Houseonomics: Why Owning a Home Is Still a Great Investment

Overview

The subject of two articles recently published in the New York Times and endorsed by many leading economists, the authors have developed a completely new process for accurately assessing the value of your home or a potential home. For generations, buying a home has been the best investment Americans could make. But what about now? In the wake of the "housing bubble," some talking heads claim that it's become foolish to own a home with a mortgage. They're wrong. In Houseonomics, two leading economists demonstrate ...
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Houseonomics: Why Owning a Home is Still a Great Investment

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Overview

The subject of two articles recently published in the New York Times and endorsed by many leading economists, the authors have developed a completely new process for accurately assessing the value of your home or a potential home. For generations, buying a home has been the best investment Americans could make. But what about now? In the wake of the "housing bubble," some talking heads claim that it's become foolish to own a home with a mortgage. They're wrong. In Houseonomics, two leading economists demonstrate why owning a home is still an excellent investment for most people in most places and help you make smarter decisions wherever you are. This book isn't for aspiring slumlords or flippers: it's for anyone who simply wants to move towards financial security, with a roof over their heads, and a home to call their own. You won't find "too good to be true" schemes here: you'll find a sensible, rational, and totally up-to-date explanation of the economics of home ownership. You'll discover how to calculate the intrinsic fundamental value of a house based on a completely new valuation strategy developed by the authors; develop a vision for financial prosperity via home ownership; and treat housing decisions as the investment decisions they really are. Learn how to negotiate more effectively when purchasing, selling, financing, refinancing, or remodeling; decide when you should prepay your mortgage; and intelligently evaluate rental/vacation properties.
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Product Details

  • ISBN-13: 9780137133789
  • Publisher: FT Press
  • Publication date: 5/5/2008
  • Pages: 214
  • Product dimensions: 5.37 (w) x 8.18 (h) x 0.63 (d)

Meet the Author

Dr. Gary Smith is the Fletcher Jones Professor of Economics at Pomona College in Claremont, California and is affiliated with the Financial Economics Institute at Claremont McKenna College. He has published eight college-level textbooks, over 60 research papers, eight educational software programs, and is a noted public speaker. He has received national and international recognition in the media. His research has been featured in various media venues including The New York Times, the Wall Street Journal, The Motley Fool, Newsweek, and BusinessWeek. He has been interviewed on CNBC and was a keynote speaker at the Brookings Institution in Washington D.C. and the Mortgage Finance Industry Summit in New York City. He received his B.A. in Mathematics with Honors from Harvey Mudd College and his Ph.D. in Economics from Yale University.

Dr. Margaret Smith is President of Smith Financial Place, an independent financial planning coaching firm that provides holistic, comprehensive financial planning and life coaching services for its clients. She does not sell products or manage assets, but rather focuses on providing objective advice and coaching. She is a Certified Financial PlannerTM, a Registered Invest-ment Advisor, a member of the Financial Planning Association, and a Certified Integral CoachTM through New Ventures West. Margaret received a Ph.D. in Business Economics from Harvard and a simultaneous B.A./M.A., summa cum laude, in Economics from Yale. She has published various articles on real estate and finance.

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Read an Excerpt

Praise for HouseonomicsPraise for Houseonomics

"The Smiths have done their homework, and with their new book you can do yours too—on what, for most families, is the most important investment people ever make. Their careful analysis takes account of important elements of the housing decision that even most so-called professional advisers overlook. And their writing is clear and easy to understand. Their book should help millions of American families."

Benjamin M. Friedman,
William Joseph Maier Professor of Political Economy, Harvard University,
Author, The Moral Consequences of Economic Growth

"Houseonomics provides the most intuitive framework for understanding the power of real estate investing. It is a great toolkit for first-time homeowners and seasoned real estate investors."

Matt Thompson, Director of Business Development,
Sony Pictures Television International

"Recent studies show that more than 98% of all homeowners had gains in the purchase of their home if they have owned it more than five years. The numbers drop measurably for those who have owned for less than two years. Houseonomics is among the first books to inform current and future homeowners that owning a home should never be seen as a short-term speculative investment, but rather a sound long-term one. This is a simple to read but powerful reminder of the benefits of homeownership along with useful tips on how to navigate through the process of buying and selling."

