-----Original Message----- From: W. Kiernan <WKiernan at concentric.net> To: lbo-talk at lists.panix.com <lbo-talk at lists.panix.com> Date: Friday, October 02, 1998 7:54 AM Subject: Re: the most common leveraged purchase
>There's something wrong with the idea of the average house owner
>thinking of his house as an investment, leveraged or no. This is a
>mistake I see repeatedly; comparing a working-class house owner to a
>rich fellow idly gambling with investments.
>
Working class house owners see housing as an investment, too. First, even if the house does not gain in value, over time the repayment of the loan means they have a siginificant equity interest. That can serve as collateral for other loans (wise or unwise). More importantly, at the end of the mortgage term, your housing costs fall significantly. If you buy a house at age 35, at age 65 you own it free and clear and can retire with lower living costs. People make this calculation all the time.
If values do go up, the owner gets a leveraged return when the house is sold. This gives homeowners far more cash than they had when they bought the house. Owners (correctly in most cases) see this as a way of to "move up" to a larger or better house.
>Primarily, a house is not an investment! Not in any social class I've
>ever belonged to, anyway; I can't speak for the folks on the hill. A
>house is something to live in; you have to live somewhere. The
>alternative to a low down payment house for low income folks is to
>rent. When you rent, of course, your payments just go up in smoke.
>Certainly I'd rather buy a house with a slightly higher-than-usual
>effective interest rate than rent a house.
>
The idea that rental payments "just go up in smoke," but mortgage payments don't, implies that one is treating the house as an investment item as well as a consumption item.