Chapter Excerpt

Praise forHouseonomics

"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

"Houseonomicsprovides 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.Houseonomicsis 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.Houseonomicsopened my eyes; it will open yours too."

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

"Housenomicsis 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, considerHouseonomicsyour '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.Houseonomicsoffers 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.Houseonomicsgives 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.Houseonomicswon't make people instant millionaires, but it will provide readers with the opportunity for a comfortable retirement.Houseonomicsshows 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,

"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.Houseonomicsbrilliantly 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

"Houseonomicshelps 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


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 bookHome Economicsbecause a home can be a single-family house, apartment, condominium, duplex—pretty much anything you live in. But the termhome economicshas traditionally been associated with making biscuits and sewing clothes, and this book is definitely not about cooking and sewing. So we consideredHouse Economicsand thought it would be interesting to merge the words intoHouseonomics,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 thatanyonecan 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.

Houseonomicsincludes 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 thatwehave 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.

Excerpted from Houseonomics: Why Owning a Home Is Still a Great Investment by Gary N. Smith, Margaret H. Smith
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.