Steve Murray, Editor, REAL Trends,
Coauthor, The Consumer Tsunami

"Houseonomicsis packed with insights for anyone who owns a home or is thinking about buying a home. The "Home Dividend" is an original and invaluable way of thinking about homes. Houseonomics opened my eyes; it will open yours too."

Chris Dialynas, Managing Director,
Pacific Investment Management Company (PIMCO)

"Housenomics is essential reading for anyone considering purchasing a home. It explains why owning a home is the best investment most Americans will ever make, and clearly lays out in everyday language and easy-to-follow numerical examples all of the financial principles associated with the purchase and sale of residential real estate. The book answers questions such as how to pick the best mortgage, how much money one saves by owning rather than renting, whether remodeling is a good economic investment, how tax breaks, leverage and compounding work together to make homeowners rich, and how to decide if a vacation home can be a good investment. World class economists Gary and Margaret Smith give readers the knowledge and confidence to ignore tainted advice from real estate agents or mortgage brokers and instead make informed decisions that are in their best interest."

Mike Schimmel, Managing Director,
Kayne Anderson Capital Advisors, L.P.

"No one explains the economics of the rent vs. buy decision as clearly as the Smiths. If you are looking to purchase a home, consider Houseonomics your 'House Buying 101.' A must read."

Jeff H. Ellis, CFA, Portfolio Analyst, Western Asset Management

"Few investors treat housing with this level of thoughtfulness and depth. Houseonomics offers an invaluable perspective on housing as an asset with returns that can be calculated and evaluated when considering home ownership and long-term personal portfolio management."

Kristin Horne, Principal, TPG Capital

"When it comes to houses, Americans suffer from a collective bipolar disease. In our manic state, we rush out in droves to buy houses before someone else does. In our depressive state, we hide our eyes when passing a 'For Sale' sign. This book is the therapy we need. Not another book offering get-rich-quick in real estate advice. Not another book proclaiming the imminence of the second coming of the Great Depression. This book charts the right path between housing mania and housing depression, offering wise advice for everyone thinking of make one of life's biggest and scariest decisions - buying that first new home."

Ed Leamer, Director, UCLA Anderson Forecast

"The Smiths have written a "just in time" book which will greatly help demystify the disinformation that is rampant about housing and real estate. Their academic backgrounds plus the wisdom of their advice on ownership of property puts them in a unique position to be of great value to the American as well as foreign consumer. This is a "must have" book in my opinion."

Frank Pecarich, Investor, Author, and Management Consultant

"Finally there is book that takes a rational and logical look at most people's biggest investment: their home. Houseonomics gives home-owners the tools to make decisions based on facts and not speculation."

Charles S. Mizrahi, Managing Partner, CGM Partners,
Author, Getting Started in Value Investing

"The Smiths' meticulous research supports a completely different approach to building wealth through real estate. Houseonomics won't make people instant millionaires, but it will provide readers with the opportunity for a comfortable retirement. Houseonomics shows that treating a house first and foremost as a place to live is actually the soundest long-term investment. It's a dose of common sense and financial planning that is much needed in today's housing market."

Matthew Haines, Founder, PropertyShark.com

"Homebuying can mean stressful encounters with The Industry: the lenders, agents, and lawyers who may not speak what you and I would call English. This book breaks down the Big Decision into small words and digestible concepts. The key is what the Smiths call the "Home Dividend"—an argument for homeowning and how it can serve your interests, not The Industry's."

Scott Tong, Correspondent, Marketplace public radio

"In recent years, Americans have bought and sold homes like they buy and sell stocks: as speculative bets on future resale values. Houseonomics brilliantly reeducates readers on the real source of wealth creation from home ownership—namely, the steady savings of rent and taxes that build valuable home equity over time."

—Joe Matt, Analyst, Capital Research & Management Company

"Houseonomics helps everyone to systematically and simply understand what is needed to maximize potential profit in finding and owning a home and also have more fun while doing it."

—Bruce Gordon Hut, CFA, Founder,
Kegani Pacific Investment Management Limited

"This book couldn't be timelier. With hundreds of thousands of Americans expected to lose their homes because they took out mortgages beyond their ability to pay, it is clear that home buyers need assistance—beyond the reassurance of the mortgage broker trying to close the deal and get his commission. This book, written in an easily accessible manner, provides that assistance; it lays out the economics of buying, owning, and financing a home."

