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Wednesday, September 22, 2010

Guest Post - Tom Graneau Author of Renters Win, Home Owner's Lose

Tomorrow I will be posting my review of this informative and thoughtful book, Renters Win, Home Owners Lose: Revealing the Biggest Scam in America
Today please enjoy a guest post from the author, Tom Graneau.
Renters Win, Home Owners Lose: Revealing the Biggest Scam in America

Renters Win, Home Owners Lose: 
A world-wind Reality

People buy homes for various reasons. According to the Federal National Mortgage Association, a government-sponsored enterprise also known as Fannie Mae, 43 percent gave safety as the reason for purchasing a home; 33 percent said that proximity to good schools was their number one reason; and 70 percent admitted that financial investment was their main motivation, down from 83 percent in 2003. It goes without saying that financial incentive is the number one motivation for home ownership in America.

This is not surprising when one considers the cooperative effort that goes into promoting the concept. The real estate industry, including banks, mortgage companies, the government, and various other organizations have come together with one voice, claiming that home ownership is the most reliable path to financial prosperity. Consequently, Americans are preoccupied over the idea of owning a home, thinking that it holds the key to their financial success.

However, when the long-term benefits of home ownership is examined closely in terms of financial gain, there is none. Statistical facts and historic trends show that nothing consumes more of people’s hard-earned income than the homes they buy. Furthermore, some of the most cash-depleted people in the United States are home owners, some of whom have purchased more than one home. For instance, more than 85 percent of the 78 million baby boomers in the U.S. have bought and sold several homes. Yet, close to 90 percent of them are broke. The logical question is, where is the wealth earned from the home. Additionally, more than 2/3 (78 percent) of American families are home owners. Nonetheless, the majority of us are strapped for cash, have little or no retirement savings, and are deep in debt.

What is wrong with the financial claim tied to home ownership in the United States? Renters Win, Home Owners Lose: Revealing the Biggest Scam in America unravels the mystery behind the push for home ownership. All told, the whole idea is a scam that benefits the super-wealthy people in this country while leaving the majority scraping to pay a mortgage for pennies or less.

Interestingly, the book focuses on home ownership in America, but the troubling issues associated with home buying are not isolated to Americans. The problem crosses international boundaries. From America to Spain, other than the differences in currency and cultural practices, the home buying process is the same. Since real estate is the most expensive commodity in every culture, those who don’t have buckets of cash to pay for a home must rely on a mortgage. It is this initial step that begins the negative, snowball effective that jeopardizes the long-term financial success of the home owner.

Realistically, banks and other mortgage companies are not in the business of watching home owners become wealthy. They are in business to make money through asset accumulation. No other debt instrument has been more lucrative for banks and investors than home mortgages. Consider, for example, the following simple mortgage scenario, based on American economic conditions:
  • If you borrow $100,000 to buy a house for 30 years at 7 percent interest, your monthly payment will be roughly $665.00 for the life of the loan (principal and interest only). Your total cost for the mortgage will be approximately $240,000 (interest only), close to 2 ½ times the amount of money borrowed.
  • To breakeven on this business transaction, your home must appreciate about 13 percent annually. This would cover the cost of the 7 percent interest loan, the 4 percent inflation rate, and roughly 2 percent property tax and home owner’s insurance costs.
  • The average annual home appreciation rate is 4 percent, despite the real estate industry’s claim that homes appreciate 10 percent annually. Hence, a net zero percent return or less on the so called “investment.” The situation gets worse because this scenario does not account for other costs associated with the property—home owner’s insurance, property tax, maintenance, remodeling, etc.  
Granted, there are times when real estate prices go up, such as what we’ve seen in recent years. This rapid increase in home valuation is usually referred to as a bubble, suggesting an unusual increase from the normal trend, which poses its own dilemma. For instance, a  housing bubble always ends up with a bust, meaning that the high peak cannot sustain itself too long before leveling off again. When it does, people who paid high prices for their homes will most likely lose money when the market drops. Sellers who appear to make money as a result of selling their home at top price have two problems: (1) while they may have some cash on-hand, they are homeless, meaning no physical home address for the time being. (2) most people who sell their homes, almost immediately, buy another more expensive one,  which consumes any apparent profit made on the first home. In which case, they are left in a cash-depleted situation, which may encourage the accumulation of more debt in the future. Hence, the cycle continues.

For these reasons and more, when the opportunity for wealth building is compared between home buyers and renters, those who choose to rent have greater propensity for financial success. That also means that when conditions are equal in all countries, the outcome will also be equal, in favor of renters who decide to invest the extra money that would otherwise be wasted on a home. Renters can truly be winners, regardless where they live!

Tom Graneau is a personal financial management coach and author of a new book, Renters Win, Home Owners Lose: Revealing the Biggest Scam in America. If you are tired of the bondage of debt and want REAL answers to personal freedom and financial independence, begin by turning things around with a no-nonsense approach to your housing option.

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