Homes vs Stocks

So whats the difference between being underwater on a mortgage and underwater on a stock ? Is it that “experts” will tell you to hold the stock in hopes of it going up in value and then explain that those with homes worth less than their mortgages shouldn’t feel bad about breaking their mortgages and defaulting ?

I think “Buy and Hold” for stocks is one of the all time great marketing scams. Ignore it. Always.

“Buy and Hold” for your house is a mantra you should always live by. The difference ?

You can live in your house. You get utility from your house. You may get a deduction for interest paid on your tax bill. You can develop a positive emotional attachment to a house.

A share of stock….well you can…you can look up the price anytime you want if you think thats fun. There is no utility of a share of stock beyond its financial value. The value of a house is that its your home.

The fact that you may be underwater in your mortgage is of no relevance if you can make the payments.

If you can make the payments on your mortgage, it shouldnt matter if your house is worth 10pct of your mortgage. If you can make the payments, make them.

My last house, I remember being freaked out watching as my rate on my Adjustable Rate Mortgage went up and up as I watched the value of my house go down. For 2 years my rate went up, my house value went down. Fortunately, I liked living there. I wasnt building any equity, in fact, I was negative, but I was going to have to pay to live somewhere. On top of everything, my credit was bad enough, I didn’t want to make it any worse. In fact, I knew that if I didn’t make the payments on my house, my chances of ever owning a house again were none and none. So I kept paying the note every month. In spite of the financial pain.

Then a funny thing happened. Interest rates started to go down. I didnt even know it until I got my annual notice saying that my mortgage payment would go down. The value of my house wasnt going up, but for the next several years, my payments went down. It took years, but I actually built equity in the house.

Which is exactly the point. Buy and hold works when it comes to the HOME you LIVE IN. Turning in the keys because you have negative equity is a fool’s game. If you do, YOU WILL NEVER OWN A HOUSE.You will be a renter FOREVER.

Your home has far more value than its mark to market price because you can live in it . Do whatever you can to stick it out. It will pay off for you in the long run




48 thoughts on “Homes vs Stocks

  1. Negative equity happened in Hong Kong starting 1997 and ended about 2000.
    It is a fact of life.
    It is not renting,
    you are still responsible for liabilities when
    someone gets hurt in front of your property.

    Comment by Hybullshit -

  2. Great thoughts on paying a mortgage vs stock.
    This should be required reading for 1st grade through 12th.
    Everyone needs to read this at least 2 times a year.
    But then, the stock brokers may want to rip that page out of textbooks.

    Comment by Hybullshit -

  3. Essentially I agree with your main points. Earlier today I heard about areas in California where the value of the home has gone down $50K PER MONTH. So, there probably is a big difference between being down 10% and facing these types of losses.

    Comment by Oscar Thibidoux -

  4. “Which is exactly the point. Buy and hold works when it comes to the HOME you LIVE IN. Turning in the keys because you have negative equity is a fool’s game. If you do, YOU WILL NEVER OWN A HOUSE.You will be a renter FOREVER”
    -MC

    I’m sorry Mark but I just cannot agree. If you remain in negative equity forevermore in “your” home then you’re renting anyway, you don’t own a thing. Send in the jingle-mail.

    Comment by Bill -

  5. Pingback: Homes vs Stocks | Chad Bennett

  6. I think many people that dumped there houses because of negative equity are speculators looking to buy property and flip it fast, i heard the numbers are from 25%-40% of the mortgage industry was this type of buyer from 2000 to 2006,

    Comment by ian -

  7. I enjoy most of what you write.. but this is moronic.

    You’re saying to stay in a debt that’s on average probably 10x a
    persons salary – because they can have emotional value in it?

    What’s wrong with being a renter? If you can make your mortgage, then
    you can afford to rent AND save a few thousand each month.

    Foreclosure does not cancel out any possibility of owning a home again..
    especially when almost every sheep has the same stripes. Many people
    will foreclose in the next few years. You saying the mortgage industry
    just lost those people as customers for life? NOT!

    Walk away, rent and save cash… why do you want to own a home, they’re
    a pain in the ass to maintain – and why would you care about deductions,
    when it’s a deduction on money you don’t have to spend in the first place.