Joseph Stiglitz, Columbia University, 2001 Nobel Prize in Economics

"The purchase of a home is the most significant investment decision confronting nearly all adults. Yet sound advice, untainted by the self-interest of real estate and mortgage brokers, is extremely scarce. In Houseonomics, the Smiths provide simple and understandable answers to the vexing questions surrounding homeownership, making it a valuable resource for anyone serious about their financial future."

Bryan White, Managing Director, BlackRock

"Houseonomics offers great insights about how to think about homeownership. Its approach is innovative, but the analysis is grounded in common sense. A useful primer for what is the most important investment most people make in their lives."

Paul Efron, Retired Partner and Advisory Director, Goldman Sachs & Co.

"This book is a common sense response to those who question the value of homeownership. The Smiths validate the argument that homeownership is normally a key component of lifelong wealth building. They present a practical guide to basic financial analysis for those planning on owning a home or who currently own a home."

Doug Duncan, Chief Economist, Mortgage Bankers Association

"There is a lot of wisdom in Gary and Margaret Smith's Houseonomics regarding the biggest investment that most people ever make. It is so well written that reading it is a joy and yet almost everyone can gain valuable knowledge in the process. The time you take to read this book will be a smart investment indeed. Having taught economics at Stanford for 35 years, I can only wish that more authors were as knowledgeable as the Smiths and wrote this well."

John B. Shoven, Stanford University,
co-author with Secretary George P. Shultz,
Putting Our House in Order: A Guide to Social Security and Health Care Reform

"The "Home Dividend" is a powerful concept and, indeed, an engine for prosperity."

Ed Yardeni, President, Yardeni ResearchIntroduction

The American Dream is to own your own home, whether it is a log cabin in Oregon, a farmhouse in Iowa, or a penthouse in Manhattan. Your home is where you eat, sleep, play, love, laugh, and cry. Where you read books, grow tomatoes, and play cards. Where you can be alone or with your family. Where you can be yourself. Your home is the biggest investment that you will ever make and can be the most profitable one, too. Over the years, millions of ordinary hardworking people have prospered simply by owning the home they live in. They didn't win a lottery or find gold in their backyard. They didn't inherit a million dollars from a long-lost relative. They simply made monthly mortgage payments instead of rent payments. You can do it, too.

When you are thinking about buying or selling a home, there is a lot to think about. Is now a good time to buy? Should you sell your home and rent while you wait for home prices to fall? Should you buy a new home or a fixer upper? Should you make a larger or smaller down payment? Should you trade up or downsize? Should you use a real-estate broker or try to do it yourself? Should you choose a fixed rate or an adjustable rate mortgage? A 30-year or 15-year loan? Should you refinance now that interest rates have fallen? Should you pay off your mortgage early? Should you remodel the kitchen? Is a vacation home worth it? What about a rental property? What can you do when you are retired and barely have enough money to buy food, but live in a home worth hundreds of thousands of dollars?

We wrote this book to help you answer these questions—and many more. We want to help you make smart decisions about your home, so that you can enjoy your home and profit from it, too.What Is Houseonomics?

We could have called this book Home Economics because a home can be a single-family house, apartment, condominium, duplex—pretty much anything you live in. But the term home economics has traditionally been associated with making biscuits and sewing clothes, and this book is definitely not about cooking and sewing. So we considered House Economics and thought it would be interesting to merge the words into Houseonomics, pronounced house-o-nomics. This book is about houses (and other homes too) and about many of the big financial decisions you make about your home.

This book is not encyclopedic. That would be boring to write and tedious to read. Instead, we put together a collection of useful principles, handy tips, and memorable stories—about things that can really make a difference.Who's Looking Out for You?

A lot of people make a profit from other people's homes: the contractors who build and remodel homes, the real estate agents who bring together buyers and sellers; the bankers who lend money to home buyers; the fund managers who trade mortgages among themselves, the agents who sell homeowner's insurance. They offer you advice on building, remodeling, buying, selling, financing, refinancing, and insuring a home. But their advice is suspect. Are their recommendations for your benefit or for theirs?

