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Homeownership is an important wealth building platform

Updated: Jun 23, 2023

1. Introduction and background

As an American tradition, our culture teaches us that homeownership is a path to wealth. Certainly, our tax code encourages it. Our mortgage finance system, broadly the system including Fannie Mae and Freddie Mac, provides lower-cost mortgage finance options. Included in this system is a government mortgage insurance program, collectively managed by the FHA, VA, USDA, and GNMA. This federally-backed program enables low-to-moderate-income individuals and first-time homebuyers to achieve homeownership. [i]

Our housing system is not without its past challenges. For example, resulting from the 2008-09 financial crisis, tens of millions of Americans either lost their homes or suffered significant delinquency. This was the result of a major economic recession and a collapse in home prices. There were many institutional failures leading to the financial crisis [ii] and as a society, we learned from this difficult lesson. Many changes have since been made to improve and increase resilience within the U.S. housing system. [iii]

The U.S. housing system, despite its past challenges, is still one of the best mass wealth-producing systems on the planet. We make the case that homeownership is a superior alternative to renting. We also provide tools, mindsets, and non-nonsense risk management suggestions to help make the best homebuying decision!


This article is presented in the following sections:

  1. Introduction and background

  2. What makes homeownership a better option?

  3. The renting challenge

  4. The adaptability mindset - home buying in action!

  5. Risk management

  6. Conclusion and notes

About the author: Jeff Hulett is a behavioral economist and a decision scientist. Jeff is a personal finance professor at James Madison University. Jeff is an executive with the Definitve Companies. Definitive helps people and organizations make the best decisions using time-tested and patented technology. Our solutions are developed from the research-informed behavioral sciences and decision sciences. Jeff holds advanced degrees in finance, mathematics, and economics.


A significant outcome of the financial crisis was a new set of real estate rental-based institutions. These companies were originally created to help America's financial institutions resolve the tremendous influx of distressed housing inventory. Just prior to the financial crisis, the U.S. was at an all-time low in distressed single-family inventory. It switched almost overnight. It was like a dam breaking and flooding a formerly dry valley.

Distressed properties flooded a marketplace completely unprepared to handle the historic volume. Companies quickly evolved to manage the "darker side" of the financial crisis. These were the companies that handled separating loan collateral from distressed borrowers and then remarketing (including renting) the properties. While some of the distress was related to foreclosure, many were handled outside of foreclosure, but still resulted in the same loss-of-home outcome. These rental and real estate management firms started as smaller company operations. Over time, a subset of these firms grew to become a professionalized industry and well-funded by investment banks. This system was originally catalyzed by Federal government programs to support banks and homeowners through the financial crisis. [iv]

Fast forward to today, this financial crisis-rooted industry is focused on providing Single-Family Rental (SFR) housing. These are companies that buy single-family homes with the intent of renting them. Their funding generally comes from large investment banks like Blackstone or BlackRock. These investment firms are making markets for bonds and funds holding SFR-based investments.

“The median price of an American house has increased by 28 percent over the last two years, as pandemic-driven demand and long-term demographic changes send buyers into crazed bidding wars. Might the fact that corporate investors snapped up 15 percent of U.S. homes for sale in the first quarter of this year have something to do with it?”

The industry’s growth depends on people’s willingness to substitute rental housing for homeownership. Depending on the market dynamics, the SFR industry can be either helpful or a significant challenge to homeownership. This challenge may deepen wealth-based social divisions.

  • We appreciated the SFR industry when we are in a buyer's market - that is a market where there is more housing supply than buyers. This was certainly the case during the financial crisis. In the buyer’s market case, the SFR industry is an important source of capital and liquidity.

  • However, in a seller's market - where there is more demand than homes available - the SFR industry can become a barrier to homeownership. It is difficult for an individual first-time homebuyer to compete with an all-cash offer backed by an investment bank! In the seller’s market case, the SFR industry is more likely to crowd out private home-buying capital.

As a final background point, systemic bias impacting mortgage credit is a valid concern. Systemic bias may be found in the data used to train mortgage loan assessment algorithms. The presence of systemic bias may make it unfairly more challenging for some people to obtain housing credit. This risk is particularly concerning for those that traditionally do NOT participate in the U.S. banking system. (I.e., The "unbanked.") This is a challenge that U.S. regulators, CRAs, (the credit data repositories) and credit modeling companies are attempting to correct. The simple systemic bias reasoning is that:

  1. Since racism and other forms of discrimination are found in our recent past, and

  2. Our credit data is a representation of our recent past reality, then

  3. It is reasonable to expect systemic bias may be found in our credit algorithms today.

Fixing our credit data is the critical step to correcting bias in our credit algorithms. That means including payment data from non-traditional data sources to train credit algorithms. This will enable credit algorithms to properly assess the traditionally unbanked population. Credit assessment bias is a big topic and is beyond the scope of this article. For a deeper dive, please see our related article Resolving Lending Bias - a proposal to improve credit decisions with more accurate credit data.

