Why Ramit Sethi Believes This Piece of Housing Advice Is 'Financial Propaganda'

The personal finance advisor frequently challenges the conventional wisdom on housing.

"House prices always go up. You're throwing money away by renting, and paying your landlord's mortgage while you're at it." Odds are that you've heard this oft-repeated financial advice before.

To Ramit Sethi, author of I Will Teach You To Be Rich, it's not financial advice. It's financial propaganda. He says renting can be a better choice than buying a home, and house prices don't always go up. Recently, he compared buying a house to buying a car, because the minute you make the purchase, you're underwater.

Considering how often we hear about the importance of owning a home, Sethi's take might seem way off. But he makes some good points that are worth thinking about, especially if you're debating whether to buy or rent.

House prices don't always go up

It's amazing how it's so widely accepted that house prices will always rise when we just had a housing crash less than 20 years ago. Real estate, like any other market, goes through its ups and downs. Some experts even say we're in a housing recession right now.

Now, one could make the argument that given enough time, real estate prices will go up. That's true, but there is a counterpoint that home buyers need to know.

The real estate market might rise as a whole, but this varies quite a bit from home to home. Some houses could double in value over the next decade. Others might only go up by about 10% or not increase in value at all.

That's the problem with the idea that house prices always go up. It can give you a false sense of security in what you're buying. When you own a home, it's not the entire market that matters, it's the value of your specific home. To come out ahead, you need your home's value to rise more than it's costing you in maintenance, repairs, interest to your mortgage lender, and so on.

"The minute you buy a house, you're underwater"

A common saying about buying a new car is that as soon as you drive it off the lot, you're underwater. It's no longer new, so it's worth less. If you paid for it with an auto loan, then you could be in debt for more than the car is now worth.

Sethi applied that same logic to buying a house, although it's not a perfect comparison. Houses don't immediately decrease in value like a new car, so you're not underwater because your house lost value. What puts you underwater are the closing costs you pay when buying a home. According to Zillow, these normally equal 2% to 5% of the purchase price of the home.

As you build home equity over time, it balances out and overtakes those extra fees you paid. Assuming your home grows in value enough, you'll eventually be at a point where you could make money by selling it.

This doesn't happen overnight, though. Sethi recommends only buying a home if you plan to live there for at least 10 years. The reality, as he puts it, is that "if you buy for a short period of time, when you factor in all costs, you will almost certainly lose money."

There's nothing wrong with renting or buying

Sethi sometimes gets pushback for being against home buying, but that's not really true. He's one of the most prominent financial personalities to go against the grain on some common advice, but he also says there's nothing wrong with buying a home. What's important is seeing if it makes sense for your financial situation and lifestyle.

Specifically, here are five guidelines Sethi recommends to decide you're ready to buy a home:

1. You'll live there for at least 10 years. If so, it's far less likely that you'll lose money when selling your home after factoring in all the costs involved.
2. Your total monthly housing costs will be lower than 28% of your gross monthly income. If they're higher, you could be overwhelmed with expenses. Sethi says there are some exceptions to this guideline, like if you live in a high-cost-of-living area.
3. You've saved a 20% down payment. It's possible to buy a home with less, but Sethi recommends this number so you get into the habit of saving and avoid private mortgage insurance (PMI).
4. You're okay if the value of your home goes down. Your home's price may go up, but if your main focus is investing, an index fund could provide a much greater return.
5. You're excited about buying a home. A home purchase should be something that makes you happy. If you're doing it because people are pressuring you, it's better to keep renting.

If you want to buy a home and it fits your situation, that's great! But if you're perfectly happy with renting, or it's a better fit for you right now, there's nothing wrong with that, either. Base your decision on what works best for you, not cliche advice or what other people think you should do.