We don't have any conflicts of interest. We won't make a dime if you buy a home, remodel your kitchen, or choose a 10-year mortgage. Our goal is to give you useful tools and insights that you can use to make informed decisions.Our Stories

Financial decisions involve some unfamiliar principles. Even professionals make mistakes. So what can we expect from amateurs who will only buy and sell a few homes in their lifetime? A lot! We wrote this book because we know that anyone can learn to make reasonable financial decisions about homeownership. One way to learn how to make the right financial decisions is to identify ways to do it incorrectly. This book identifies several pitfalls to avoid.

Houseonomics includes many stories to show you the typical kinds of housing decisions that people face and how others have dealt with them—sometimes wisely, sometimes foolishly. All our stories are real. The reason we tell these stories is not to embarrass anyone, but to learn from their experiences. Heck, some of these stories are about mistakes that we have made. The names and some unimportant details in the stories are changed to protect the individuals' identities, and we sometimes combine two stories into one or split one story into two or three. Again, we want to do whatever will be most helpful to you.

Now, let's get started.

© Copyright Pearson Education. All rights reserved.

Read More Show Less

Table of Contents

Acknowledgments xix

About the Authors xxi

Introduction 1

Chapter 1 The Million-Dollar Question 5

Our Homes Are Our Castles 7

An Engine to Prosperity 8

Uncle Sam Wants You to Be a Homeowner 10

The Million-Dollar Question 13

Slow and Steady Wins the Race 15

The Bottom Line 15

Chapter 2 Your Home is an Investment 17

Investment Versus Speculation 17

Your Home Dividend 19

The Nifty Fifty 23

Waiting to Buy 24

It Is Hard to Time the Stock Market and Housing Market 24

Taking the Long-Term View 25

Don’t Day Trade Homes 26

Your Home Is an Investment 29

A Home to Call Their Own 29

Look at the Whole Picture 30

What Am I Supposed to Look at Again? 31

The Bottom Line 32

Chapter 3 Now is a Good Time to Own a Home 33

A Home in Fishers, Indiana 34

Cash is King 38

The Lynch’s Southern California Home 43

Your Home Is Not an ATM 46

The Millionaire Paupers 47

Housing as a Portfolio Decision 49

Homes North, South, East, and West 51

The Bottom Line 54

Chapter 4 Finding a Home and Closing the Deal 55

How Much Home Can You Afford? 55

How to Choose a Home 59

How to Choose a Realtor 61

Is the Price Right? 63

This House Will Be Sold on November 11 63

The 6 Percent Fortress 64

Moving Merchandise 67

Happy Clients 69

The Closer 70

The Times They Are a Changing 70

Match This 72

Realtors: Can’t Live With Them or Without Them 72

Negotiating Boldly 74

Good Things Come to Those Who Wait 75

Regression to the Mean 76

The Bottom Line 78

Chapter 5 Debt Doesn’t Have to Be a Four-Letter Word 79

Using Loans to Live Beyond Your Means 80

How to Invest Like Warren Buffett 81

Loans Create Leverage 82

Leverage + Compounding = Wow! 84

Loan Payments 85

The Unpaid Balance 85

Comparing Loans: The Total-Payments Error 87

The Right Way to Think About Loans 88

Bad News, You Won the Lottery 89

Can You Make Money Borrowing at 12 Percent to Invest at 7 Percent? 90

The Bottom Line 91

Chapter 6 Choosing the Right Mortgage 93

Finding a Lender 93

Getting Preapproved 95

Saving for Your Down Payment 97

Mortgage Terms 101

Mortgage Rates 102

Anchoring 103

Mortgage Points 107

Sure, I’ll Lend You Money 109

30-Years, 15-Years, or ? 109

Adjustable Rate Loans 110

Creative Financing 113

Buying a House with Creative Financing 114

Biweekly Mortgages 115

Graduated Payment Loans 116

The Bottom Line 119

Chapter 7 Refinancing and Home Equity Loans 121

Heads You Win, Tails I Lose 121

Prepayment Penalties 123

Does Refinancing Pay? 123

The Break-Even Refinancing Rate 124

Wake Up, Little Susie 126

The Time Value of What? 126

Mental Accounting 128

You Can Sell Your Home Without Selling Your Home 129

Say No to Credit-Card Debt 130

One Way to Pay for College 131

The Bottom Line 132

Chapter 8 Remodeling 133

Sunk Costs 133

Does Remodeling Pay for Itself? 135

Remodel Sooner, Not Later 139

Make It Bigger, Not Better 140

What’s a Remodeling Project Really Worth? 141

Leaky Windows 144

I’d Rather Do It Myself 145

Paying By the Job or By the Hour? 147

The Big Job in Waltham 147

The Bottom Line 148