This article is intended to be helpful, regardless of your social class or banking-related background. Ultimately, knowledge of the broader housing system, an adaptable mindset, decision assistance apps, and some no-nonsense risk management thinking are great tools for overcoming potential bias and making the best decision for you!

Next, we explore why homeownership is a superior alternative to renting.


2. What makes homeownership a better option?

It is natural for people to think in terms of current cash flow. The most salient question is:

"Do I earn enough money today to pay my bills and hopefully have a little left over to save?"

If the answer is "yes" then all is good! Right? …. Not so fast! The answer is more nuanced: “It depends.”

Housing, whether rented or owned, is usually the single largest household payment. In this section, we show that where we make those housing payments is critical. We model the time-value impact of paying a rental payment and compare that to a similarly modeled mortgage payment. In our models, the starting rental payment is lower than the mortgage payment. We show how rental firms drive up the cost of housing, whereas a mortgage effectively fixes a homeowner’s housing payments over the long term. We show how about half a homeowner’s mortgage payment is a tax-benefited investment. We show how our own psychology, known as "availability bias," is working against us.

Next, we start at the base. We answer the question “What is in a mortgage payment?”

This chart is provided by economist Bill Knudson. [v] It shows the breakdown of the typical amortizing mortgage payment based on mortgage rates in February 2022. This is based on a $100,000 loan. You may apply a multiplier to make this graph relevant to your situation. Please notice the yellow and pink boxes. They show that only about half a mortgage payment, the interest, is the portion of the payment going to others. The rest, the principal and tax benefit, is for the homeowner! This means that only about half of the mortgage payment is comparable to rent, the other half is a scheduled benefit for the homeowner. Mortgage rates change regularly. By the time you read this, mortgage rates will likely be different. The proportion between principal and interest may be a little higher or lower, depending on the current mortgage rates. Also, even if you originate a mortgage at a higher rate, over time, the market ALWAYS provides refinance opportunities at lower rates. Take a long view when considering your mortgage options. The point is, a significant portion of your mortgage payment is going back to you!

Fun Fact: The word "amortization" is from the Latin stem "-mort." "-Mort" means "to kill" in Latin. As such, an amortizing loan payment literally means "killing the loan."

The rule of thumb is:

"About half a mortgage payment is an investment in yourself."

Good to keep this in mind when comparing renting to owning a home.

The next step in our reasoning process is to show the true long-term financial impact in a more meaningful (salient) way. Availability bias is a holdover from our own evolutionary biology. Thousands of years ago, it was important to our ancestors' survival to be hyper-focused on presently available sensory information. If you were eaten by a wild animal today, it hardly mattered how well you saved for the future! This legacy genetic coding made sense millennia ago. However, today it is both a) largely unnecessary and b) contrary to building wealth.

Today’s evolutionary challenge is that paying a little less today for rent than a mortgage is very salient. "Salient" is another word for "available." In the short term, paying less "feels" like the right thing to do. Even if paying more is actually an investment akin to taking money out of one of your pockets and placing it in another. To help us overcome our natural brain wiring, it is important to educate ourselves on how our rent vs. own decisions has a BIG impact on long-term wealth. Because it is in our nature to rent, homeownership must be intentional. The following is a graph showing the outcome of our homeowner’s stoic’s arbitrage model. This shows the long-term impact of homeownership vs. renting.

The headline is: A renter’s long-term opportunity cost is approximately $9 million! Another way to look at it is - You have 9 million good reasons to take a chance on homeownership! As such, even if the model is not exactly your expectation, it still pays to own. Please notice it takes time for the value of homeownership to accelerate. As such: Start Young! Getting on the homeownership ladder when younger will greatly improve your long-term wealth creation.

Side note about the stoic’s arbitrage: We all have high-value choices to make. The rent v. own decision is one of those choices. The stoic’s arbitrage is the long-term value trade associated with a particular choice outcome. The following graph shows the expected outcome of just such a trade. In this case, the trade is selling yourself out of a rental property and buying yourself into homeownership. Both of which provide a similar “roof over your head” utility. Please see our article series The Stoic’s Arbitrage - A Personal Finance Journey for more context and additional examples.

There are a few assumptions and observations worth mentioning:

  • The model is based on a $400,000, 30-year amortizing loan with a tax-adjusted rate of 3.5%. There are certainly lower price, more affordable home-buying options. Below, we suggest some savvy adaptability options to help find the home that meets your financial needs. Also, do not worry if your mortgage rate is higher, the mortgage rate has a smaller outcome impact in the blue part of the graph.

  • The growth in the blue (homeowner) part of the graph is from the “invest in yourself” part of the loan payment shown earlier. It is also the result of home appreciation.

