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Okay, I've had a couple of these calls in the last little while, so I got stopping addresses for a second. Dave, the rents in our area are so high, so much higher than what I'd pay to buy a house, so much cheaper a month.
Not true. You're not comparing apples to apples, at least over a period of time. It cannot be true economically, and let me walk you through why, because it's a basic concept. But this is the thing where we get scope creep, where we get justifying and rationalizing buying the house when you're not ready to buy a house, or buying a house you can't afford, or buying a house in a situation where you shouldn't.
I love homeownership. I've always believed long-term owning a home is one of the best plans you can have long-term, but you need to do it in a wise way so the home is a blessing and not a curse. The stupidity that's out there in the culture, including in some of the wonky think tanks, is like, "All home ownership is down. Americans, you know, the wealth inequality gap is widening. It's difficult to buy a home." Yeah, that's all true, but broke people when they buy a home aren't blessed. It makes them broke. That's why they call them mortgage brokers. And if a whole bunch of broke people buy a house at one time, you could bundle it and sell it on the hedge fund, and later on it's a regular mortgage block, and it can actually crash the whole economy back to 2008. Does anybody remember? So it's not a good policy decision, not a good macroeconomic decision, to force people into buying homes or to encourage people to buy homes when they are broke.
Now, once you're ready to buy a home, though, and you're looking at renting, and you say, "Rents are, you know, $1,500 a month, but I can buy this house for $800 a month," that is just not true long term. It could be true for a moment in a boomtown where something's going on, like the strike oil. You get in one of these boomtowns and that could happen, but eventually supply and demand, the economics, will take effect. Here's why. Landlords want to have renters, and when there is an abundance of renters willing to pay ridiculous prices, what they do is start building rental property or buying property and turning it into rental property. So if there's a house on the market on the street, and an individual can buy that house for $800 a month, or an investor can buy that house for $800 a month and rent it for $1,500, and there's an abundance of renters out there, that's the reason the price has driven up. There's a shortage versus the demand. Anytime demand is higher than supply, prices go up. When there's a shortage on something, that's when prices go up.
But what happens is the shortage corrects itself very quickly, because those of us who are investors want to tap into this hot rental market, so we go buy a bunch of property and turn it into rental property, or build a bunch of property and turn it into rental property, which raises the supply back up. Thus the shortage goes away. So over time, rents are not going to be double the monthly payment on a house, because investors who are willing to borrow money or willing to pay cash, like I am, will buy enough rental property to take advantage of the great rates of return that an overpriced rental market will produce. That will cause the rent to come down or the value of the houses to go up. So rent always approximates, slightly above, payments. It always does over time. So when you call me up and say, "Oh, I can buy for fifty percent of what I can rent," no, you can't. You're not comparing apples to apples. In the neighborhoods where you can buy, investors would have already gobbled that house up and doubled their money. That's the point, and that doesn't square with the shortage, which causes the economics to balance out.
Now, again, there might be a six-month period of time where that is not true, but long term, in Missouri, long term in Boise, long term in Abilene, that's what happens. If there is a jump for one reason or another, it will very quickly even out, and most of the time it's already pretty even. Rent is going to be slightly more than payments on average, because investors require renters to pay enough rent so they can cover their payment, or so they can get a rate of return on the cash they have tied up. Like in my case, I'm not going to tie up money at a four percent return in a piece of rental property. I've got to get more rent out of it than that, because I can make more than that on my money doing something else. That's going to drive rental rates. That's what we're talking about here, and these are always going to approximate each other.
Now, if you find rent that is slightly more than the house payment, that would be normal. If you find house payments slightly less than rent, that would be normal too, and it is not cheaper in that case. Let's say you have a $1,500 rental rate and a $1,200 payment. That would probably be fairly accurate. Rent is always going to be a little bit more than the payment, but when you're renting you're not paying to put on roofs, fix heating and air, or fix broken hot water heaters. You're not paying the increases in insurance and increases in property taxes that come along until I renew your lease, and then I'm going to bump up the rent enough to cover that. That's the difference. Homeownership in a given year might be more expensive for you as a consumer than renting, depending on the repair bill you end up having. So there is no economic or mathematical excuse for buying versus renting until you're ready. In the short term, renting can be cheaper. In the long term, owning is always better than renting, so you want to get yourself in a position where you own as you build wealth and head toward retirement. That's going to assist you, with a paid-for home, in building wealth. But it does not assist you when you buy a home and rationalize your little butt off just because you got house fever, your little friends are out there buying houses, and your family members are whining at you over Thanksgiving dinner that they bought a house and you haven't bought a house yet. Why didn't you buy a house? Because I'm freaking broke, and I'm not going to stay broke, because I'm on a budget. I'm going to get my debt paid off and get my emergency fund in place. So when I buy a house, I'll buy it with a good down payment, on no more than a 15-year fixed rate, with a payment of no more than one-quarter of my take-home pay. Then I'm going to buy a house, and the house is going to be a blessing, not a curse. I want you to own your house. I don't want the house to own you.
Too many people rationalize their butts off. They've got student loans at Brown's long, they've got two car payments sitting in the driveway, they've got a MasterCard, they've discovered bondage and American distress. All the money comes in and all the money goes out, and they've strapped themselves to a house on a thirty-year adjustable rate mortgage at some of the lowest interest rates in my lifetime. I'm almost 60 years old. If these are the lowest interest rates in 60 years, where in the world do you think it's going to adjust? Up, dummy, not down. Where are you going to go from 2.9 to 1.9? Is this really your set of assumptions on which you justified buying an adjustable rate mortgage? That's dumber than a grub worm in a box of rocks. That's stupid, and you're going to get killed. Don't do that. But we've got to have the one with a Jacuzzi and a skylight, and I don't feel safe three streets over, and we come up with all this crap that we used to justify it, and all this peer pressure. The house is the most expensive purchase you're ever going to make for most people. Don't do that. Do it right, so that your home becomes a safe haven and not a point of stress on your finances, on your marriage, and in your belly.