Wednesday, July 14, 2010

The best way to get rich is to sell books to gullible people

I sometimes wonder how much the current crisis was acerbated by bad advice from financial gurus on TV, advice that has changed amazingly little. Here's a recent example from David Bach (author of Start Late, Finish Rich and endless variations):

The best type of debt is debt that builds wealth over the long run, and the
No. 1 example of that is mortgage debt.

"Home values have increased an average of 6.5 percent a year over the past 30 years," says Bach. "So when you borrow to buy a home, chances are that's good debt. You'll build value."

Bach heavily promotes the idea of homeownership, saying that everyone needs to own where they live. "About 40 percent of Americans are renters," says Bach, "and the fastest way to wealth in America is buying where you live."

Bach cites some shocking numbers to back this up. "The average renter has a median net worth of $4,000, and the average homeowner has a median net worth of about $150,000."


One of the reasons so many Americans seem mired in bad debt (Bach reports that the average American carries approximately $8,400 in credit card debt) is that financial education is pratically (sic) nonexistent. "This type of commonsense stuff isn't taught in school," says Bach, "and most Americans don't realize how bad high-rate credit cards are hurting them."

Bach has been doling out this same advice complete with the same net worth statistic (apparently included under the assumption that schools didn't teach statistics either) for about a decade*. It is slightly more sound now than it was five years ago, but it is still not what you'd call good.

This ground has been covered before (notably by Felix Salmon) but just to recap:

1. Home ownership is not a particularly good investment either in terms of returns. It's bad in terms of liquidity and horrible in terms of diversification;

2. Analyses purporting to show the amount saved by owning vs. renting almost always overlook the direct and indirect costs associated with suburban commuting.

3. Home ownership makes it difficult for workers to go where the jobs are. This has economic consequences on the national level, but it's on the individual level that this can turn into a real horror show. Housing prices, liquidity and employment are all correlated by region.

*In Start Late, Finish Rich, Bach says "you cannot get rich being a renter."

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