Chapter 9 Rental Properties and Vacation Homes 151

You Used to Pay the Landlord, Now You Are the Landlord 151

Adverse Selection 152

Moral Hazard 152

Long-Distance Landlords 154

Ah, the Tax Code 156

Fishers, Indiana, Again 156

If I Bought It, It Must be Worth the Price I Paid 160

A Home with Two Rentals 161

Those Darn Taxes 162

The Investment Value of a Vacation Home 163

The Bi-Coastal Renkens 165

The Bottom Line 166

Chapter 10 Letting Your Home Take Care of You 167

HRAs 167

Life Is a Journey: From Porterville and Indio to Thatcher 170

Should You Raid Your IRA to Pay Off Your Mortgage? 171

Reverse Annuity Mortgages 173

Grandma Ford 173

What Do I Owe You? 175

RAMed by a RAM? 176

The Bottom Line 177

Chapter 11 Selling Your Home 179

Home Dividends, Again 180

Curb Appeal 181

Clean It Up! 182

Pictures on the Wall 183

Loss Aversion 184

Waiting for the Right Price 186

Our Price Is Firm, But the Terms Are Negotiable 187

The Bottom Line 187

Afterword 189

Appendix A An Owner-Occupied Home in Fishers, Indiana 191

Appendix B A Rental Home in Fishers, Indiana 195

Appendix C Your Home 199

Index 205

Read More Show Less

Preface

Praise for Houseonomics

"The Smiths have done their homework, and with their new book you can do yours too—on what, for most families, is the most important investment people ever make. Their careful analysis takes account of important elements of the housing decision that even most so-called professional advisers overlook. And their writing is clear and easy to understand. Their book should help millions of American families."

Benjamin M. Friedman ,
William Joseph Maier Professor of Political Economy, Harvard University,
Author, The Moral Consequences of Economic Growth

"Houseonomics provides the most intuitive framework for understanding the power of real estate investing. It is a great toolkit for first-time homeowners and seasoned real estate investors."

Matt Thompson , Director of Business Development,
Sony Pictures Television International

"Recent studies show that more than 98% of all homeowners had gains in the purchase of their home if they have owned it more than five years. The numbers drop measurably for those who have owned for less than two years. Houseonomics is among the first books to inform current and future homeowners that owning a home should never be seen as a short-term speculative investment, but rather a sound long-term one. This is a simple to read but powerful reminder of the benefits of homeownership along with useful tips on how to navigate through the process of buying and selling."

Steve Murray , Editor, REAL Trends,
Coauthor, The Consumer Tsunami

"Houseonomics is packed with insights for anyone who owns a home or is thinking about buying a home. The "Home Dividend" is an original and invaluable way of thinking about homes. Houseonomics opened my eyes; it will open yours too."

Chris Dialynas , Managing Director,
Pacific Investment Management Company (PIMCO)

"Housenomics is essential reading for anyone considering purchasing a home. It explains why owning a home is the best investment most Americans will ever make, and clearly lays out in everyday language and easy-to-follow numerical examples all of the financial principles associated with the purchase and sale of residential real estate. The book answers questions such as how to pick the best mortgage, how much money one saves by owning rather than renting, whether remodeling is a good economic investment, how tax breaks, leverage and compounding work together to make homeowners rich, and how to decide if a vacation home can be a good investment. World class economists Gary and Margaret Smith give readers the knowledge and confidence to ignore tainted advice from real estate agents or mortgage brokers and instead make informed decisions that are in their best interest."

Mike Schimmel , Managing Director,
Kayne Anderson Capital Advisors, L.P.

"No one explains the economics of the rent vs. buy decision as clearly as the Smiths. If you are looking to purchase a home, consider Houseonomics your 'House Buying 101.' A must read."

Jeff H. Ellis , CFA, Portfolio Analyst, Western Asset Management

"Few investors treat housing with this level of thoughtfulness and depth. Houseonomics offers an invaluable perspective on housing as an asset with returns that can be calculated and evaluated when considering home ownership and long-term personal portfolio management."