    Comment by nigel -

  8. Isn’t your philosphy of do not buy and hold stocks why you are being investigated by the SEC right now?

    Comment by Aaron -

  9. Great advice Mark. Bless you

    Comment by Winky -

  10. The problem is with stocks is you cant fix it up. If it’s a dog, it will always be a dog. A house can be fixed to make it yours. Too often recently, people are thinking of their residence as their cash cow. Not so. It is a place to live your life. Now I’m a pretty good architect, and a real lousy financial advisor, but the house as an investment works for you only, not as a real estate venture.

    Comment by Jack R. -

  11. Actually, turning in the keys is working out pretty well for some, and they aren’t becoming renters for life. First, they buy a second house, similar to the one they own, but for much less than they owe on their current mortgage. Then they stop making payments on the first house, and let it go into foreclosure. As a result, they have an equivalent house, but owe less money. So what if they have bad credit for a few years. It can be worth it if you save a few hundred thousand dollars.

    It may not be ethical, but it’s financially advantageous.

    And renting isn’t always bad either. A lot of people who sold or stayed out of the market to avoid the bubble and rented instead are in a lot better position than if they bought to avoid being locked out of the market forever a couple years ago.

    Comment by KeithOK -

  12. No one seems to mention that if you are underwater on your home equity and you let the bank foreclose on you that in most states the bank can SUE you for the difference. So, if you house is worth $100k and you owe $150k and you let it get foreclosed upon, then the bank can SUE YOU FOR $50k. That’s another good reason to stand by your obligations.

    Comment by dave -

  13. Thank you Mark! Finally someone who’s making sense when talking about real estate.

    Comment by Staten Island real estate broker -

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  15. “STeve, the reason so many people have gotten in trouble in this market is because they “expected” some specific outcome. You can not expect anything to happen. There are so many variables that make up our financial system. Its possible to hope. Its a huge mistake to expect.”
    - – - – -
    Mark,

    If a person can’t EXPECT something GOOD to happen, why would anyone ever put a single PENNY in the stock market? On the contrary, I fully EXPECT the market to go up SOME TIME IN THE FUTURE. Maybe today. Maybe tomorrow, next week, next month, next year, maybe 2012, who knows. The key is to NOT put money in the stock market that you need any time soon, say within 5-10 years. If you put money in stocks today that you will need next year, you may be very disappointed.

    Maybe you should’ve said “the reason so many people have gotten in trouble in this market is because they “expected” some specific outcome to happen quickly.”

    Comment by Jeff -

  16. Mark,

    I really enjoyed “Homes vs Stocks” and “Where to Put Your Money Right Now”. I beleive we need more straightforward simple advice like you gave in those articles. Keep it up.

    Andy

    Comment by Andy Short -

  17. “Show me 30 stocks that you could have bought 25 years ago, held until today, and made money?”

    30? I can think of a few household names… GE, Proctor and Gamble, Pepsi, Coke, etc. If you invested in them 25 years ago, held on, and reinvested the dividends, you’d probably be very wealthy by now.

    It’s quite easy to go back in time and find examples. The future is a little more tricky, though. A good starting point would be to determine what characteristics gave those successful businesses their longevity and invest in similar enterprises going forward.

    Comment by Nate -

  18. “Show me 30 stocks that you could have bought 25 years ago, held until today, and made money?” — Will Appleton

    Um, here: http://upload.wikimedia.org/wikipedia/commons/c/cd/DJIA_historical_graph_%28log%29.svg

    Comment by Michal Daniel -

  19. A share is a share is a share. If the market tanks, you holding the shares will be renting while the person who was honoring there word will still have a home. Wall street is a gambling mecca and no one knows the outcome, but if you keep making your payments and try and keep your house you for sure know your outcome. You can get better odds in Vegas than Wall Street right now.

    Comment by David -

  20. Value is all relative. If you value your home for utilitarian purposes and/or sentimental values, one would be inclined to “buy and hold.” However, if there is no perceived value…accepting your losses is a great approach for anyone who understands the real opportunity costs of the “buy and hold” strategy. Needless to say, the comparison of homes vs. stocks would be more apropos if the comparison was made between homes vs. automobiles.

