Car vs. House, good perspective

It's no secret that real estate is generally a good investment, while cars are almost certainly not.  I say "generally" for real estate because it is very possible to turn real estate into a terrible investment.  Flippers, sub-prime buyers who can't handle the payment reset, and someone who overpays in a hot market are cases where real estate could end up a poor investment.  When is a car a good investment?  Well, almost never.  I knew a guy in high school whose dad was a mechanic.  They used to buy used cars, fix them up and sell them for a profit.  In that rare instance, or perhaps selective collectibles, a car might be a worthwhile investment.

Otherwise, while they are both "use assets," a house is likely to make you better off in the long run, and a car is not.  Again, no big surprise.

I was listening to Dave Ramsey today, as I often do if I am in my car during the afternoon.  A 25 year old woman called in.  I don't remember her name, but we'll call her Kathy.  Kathy asks Dave if she should get an apartment or build a small starter house.  Naturally, Dave asks her two questions, "do you have any debt?" and "how much do you make?"

Not long ago she was debt free, but just recently purchased a new car, and financed the whole thing.  Also, she bought a small piece of land on which to build a small starter house.  The car was $31,000 and the land was $20,000.  She owes $31,000 on the car, and $16,000 on the land (she put $4,000 down).  Her income is $43,000.

You can imagine what came next.  "Sell the car," Dave instructed in no uncertain terms.  "Today."

"Well," she kind of pleaded, "does it matter what kind of car?"  Of course, we all know the answer.  It's really not difficult.  Spending 72% of your annual income on a car is just silly.

With the car payments, she would have a difficult time financing the construction loan for the house.  Essentially, she was sacrificing a house for a car.  Dave put her situation into perspective very effectively.

"You're 25 years old today, right?  Let's say you wake up tomorrow and you're 35.  Let's pretend that you're still single for the sake of simplicity.  You may be married with a bunch of kids, but that doesn't matter.  At 35, would you rather have a house that you are ten years into payments on, or a ten year old car?"

Well done, Dave.  We don't even need to wait for the answer.

Comments

[Kirk Walsh]

"It's no secret that real estate is generally a good investment"

I think a lot of people would argue that point. Housing has traditionally only returned a nominal amount above inflation, while investing in stocks has averaged a return of 7% annually over and above inflation.

I swore I did a post on this one time, but I can't find it.

[James]

No doubt, cars should be purchases for transportation, not investments.

[Livingalmostlarge]

I'd rather have a house, probably why I still have my crappy car. Because I have way to nice a house to afford on our salaries with a car payment.

[Deborah]

Where can you buy a $20,000 lot to build a home?

I'm in Vancouver, Canada and I'm not so sure buying a home is a good investment here anymore. We don't get to deduct our interest from taxes.

We bought our first home on a peak in 93 and equity growth of our home was so slow, 10 years later, after paying about $30k per year on mortgage, strata fees and property taxes, our home had only appreciated by about 13%, or about 40k. Indeed, for several of the years in between if we had wanted to sell and move we'd have probably had to sell for 10-15% less. Our local market has had a recent run up again and my niece wants to buy something just to get into our real estate market and I just tell her it will make her cash poor for life and probably destroy her economic future.

I just did a calculation and if we saved the difference between our home ownership housing costs and renting and bought on a dip 5 years later instead we'd have had about $110k down payment and a $160k mortgage for the home we were in, at buying it 10% less. One did sell for 15% in that period. Anyway, by 2003 we'd have been 75k better off by just waiting, and that isn't counting the compounding effect of paying interest on that extra 75k for the past 4 years.

I think dips or bottoms in the housing market occur 4-7 years after the peaks and I've seen two serious peaks here in Vancouver in my adult life that have been significant burdens to those who entered the real estate market during them.

I was working in banking during the first so I saw people losing their homes. I wrote about it in my blog post, http://makingsenseofmyworld.blogspot.com/2007/05/low-interest-rates-as-destructive-as.html

Does your financial planning course examine the gross differences in home equity leverage with low interest rates versus the higher interest rates of the past?

Brevity isn't my strong point. Also on my blog in January I did a post on retirement where I talk about the housing trends and do some calculations on the leverage that people here in Vancouver got on their home purchases.

[Deborah]

Hmmm, the link got cut off. The post is titled "Low Interest Rates - As Destructive as Usury?" It is under May.

http://makingsenseofmyworld.blogspot.com/

[Q at $1 Million to My Name]

Cars and principal residences are not investments. Stocks in your brokerage account and rental properties are investments

[AlmostDebtFreeLA]

Deborah, glad to hear some sound advice on houses and investment. Here in Los Angeles I can't find any instance where it makes more sense to buy than rent. The rental rates don't come anywhere near supporting the current prices. Everytime this happens in LA, home prices correct themselves. It takes time, but it is a cycle.

Unfortunately, it would appear that the caller "Kathy" is more commonplace with my peers (mid-late 20s) than I would like to see. Lots of people are way too overleveraged to enjoy their lives.

[hustler]

A house will always be your home and sanctuary. Can't measure that.

[Livingalmostlarge]

I owed in So Cal, and it's better to own. But you have to own long term, if you stay put for 10 years why not buy? Does the market matter at that point? Our plan was to hold on forever, but we moved. Otherwise we would have held it forever, nice college tuition for our first kid.

[Her Every Cent Counts]

I think it's ridiculous to spend a lot of money on a car. I spent $7,000 on my 1999 Toyota Solara and I should have spent less. Then again, gosh, I'd love to own a hybrid. But I can't afford one now, so I'll just wait out until i can.

[qwerty]

I just bought my dream car (New Beetle) at the age (22) I'm supposed to be enjoying it. It's nearly exactly the same situation as Kathy's, but I'll share my situation and I'll welcome comments. I still live with my parents, hold a full time job (getting paid equal to graduate incomes) and have one more year left until graduation, which after a pay rise is guaranteed. I have a partner also still at home, earning more than me. We have total freedom to do whatever we like. We are planning purchasing a rental property, where he pays the mortgage and I continue paying for the car. There are no plans for kids in the next 4-5 years. Although we have thought about the possibility of making this situation work, is there any problems sticking out like a sore thumb any of you can see with it? ...

[qwerty]

I just bought my dream car (New Beetle) at the age (22) I'm supposed to be enjoying it. It's nearly exactly the same situation as Kathy's, but I'll share my situation and I'll welcome comments. I still live with my parents, hold a full time job (getting paid equal to graduate incomes) and have one more year left until graduation, which after a pay rise is guaranteed. I have a partner also still at home, earning more than me. We have total freedom to do whatever we like. We are planning purchasing a rental property, where he pays the mortgage and I continue paying for the car. There are no plans for kids in the next 4-5 years. Although we have thought about the possibility of making this situation work, is there any problems sticking out like a sore thumb any of you can see with it? ...

[gtm]

That's a really good story. I've always been shocked on people who spend more than half of their yearly salary on a stupid car to get your from point a to point b. Good post!

[La BellaDonna]

There's always this to consider, if you're having trouble making a decision between the two:

Would you rather live in a car, or in a house?