Kristin Horne , Principal, TPG Capital

"When it comes to houses, Americans suffer from a collective bipolar disease. In our manic state, we rush out in droves to buy houses before someone else does. In our depressive state, we hide our eyes when passing a 'For Sale' sign. This book is the therapy we need. Not another book offering get-rich-quick in real estate advice. Not another book proclaiming the imminence of the second coming of the Great Depression. This book charts the right path between housing mania and housing depression, offering wise advice for everyone thinking of make one of life's biggest and scariest decisions - buying that first new home."

Ed Leamer , Director, UCLA Anderson Forecast

"The Smiths have written a "just in time" book which will greatly help demystify the disinformation that is rampant about housing and real estate. Their academic backgrounds plus the wisdom of their advice on ownership of property puts them in a unique position to be of great value to the American as well as foreign consumer. This is a "must have" book in my opinion."

Frank Pecarich , Investor, Author, and Management Consultant

"Finally there is book that takes a rational and logical look at most people's biggest investment: their home. Houseonomics gives home-owners the tools to make decisions based on facts and not speculation."

Charles S. Mizrahi , Managing Partner, CGM Partners,
Author, Getting Started in Value Investing

"The Smiths' meticulous research supports a completely different approach to building wealth through real estate. Houseonomics won't make people instant millionaires, but it will provide readers with the opportunity for a comfortable retirement. Houseonomics shows that treating a house first and foremost as a place to live is actually the soundest long-term investment. It's a dose of common sense and financial planning that is much needed in today's housing market."

Matthew Haines , Founder, PropertyShark.com

"Homebuying can mean stressful encounters with The Industry: the lenders, agents, and lawyers who may not speak what you and I would call English. This book breaks down the Big Decision into small words and digestible concepts. The key is what the Smiths call the "Home Dividend"—an argument for homeowning and how it can serve your interests, not The Industry's."

Scott Tong , Correspondent, Marketplace public radio

"In recent years, Americans have bought and sold homes like they buy and sell stocks: as speculative bets on future resale values. Houseonomics brilliantly reeducates readers on the real source of wealth creation from home ownership—namely, the steady savings of rent and taxes that build valuable home equity over time."

—Joe Matt , Analyst, Capital Research & Management Company

"Houseonomics helps everyone to systematically and simply understand what is needed to maximize potential profit in finding and owning a home and also have more fun while doing it."

—Bruce Gordon Hut , CFA, Founder,
Kegani Pacific Investment Management Limited

"This book couldn't be timelier. With hundreds of thousands of Americans expected to lose their homes because they took out mortgages beyond their ability to pay, it is clear that home buyers need assistance—beyond the reassurance of the mortgage broker trying to close the deal and get his commission. This book, written in an easily accessible manner, provides that assistance; it lays out the economics of buying, owning, and financing a home."

Joseph Stiglitz , Columbia University, 2001 Nobel Prize in Economics

"The purchase of a home is the most significant investment decision confronting nearly all adults. Yet sound advice, untainted by the self-interest of real estate and mortgage brokers, is extremely scarce. In Houseonomics, the Smiths provide simple and understandable answers to the vexing questions surrounding homeownership, making it a valuable resource for anyone serious about their financial future."

Bryan White, Managing Director, BlackRock

"Houseonomics offers great insights about how to think about homeownership. Its approach is innovative, but the analysis is grounded in common sense. A useful primer for what is the most important investment most people make in their lives."

Paul Efron, Retired Partner and Advisory Director, Goldman Sachs & Co.

"This book is a common sense response to those who question the value of homeownership. The Smiths validate the argument that homeownership is normally a key component of lifelong wealth building. They present a practical guide to basic financial analysis for those planning on owning a home or who currently own a home."

Doug Duncan, Chief Economist, Mortgage Bankers Association

"There is a lot of wisdom in Gary and Margaret Smith's Houseonomics regarding the biggest investment that most people ever make. It is so well written that reading it is a joy and yet almost everyone can gain valuable knowledge in the process. The time you take to read this book will be a smart investment indeed. Having taught economics at Stanford for 35 years, I can only wish that more authors were as knowledgeable as the Smiths and wrote this well."

John B. Shoven, Stanford University,
co-author with Secretary George P. Shultz,
Putting Our House in Order: A Guide to Social Security and Health Care Reform

"The "Home Dividend" is a powerful concept and, indeed, an engine for prosperity."