    Let me explain. For most consumers the analogy between a hard asset and a paper asset is hard to comprehend. With an automobile…people get it. There is not a day that goes by that a consumer drives a vehicle not based on the affordability of payment. In matter of fact, most car salesmen pitch affordability and not the real costs of finance.

    Look around you. How many people do you see or know that drive a car that is really out of their financial capacity? Better yet, how many people have traded their cars and acquired the newest, most bling car by accepting the negative equity in the old vehicle wrapped into the financing of their old vehicle?

    At the end of the day, one has to take fiscal responsibility for their actions. Like a vehicle, sometimes you make a bad buy…but you live with it and move forward. Repossessions are common in the auto industry; however, nobody is clamoring about the ills behooved onto car buyers. Unlike an automobile, it is not written in stone that as soon as you drove off the lot that you hard asset lost 25% of its value the day you took possession.

    Just food for thought.

    Comment by James K Barath, CMPS -

  21. Guy who said “listen to Warren Buffet” also said Buffet was 100% Treasuries. So Did Warren
    SELL his equities in order to be in cash? Of course! He doesn’t just buy and hold forever.
    KEEP BELIEVING THE LIE… If you want to make money in stocks you have to know when to sell,
    and know how to take losses.
    Show me 30 stocks that you could have bought 25 years ago, held until today, and made money?
    Also, don’t just tell me to look at the DOW average and see where that was 25 years ago, and where
    it is today. You probably believe that lie also. They have changed 11 of the DOW 30 in the
    last ten years with better performing stocks AT THE TIME. Funny the so called experts don’t
    even buy and hold their own index, or it would be at 500 not 8400. Easy to make an index look
    good when you can constantly stack it.
    BY the way NASDAQ actually hit 5100. Today at 1500. Did you make money there buying
    and holding???
    Mark, tell them what you would be worth if you held onto your YHOO stock and not sold?
    I’m guessing you got stock somewhere around $50 and today at $10. That’s ok though. Not only
    would have lost 80% of net worth, but would only have to have a FALLING STOCK go up 400%
    to break even.
    Stock market is a great investment, it’s just not for amateurs who think they can buy, and never
    have to do any work…

    Comment by Will Appleton -

  22. i have an ARM — gave myself 5 years to retire from the Navy and get myself together financially, then redo my loan and chill. i’m working my ass off right now to get the house ready for refinancing, but honestly i’m wondering if i can even get a new loan with the way things are going. if not, well, interest rates are super low, and maybe my mortgage won’t go up at all. either way, i’m sticking with it. i’m in downtown Baltimore in a cool, 85-yr old rowhome for a while. it is, as you said, my home.

    Comment by simplyscott -

  23. “I think “Buy and Hold” for stocks is one of the all time great marketing scams. Ignore it. Always.” — Mark Cuban

    Sigh. Never, always and should. Three words I strive to avoid because they’re so uselessly confining.

    Back to “Buy and Hold.” Once upon a time, long ago, when the stock market was invented, the reason to own the paper was not to eventually flip it to a greater sucker. No, the reason the stock market was invented was for distribution of risk among many players, all of whom would be partial owners of the enterprise, and — most importantly — reap the benefits, namely DIVIDENDS. Somewhere along the line this simple fact of YIELD was tossed aside, forgotten and ignored by most. However, there are still companies out there that have zero debt and pay 10% dividend yearly, meaning in about 7 years one doubles one’s money, if one reinvests the dividend. That is what “Buy and Hold” used to mean, when it came to stocks.

    Comment by Michal Daniel -

  24. Disagree with you on the home as an asset theory Mark.
    The majority of your monthly payment is interest & you have to pay property tax.
    Two factors that are extremely difficult to recoup on the sale of a home.

    Comment by FLC -

  25. My best investments – in real estate and outside of real estate – have been “buy-and-hold.” My biggest investment mistake was selling my condo in 2002 and watching the market in CA take off like a rocket. In fact, looking back on my investment performance of the past few years, I have lost quite a bit to over-trading and transaction costs. My best-performing stocks and funds have been those I have held for the longest.

    Going forward, I plan to build a portfolio of income-producing stocks and bonds that will eventually throw off enough in dividends and interest to fund my basic living expenses. I am sure I am sure I will sell some investments due to overvaluation, dividend cuts, etc., but if the business is sound, and the stock fairly priced and pays a good yield, I see no reason to sell. So, count me as someone who leans towards what you derisively refer to as “buy-and-hold.”

