. Corporate landlords, you may dislike them or like them, at least, they respond rationally, meaning they look at how much supply is out there and when there's more supply, like in Austin, Texas, Florida, many other places, they drop their prices. It’s just math.
VMc: Let's talk about buying versus renting.
RS: I've been talking about buying versus renting for 20 years. It is literally the single most controversial thing I say. And this shows you how insane the American culture around home ownership is. I have a very simple argument, which is, before you make the biggest purchase of your life, you should probably run a few simple calculations that shouldn't be controversial. In America, when you even suggest that maybe buying a house is not the best financial decision, that seems to attack American No. 1 religion, which is home ownership. Let me put it bluntly: in many cities right now, it makes no financial sense to buy, and you can actually make far more money renting than owning.
I'll give you a specific example. I was living in Manhattan and I kept a very close eye on other apartments nearby. There was a similar apartment, same square footage, same number of bedrooms and bathrooms, same view. Let's assume my apartment cost $3,000 for easy math. To own, that equivalent apartment would have cost 2.2 times more. Instead of paying $3,000 a month in rent, I would have paid $6,600 a month to own. If you calculate those numbers in a buy-versus-rent calculator, it will not make financial sense to buy in 30 plus years. You know what I did? I took that $3,600 instead of buying a house, which meant I had to go to fix things and repair things and put money inside, I just simply invested the money, and I have made more money renting for the last 20 years in superior locations with zero maintenance than I would have by owning a place.
This is like telling people the sky is green, they simply cannot compute it, and they use the same argument: “What about equity?” Well, I have equity too. It just happens to be in the top 500 companies in America. “You're throwing money away on rent.” Do you say the same thing when you eat out for sushi, you're throwing money away on sushi? You're paying your landlord's mortgage while I'm paying my sushi owner’s mortgage. We have a very distorted view of housing in America, because deep down, we believe successful people own housing and poor people rent. Not only is that wrong, that actually makes many people, particularly young people and people of color, feel ashamed that they cannot compete in today's housing market, and that's wrong.
VMc: For that whole equity question, you'd have to put that difference in some kind of compound-interest-earning vehicle, whether it's a business or stock market.
RS: That's the crux of it. You nailed it. So if you choose to rent, that can be a fine financial decision, even a good financial decision, but you absolutely, positively have to invest the difference between how much you would pay for rent and how much you would pay to own. If you simply rent and you do not invest your money, you're doomed. But if you carefully run the numbers and you decide it's actually superior to rent and invest some or all of the difference, then you can set yourself up for a very rich financial future.
VMc: What about having to move? What about stability? What about not owning your home and being in control? What about painting it? What about kids and school districts?
RS: For all valid questions for the biggest purchase of our lives, you have to start with the financial considerations. How much will it cost to buy? How much will it cost to rent? Then and only then do you factor in the non-financial consideration. But in America, we simply skip over the first one. Ninety five to 99% of people I talk to have never run a simple buy-versus-rent calculation. That is insane for the biggest purchase of your life.
I'll give you another example of something they don't do. People say you're throwing money away on rent, which I find hilarious. Do you know that right now, if you buy a house, you will pay more towards interest than you will towards principal for 20 years. So we might more aptly describe buying a house as throwing money away on interest. And I don't know about you, but I don't really like to throw money away on interest.
VMc: It's truly shocking. I've looked to see how much I've spent on interest, and it's staggering. It's like buying two houses.
RS: If you told someone that your $400,000 house will actually cost you over $850,000, they simply won't believe it. These numbers are so big and staggering and intentionally obscured that people simply don't believe it.
VMc: This article is changing by the minute, the more you're saying.
RS: You're so knowledgeable about this. I love talking to you, because no reporters understand this stuff. I love that you know this. I argue with people on Twitter for sport, and you should check that out.
Here's another consideration. You buy a house. You bought it for $300,000, Now it's worth $650,000. Good job. Congratulations. Now what? How do you get your money from that house? You could sell it, but because of NIMBY, there are no other inexpensive houses or smaller houses for you to buy. So now, if you're 65 or 70, you have to move to a place you have never been to. You don't even know where to buy groceries from, you move away from all your friends and network. So you can cash out from your house, or you take a home equity line of credit, a very sophisticated instrument, or you try to extract equity from your house, but now you've taken on debt, which is a very complicated instrument. In other words, so many people put the bulk of their net worth in an illiquid, geographically undiversified asset, never thinking about how they're actually going to get money from it.
Two other points: One is the risk of putting the bulk of your net worth into one house. We just saw what happened in the Palisades in Los Angeles and several other places. Generational wealth, another phrase that's used and weaponized by the realtor industry, the National Association of Realtors. If you're a kid, what would you rather receive in the unforeseen circumstance that your parents passed away? Would you rather get one house in perhaps an older area that you don't want to live in, a house that's deteriorating and has not been maintained, and split that house over three siblings? Or would you rather get part of an investment portfolio? I ran some surveys on this. The vast majority of people would rather get a portfolio. And yet, most parents, when they think about generational wealth, the only thing they think of is a house.
VMc: What about this idea? Own, sell it at high. Rent until everything comes down again, and just keep writing that cash and then use whatever extra cash to buy at a low.
RS: In general, the idea is, okay, let me tell you the problems with it. One, people are notoriously bad at timing the market. It's very difficult to know when things are high or low, until you look back in retrospect. Two, there are massive transaction costs with buying a house. This is why it's even funnier that people talk about buying a house and making a lot of money when the average homeowner does not stay in their house for 30 years. Every time they move, they are losing huge amounts of money.
If you're going to buy a house, I have a set of five rules if you're ready to buy a house, and one of them is you have to know that you are going to be there for at least 10 years. If you don't know that, don't buy the house, because the transaction costs are simply too huge. You have to spread them out. I don't love that strategy. But if you happen to be lucky enough to buy and sell at the right time, congratulations.
VMc: What else haven't I asked that I should ask that you want to talk about?
RS: I have several other things. First of all, I don't think buying a house is, on its own, a bad idea. I think that people simply do not realize you don't have to buy a house to build a rich life, and you absolutely need to run your numbers before you buy, that's number one. I'm sure when I buy a house, it will be a horrible financial decision, but not everything has to pencil out on a spreadsheet. It's not horrible. You just have to run the numbers, and you have to realize there are lots of ways to build a rich life, whether you own or whether you rent.
VMc: Whether you have a baby, whether you buy an expensive pair of boots, you should always run the numbers.
RS: Especially on a freaking house.