Ed Yardeni, President, Yardeni Research

Introduction

The American Dream is to own your own home, whether it is a log cabin in Oregon, a farmhouse in Iowa, or a penthouse in Manhattan. Your home is where you eat, sleep, play, love, laugh, and cry. Where you read books, grow tomatoes, and play cards. Where you can be alone or with your family. Where you can be yourself. Your home is the biggest investment that you will ever make and can be the most profitable one, too. Over the years, millions of ordinary hardworking people have prospered simply by owning the home they live in. They didn't win a lottery or find gold in their backyard. They didn't inherit a million dollars from a long-lost relative. They simply made monthly mortgage payments instead of rent payments. You can do it, too.

When you are thinking about buying or selling a home, there is a lot to think about. Is now a good time to buy? Should you sell your home and rent while you wait for home prices to fall? Should you buy a new home or a fixer upper? Should you make a larger or smaller down payment? Should you trade up or downsize? Should you use a real-estate broker or try to do it yourself? Should you choose a fixed rate or an adjustable rate mortgage? A 30-year or 15-year loan? Should you refinance now that interest rates have fallen? Should you pay off your mortgage early? Should you remodel the kitchen? Is a vacation home worth it? What about a rental property? What can you do when you are retired and barely have enough money to buy food, but live in a home worth hundreds of thousands of dollars?

We wrote this book to help you answer these questions—and many more. We want to help you make smart decisions about your home, so that you can enjoy your home and profit from it, too.

What Is Houseonomics?

We could have called this book Home Economics because a home can be a single-family house, apartment, condominium, duplex—pretty much anything you live in. But the term home economics has traditionally been associated with making biscuits and sewing clothes, and this book is definitely not about cooking and sewing. So we considered House Economics and thought it would be interesting to merge the words into Houseonomics, pronounced house-o-nomics. This book is about houses (and other homes too) and about many of the big financial decisions you make about your home.

This book is not encyclopedic. That would be boring to write and tedious to read. Instead, we put together a collection of useful principles, handy tips, and memorable stories—about things that can really make a difference.

Who's Looking Out for You?

A lot of people make a profit from other people's homes: the contractors who build and remodel homes, the real estate agents who bring together buyers and sellers; the bankers who lend money to home buyers; the fund managers who trade mortgages among themselves, the agents who sell homeowner's insurance. They offer you advice on building, remodeling, buying, selling, financing, refinancing, and insuring a home. But their advice is suspect. Are their recommendations for your benefit or for theirs?

We don't have any conflicts of interest. We won't make a dime if you buy a home, remodel your kitchen, or choose a 10-year mortgage. Our goal is to give you useful tools and insights that you can use to make informed decisions.

Our Stories

Financial decisions involve some unfamiliar principles. Even professionals make mistakes. So what can we expect from amateurs who will only buy and sell a few homes in their lifetime? A lot! We wrote this book because we know that anyone can learn to make reasonable financial decisions about homeownership. One way to learn how to make the right financial decisions is to identify ways to do it incorrectly. This book identifies several pitfalls to avoid.

Houseonomics includes many stories to show you the typical kinds of housing decisions that people face and how others have dealt with them—sometimes wisely, sometimes foolishly. All our stories are real. The reason we tell these stories is not to embarrass anyone, but to learn from their experiences. Heck, some of these stories are about mistakes that we have made. The names and some unimportant details in the stories are changed to protect the individuals' identities, and we sometimes combine two stories into one or split one story into two or three. Again, we want to do whatever will be most helpful to you.

Now, let's get started.

© Copyright Pearson Education. All rights reserved.