    Comment by Nate -

  26. Pingback: Underwater Mortgage Watch | Earn What You Spend

  27. I think your talking 100 percent truth, right on the money on
    keeping your house no matter what!
    The market may go up and down (esp. with inflation because of
    the FED’s “funny money policy’s).
    But once you’ve made a house “your home”, that’s just what it
    should stay!
    The market may be down right now, but if you stick with your home
    you may get in the water, but you won’t get as wet!
    (not to mention that the roof over your head will still someday be
    your’s , except for taxes).

    Comment by Shane Sheibani -

  28. Mark (and Mr. Shepard), stop with the anti-buy and hold BS for stockholdings. Stock
    returns have far outpaced home gains over long periods. The real expert on the
    stock market is Warren Buffett, and he just said he’s going from
    100% T-Bills in his private accounts to 100% equities.

    To paraphrase, Warren doesn’t know where the market is going in the
    short run, but that doesn’t matter. All that matters is the market is
    cheap now, and that virtually guarantees a passive index holder will
    earn very good returns over the next decade. As usual, never invest
    money in equities you will need in the next five years.

    And Mark, your investment style is a brokers dream. Constant furious
    action generating commission after commission, and forcing you to overcome
    your accumulated transaction costs just to catch up with an index fund.
    Just put your long term holdings into indexes and focus on running your
    own life and business. Don’t waste time trying to pick winners unless
    you are going to dedicate yourself to it. And if you do, read all of
    Buffett’s shareholder letters, as well as the Intelligent Investor by
    Graham (updated edition with Jason Zweig commentary recommended) and
    Security Analysis by Graham and Dodd (new updated 1940 edition
    with notes from top investors recommended).

    Learn to value your investments, and buy only at a large margin of safety
    and sell only when they approach fair value. Then you’ll do fine. This
    stupid little approach let Warren Buffett turn a childhood savings
    built from newspaper routes and owning pinball machines, into well over
    $100,000 (in 1950′s dollars) before he ever started work as a
    professional investor. You know the rest of what happened after that,
    over 50 years of investing with only one down year, and only one year
    trailing the market. Average returns significantly north of 20% per year.

    Ask Warren if he still believes in long term buy and hold investing.
    He’ll say yes, and you should too, as long as you know the difference between price,
    and value.

    Comment by Randy Hill -

  29. If opec cuts to 2 million barrels of oil, 90% of those producing nations will DEFAULT on their debt or

    they will all cheat and produce more, price will rise until the cheaters cheat then price will fall.

    the world can’t afford more than $60 oil.

    Peak credit, is here and deflation is upon us…

    Save your money.

    Comment by EDCmorale -

  30. turning in your keys will not disqualify you from being a home owner.

    WRONG> Fannie/Freddie guidelines wait 3 years after foreclosure, 2 year after a chapter 7 bk.

    Why not for some of those, foreclose and buy your home back cheaper 3 years later after you saved the difference on your rent payments?

    Besides…. They will need home buyers ASAP. I’ll bet they will reduce the time period because we BUILD A QUARTER CENTURY OF HOMES IN 5 YEARS!!!

    Comment by EDCmorale -

  31. Mark,

    You need more clarification on this. Most people that have bought
    a house in the last 5 years probably can’t afford the house they bought.
    Yea, they can make the payments and get buy but there is no guarantee
    they will make these expensive payments in the future especially
    because we are more likely to see more layoffs. Now there house
    is worth about 30-50% of what they paid for it and they likely put no
    money down. People like this that don’t have lots of money and should
    let there house go. And we are not even talking about the people
    that bought in the last 4 years and haven’t had their mortgage rate
    reset.

