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Yesterday, my friend and fellow Fool Morgan Housel got one thing right for sure: I love to disagree with him. That's why it may be surprising that I'm not going to disagree with his views on housing. That may be particularly surprising since I recently took a bullish stance on the investment characteristics of a home.
Fact: It's a crapshoot whether most people make money on the purchase of their home.
OK, so I'm using the word "fact" pretty loosely there, but I'll bet that most people don't end up making money -- or at least worthwhile money -- on their home purchase. Not that they'd know, because I'm sure a fraction of a fraction of a percentage of people actually keep track of all of the financial costs and gains associated with their home, so that they have a full picture of their returns on the day they sell their house.
Which brings me to...
The real reason your home will be a poor investment
Morgan hints at this in his article yesterday, but maybe I'm just a dunce who likes to be beaten over the head with very blatant conclusions. So here it is, spelled out: Americans are terrible at buying homes.
Yes, that's right. As Oprah would say, "You're terrible at buying a home, and you're terrible at buying a home, and you're terrible at buying a home!"
Putting on my exaggeration cap, I'm thinking I could count on one hand the number of people nationwide who sat down with their Realtor and had a serious talk about price-to-rent ratios before doling out the down payment. Those ratios aren't mysterious and hidden (Morgan has a list of major cities in his article). They're not difficult to understand. And it's been a long time since I was knee-high, but I'm pretty sure you learn the required math skills long before leaving elementary school.
And that's not to mention the interesting -- though admittedly anecdotal -- mortgage-interest misunderstanding that Morgan highlighted:
I recently posed a simple question to 10 friends whom I consider fairly smart: If you have a 30-year fixed mortgage at 6% interest, what percentage of your monthly payment goes toward principal in the beginning? Six answered 94%, which is exactly wrong. The correct answer is 16%.
Along with the sad truth of how mortgage amortization works, Morgan points out that the average length of time that homeowners own their home is eight years. Which is great if you're a bank collecting the interest (since most of the payments to that point will have been interest), but terrible if you're an owner who thinks they're building wealth.
And when simple concepts like these are so badly misunderstood -- or simply ignored -- is there any hope at all that potential homebuyers might sit down with some paper and a pencil to plot out all of the future costs and returns of owning a home to determine whether it's really a wise purchase?
Becoming a terrible investor in one simple phrase
But all of that can be kicked to the curb because we can quickly and easily get to the bottom of Americans' problem with buying homes by examining one simple little phrase that's been uttered over and over and over ad nauseum: "The American dream."
Buying a home is part of the American dream. Sure, it sounds good, but what do dreams have to do with investing? Investing can fund dreams. Big dreams can inspire investors. But when the asset you're buying is also a dream ... watch out!
Americans are poor homebuyers simply because they don't think about a home the way a savvy investor approaches an asset purchase. They say, "I'm staking out my piece of the American dream," and assume the rest works itself out.
A wise middle school science teacher once told a younger version of me that when you assume, you make an ass out of you and me.
Change ain't a-comin'
For the nation as a whole, this just isn't going to change. We love our American dream just like apple pie and baseball. Even if cupcakes now trump apple pie and most ADD-riddled Americans prefer the fast pace of football or the bone-jarring brutality of UFC to baseball.
More importantly, though, there is a massive industry built around housing, and it stands to take a hurtin' if consumers get smarter about the way they buy houses. Realtors take massive rips on either side of a home transaction -- the more, the better! -- and homebuilders such as KB Home (NYSE: KBH ) , Toll Brothers (NYSE: TOL ) , and Lennar (NYSE: LEN ) have product to move -- all the better if they can do so at unrealistically high prices.
Banks such as Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) , and JPMorgan Chase (NYSE: JPM ) would obviously like to avoid a repeat of the past few years, but even for them, the rapidly churning, price-is-no-issue housing market is peachy, since they collect fees and pawn a lot of the risk off on investors.
I've pulled few punches with this industry, whether it's the sort-of-but-not-quite-advisor Realtors or the let's-take-the-easy-way real estate appraisers. But in all of the post-meltdown rumblings, there doesn't appear to be any big upheaval in the way the industry operates.
So where's the silver lining?
It's simple: You don't have to be bad at buying a home. You can be Foolish about it. We're a nation of terrible homebuyers, yet Fools can decide to step out of the box, look at the numbers, and do the work that 99.9% of homebuyers aren't doing. And you can ditch the delusion that because it's called "the American dream," it will automatically work out in your best financial interest.
Of course you could also ignore everything I've said here and tell me to go climb a tree. That's fine, too. I recognize that people may want to buy a home for the same reason they'd want to buy a big-screen TV. The home may be near good schools, have the backyard-barbeque-party vibe that you yearn for, or have a killer Viking kitchen.
But if that's the focus of your homebuying experience, don't blindly assume that it'll work out from an investment angle.