Read More Show Less

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Sort by: Showing all of 8 Customer Reviews
  • Anonymous

    Posted June 28, 2008

    True Economic Perspective on House Buying

    The section on realtors is a good example of this book¿s strengths. There are some hyperbolic books out there that say people buying or selling a home should never use a realtor. That advice is wildly exaggerated. The Smiths avoid the hyperbole and instead emphasize what we should know, but don¿t. Buyers are looking to buy a nice home at a good price. Sellers are looking to sell their home at a good price. Realtors are looking to close the deal and move on to the next sale. So, buyers be wary when your realtor tries to persuade you to raise your offer sellers be wary when your realtor tries to persuade you to lower your counteroffer. Buyers and sellers be very wary when you both have the same realtor. The Smiths¿ approach to buying a home, getting a mortgage, refinancing, remodeling, buying a vacation home, buying a rental property, and selling your home is similarly balanced and nuanced. It is simply not true that everyone should always do it one way. Sometimes, buying is better other times, renting is better. Sometimes, a fixed-rate mortgage is better other times, an adjustable rate mortgage is better. I really appreciated this approach, which is aimed at helping readers make better decisions instead of proclaiming that there is only one right way I think that pretty much anyone interested in real estate (and who isn¿t?) can learn something from this book.

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  • Anonymous

    Posted July 1, 2008

    Hosenomics makes dollars and sense

    This book is full of memorable wisdom (¿a good home in a great location is better than a great home in a bad location¿) and wonderful stories (I laughed out loud at the ankle breakers). The book¿s big messages are: (1) people should think of their home as an investment and (2) buying a home will be a great investment if the rent savings are bigger than the mortgage payments and other expenses¿a difference they call the ¿home dividend.¿ This phrase ¿home dividend¿ is intended to encourage people to think of their homes the way Warren Buffett thinks of stocks for example, look at long-term earnings, not short-term price fluctuations. I think these messages are correct and much-needed. Most people don¿t think of their homes as an investment, and those who do focus on home prices. My parents live in Cincinnati, Ohio, and have often told me that home prices there have only gone up by about 4% a year for the past 20-30 years, implying that they have only made a 4% rate of return on their home. As the Smith¿s point out, homes are a leveraged investment and the rate of return should include the rent savings. My parents paid off their mortgage several years ago and now they are living rent-free in a home that they couldn¿t afford to rent! Their home has without question been the best investment they ever made. It¿s an excellent book and I¿m glad I bought it. I also bought a copy for my parents and told them to read the Indianapolis example.

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  • Anonymous

    Posted June 9, 2008

    A reviewer

    If you are looking for a book on the best city to live in, this isn¿t the book for you. If you are looking for a book on how to get rich by buying properties with no money down and trading up every two years, this isn¿t the book for you. If you are looking for a book that explains why owning the home you live in likely to be the best decision you will ever make, this is the book for you. If you already believe this (like I do), Houseonomics will reassure you (like it reassured me). If you don¿t believe it, this may be the book that will convince you.

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  • Anonymous

    Posted June 11, 2008

    An easy way to understand the value of owning your home

    I used their guidelines to calculate the home dividend for my house here in Dallas and I was surprised by the results. I thought I was barely breaking even since I¿m making mortgage payments and home prices here only go up by about two percent a year. Once you take into account the rent savings and leverage, I saw that my home is actually a good investment. This is a great book to have.

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  • Anonymous

    Posted May 30, 2008

    helpful and fun

    There's a lot to like about this book. For example, I've never thought of my home as an investment, but now I do. I also loved the writing style. This is a very readable book.

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  • Anonymous

    Posted May 25, 2008

    sensible & practical

    Filled with helpful advice instead of hyperbole. Convinced me that a home is a long-term investment, not speculation. I loved the stories.

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  • Anonymous

    Posted June 10, 2008

    A reviewer

    Houseonomics is full of useful principles for thinking about how to get the most out of your house. It will help you think about when to buy a house, when to sell, when to remodel, when to refinance. It is one of the most helpful books I've read in a long time.

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  • Anonymous

    Posted June 16, 2008

    Well Written, Very Useful!

    I bought this book after listening to one of the authors on Chuck Jaffe¿s The Big Interview on YourMoneyRadio. The book is even better than the interview, because it covers lots of topics that weren¿t in the interview. For example, I especially like the idea of thinking of your home as a Home Retirement Account 'HRA'. As the Smiths point out, your home is like an ordinary IRA in that it has great tax advantages and it can be used to pay your bills when you are retired 'most obviously by saving you rent, but also because you can use a reverse annuity mortgage to pay your bills while you still live in your home'. I had always thought of my home as simply a place to live, not as part of my retirement planning. Now I look at it differently. The total payments error is another great concept that didn¿t come up in the interview. Overall, this is a very well written and very useful book. I bought copies for my grown children and have recommended it to dozens of people.

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