    Comment by Joe M. -

  32. Mark is right about stocks. If there’s any time to explore survivorship bias it is now.

    Comment by Heath S -

  33. Mark what do you think about Obama saying that he will stop domestic drilling as one of his first acts of power? The way I see it, if you want to stimulate the economy that is a great way to create jobs in various sectors of business, construction, transportation, production, maintenance, heck even municapality jobs. Having lower gas prices would lower food cost even bottles of water, car parts that rely on petroleum based components. We would be ready for that day that OPEC cuts production 2 million barrels a day so what we have oil why not use it. I just think that it is good to be prepared for a rainy day. When fuel spiked this time we werent ready. In the future I think we could be. The only useful reason I can think of not using the resources that we have in this country is that when OPEC runs out of oil it would be our turn to stick it to them. I would defiantly be interested in what you think. Thanks,
    Brian L. Spears

    Comment by Brian Spears -

  34. Mark, you implicitly said this. As a homeowner, you are your own landlord.

    Just like a stock with a dividend, your investment in the house is augmented by the money you didn’t spend on rent somewhere else. At least that is how I consoled myself when I went through a similar upside down experience in 1990.

    Comment by Omar -

  35. Mark, There is no “real value” any longer in owning the stock of a publicly traded company.
    You actually OWN NOTHING except Blue Sky. Back in the day, (20+ years ago) you may have
    had a typical publicly traded company with 10 million shares outstanding. Today it is not
    unusual to have over 100 million, 500 million, or Billions of shares held by the public. It is
    impossible for a “typical” shareholder to control even a fraction of a percentage of the company’s
    stock in order to have any “real ownership” (voting rights, influence, etc.) on the decisions the
    executives, or Board may make in the direction of the company. You do not get any share of
    profits by owning the common stock (and let’s not talk dividends, am so tired of hearing brokers
    recommend a 3% dividend stock that moves 50% in price, but tries to convince client that they
    still got income check “which by the way you pay taxes,” net return -48% total return.) Again,
    your “typical” shareholder will never own enough of a stock to make dividend checks matter, and
    besides very few stocks even pay a dividend today.
    So you DO NOT have voting rights (that matter), you do not share in revenues, you have no
    influence over ANY decisions made on behalf of you, or any other shareholders, and you do not
    even receive a stock certificate to “hold” to make you warm and gushy. Thinking you are part
    owner of a company because you bought a share of stock has become a huge lie.
    What do they get: Lots of the public’s money. “Let’s IPO, secondary offering, etc. 200 Million
    shares @ $15 for let’s say $3 Billion, for maybe a company that so far only has only LOST MONEY.
    But they are now funded again, original investors get money back (and then some), and top guys
    in the room (who many had nothing to do with creating the company) may create HUNDREDS
    OF MILLIONS in wealth for themselves that very second.
    What did the public shareholders get? The opportunity se “re-sell their stock to someone else
    at the price “based on human psychology” for whatever price it may be at on any given trading
    day. On the positive side there IS a market for BLUE SKY, but that is all anyone owns when they
    own a stock today.
    The next big “CRISIS, SCAM, FLEECING, SCANDAL, or whatever you want to call it (Wall Street
    likes to use CRISIS to let you think it is out of their control, and they did nothing wrong) will be
    companies filing bankruptcy, taking their current stock to ZERO, getting government (TAXPAYER)
    money, renegotiating their debt, and reissuing “new stock” raising billions again, and voting themselves
    options on the new stock. Watch GM, Ford, Citi, etc.. It will happen with household names as
    well as many public companies you may have never heard of.
    They will figure out very shortly that a ZERO MARKET VALUE, does not mean the company no
    longer exists…
    So unless you are an insider, at least you have the value of living inside your home…

    to zero, renegotiate to creditors, steal taxpayer money, and reissue stock with lots of

    Comment by Will Appleton -

  36. I completely agree. If you can make the payment you should, regardless of the equity you have. We are 6 or 7 months into starting a new business. I have had to get rid of everything except for one older vehicle that is paid for and our house. I completely underestimated how hard it was going to be to find an investor in this economic climate. We are going to do whatever it takes to keep the house even though we have no equity whatsoever.

    Comment by Shawn Shepherd -

  37. I’m currently in a position where I’ve taken over my dad’s mortgage simply because he’s about to go bankrupt (due to bad stocks funnily enough) and can no longer afford it. It’s a huge commitment for me and limits future options (at least for the short-mid term), but I just didn’t feel right about my parents letting go of the house where we’ve spent most of my life living so far. Every little plant in the garden in that house is something my parents spent over a decade arranging, little things like that. There’s a certain unease about just letting it go, and possibly never being in a position to buy those memories and stability back again. This post only re-affirmed those thoughts. Thank you.

    Comment by Gaurav Sharma -

  38. I agree 100% a home as an utility, and in most cases i believe we all have some emotional attachment. Very different than stocks or other similar things.

    Comment by Helder -

  39. Need to clarify the stock thing — one sentence with no explanation. Yes, homes are nice, but people have bought homes from holding onto stock and then selling it.

    Comment by darlene888 -

  40. If you can afford the payments, is the key to this entire column. If you can afford your house payment, and like where you live, then live there, and BE HAPPY. However, if you are backwards in your home, you may not also be able to afford the payments, but if you can afford the payments, don’t worry, be happy.

    http://www.DailyPUMA.com

    Comment by alessandromachi -

  41. Homes are a place to live, not investments.
    Live where you want to live people!
    If it happens to provide you financial gain, great.

    Comment by Todd -

  42. This is the EXACT conversation I had with a friend the other day! Thanks for justifying my point, I have now emailed this to all my friends here in Minneapolis. I often send them my favorite ‘Cuban-isms’!

    Comment by nellykay -

  43. Not surprisingly, I’m with Mark here. I bought my house 8 years ago
    for $350K. 2 years later I got an unsolicited offer of $600K. Sure,
    home values were increasing but this was even above the local norm.
    Why did I decline? Because I loved my house… our first as a married
    couple and for our new daughter. But also I would have had to “move
    up” in price to get a replacement. I was quite happy with my payment
    each month, figuring that if I lost my decent paying job I could go
    tend bar and still afford my place.

    Someone could have offered me $1mm and I would have declined (would have
    taken a few million because of those benefits) because I was in a safe place
    that I really enjoyed. It’s small. It’s old and needs work. But I can
    afford it and, you can’t “buy” the kind of neighbors I have.

    So it’s interesting to watch the perceived value of my home go up and
    down but it matters not if my plan is to enjoy my home, my neighbors and
    security of knowing that I’ll be able to afford my payments when times get
    tough.

    Stock, on the other hand, is all about perceived value at that moment in time.
    It seems so obvious but very helpful to have it pointed out from time
    to time.

    Comment by Tom McDonald -

  44. “”Buy and Hold” for your house is a mantra you should always live by.”

    It’s also MUCH easier to buy and sell stocks. Most houses take months of work to get them to your liking.

    Comment by cb -

  45. Mark,

    I totally understand why you endorse buy and hold for your home. It’s not as clear to me why you wouldn’t also endorse this for a stock in this environment… shouldn’t we expect the market overall to eventually reach 15,000 once again? As you’ve mentioned before, if you’re selling, someone’s buying — is that person a smarter investor than you?

    I’m hoping to keep a tight grip on my portfolio, continue to invest in what I hope is a low market, and eventually see equity markets rise back to where they were, or thereabouts.

    From MC>
    STeve, the reason so many people have gotten in trouble in this market is because they “expected” some specific outcome. You can not expect anything to happen. There are so many variables that make up our financial system. Its possible to hope. Its a huge mistake to expect.

    Comment by Steve Carpenter -

  46. Sounds like the “experts” in the states are bloody mad (I’m in Canada). I don’t think I’ve ever been told to dump my home when things are rough. We live by the saying, “Hold on to your land because God isn’t making anymore of it.”

    Comment by Matt B. -

  47. I buy into buy-and-hold for mortgage, as well as stocks. You say it’s a bad idea for stocks, but give no reasons. I’d like to know why you think “taking the loss” on stock is a good idea.

    For someone like myself, who makes about 120k and doesn’t have a lot invested outside of my 401k, it seems to be a bad idea to realize the loss if you don’t need the money.

    I say this as someone that has 27,000 shares of SIRI that I bought for 24 cents. While I currently am “in the black”, I would not sell them if I was in the red. Though my luck will be for the company to claim bankruptcy, then the joke’s on me.

    Comment by Jamison -

  48. Mark,
    Can you explain why a Billionaire would have the need to take out a mortgage?


    From MC>
    Because there was a lot more time in my life when I had a lot less money

    Comment by Gregory Rueda -

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