  • The person starts work at 22 and retires 40 years later at 62.

  • We assume the starting rent payment is only 80% of the mortgage payment. The model demonstrates the power of fixing a long-term housing payment v. the rent increasing over time. [vi]

  • We assume rent payments increase generally at a 5-year average, based on actual past annual rental payment change experience. This is a significant driver and is represented in the orange part of the graph. If rental rates change faster, the future value opportunity cost of renting increases significantly.

Next, we discuss the challenge of renting. Particularly given the incentives of the large investment banks that fund much of the SFR housing.


3. The renting challenge

Investors generally seek yield. This should not be surprising. For most of us, making more money on a stock or bond portfolio is better than making less. If you were given the choice of making more or less money on similar investments, you would likely choose to make more. In the last decade, interest rates have been low. This generally means investment returns, on average, are lower. SFR bond yields are now higher and are generally increasing. This means an investor may get a higher return on a rent-based bond than on a similar mortgage-backed bond. (Technical note: risks of different bonds may be evaluated by comparing bond convexity-based characteristics [vii])

Notice the most recent bond volume is increasing significantly. This is because, according to and, and others, U.S. rental payment rates have increased annually by over 7% since 2020.

For those living in particularly hot markets like Los Angeles, these rents have increased by double, triple, or even more than the national average. This relates to an individual’s long-term wealth risk management. As observed in the earlier graph, this is why we see such a big wealth separation between the homeownership and rental value creation potential. When you originate a mortgage, it is based on your ability to pay TODAY. For many, including professional and non-professional employees in their 20s, salary increases over time. The growing difference between future salary increases and your fixed mortgage payment is your PRIMARY source of wealth-building capacity. This is an important point. Homeownership not only provides a roof over your head, but it also provides the foundation for wealth accumulation. However, it is likely a landlord, often backed by investment banks, will regularly increase your rent. As such, over time, the rental is sucking away your wealth capacity.

By the way, do not blame the landlord or the investment banks, they are simply doing what they do: optimizing return under a market and legal-based rule set. However, individuals should use this stoic-informed knowledge to evaluate "doing what you do." That is, if you are renting, consider buying a home. Admittedly, in a seller's market and competing against investment banks, it is more difficult to find the best home-buying alternative. Homeownership success is directly related to your willingness to be adaptable.


4. The adaptable mindset - home buying in action!

People are amazingly adaptable. It is in our nature. However, sometimes it is challenging to be adaptable when we lack knowledge or experience with something that seems scary or difficult. Your adaptability is a key enabler to homeownership success. The good news is, once you start, you will find buying a home is neither difficult nor scary. The following are a few adaptations to consider:

1. Reverse Migration: For some, the pandemic has provided more work location flexibility. If you are presently living in a hot/high-cost market, it may be time to relocate to a lower-cost but rising housing market. A new norm called the "donut effect" enables people to live outside a headquarters city, but close enough for periodic onsite meetings. A hundred years ago, the U.S. saw a rural-to-urban migration as people flocked to big cities for work. Today, there is a new “urban to less urban” migration owing to pandemic concerns and new work-from-anywhere company employee location policies.

2. Country Music Lifestyle: Some have taken the new pandemic work-from-anywhere norms to explore many areas. Some are moving with the seasons to areas that interest them. WiFi and mobile technology enable them to work hard. Interesting areas (ski, beach, hiking, etc) allow them to play hard. If you are currently living in multiple locations, it may be time to buy an investment property. [viii] Buy it in an area you may want to eventually live. You may need a property manager to handle the rental since you are not always in town. While this will reduce the blue or homeownership value, it will still enable you to eliminate the larger orange or renting opportunity cost. Eventually, you may wish to live in this home. Once you do, this will help you realize the homeownership value.

3. Friends & Tenants: If you are just entering the workforce, consider a lower-cost city and buying a home with the intent to rent rooms to others. Mortgage companies do have programs to include rental income from others for mortgage loan income qualification. Most mortgage companies have low down payment mortgages (e.g., FHA-insured loans) for those with income but not as much in savings. There are many resources for finding more affordable U.S. housing markets. Here is one example from the google search “most affordable us housing markets:” Forbes Article.

4. Co-ownership: Most people think of joint ownership in the context of a married couple. A little-known but increasing trend is toward multiple joint owners that are not married. It could even be more than 2 people. Because homes have become less affordable, co-ownership is a way for a group of people to pool their resources to buy a home together. It is a great way for people that may not have enough income and assets separately to come together to buy a home. As you can imagine, this could get tricky. It is important that all members of the group are aligned on their criteria for buying the home. Also important is alignment for exiting the home. What if someone gets another job? What if someone cannot pay their fair share? In my experience, a well-crafted operating agreement is essential for documenting the exit criteria. The operating agreement, signed by all parties, contains the exit rules all parties agree upon. My two younger sons went into a co-ownership agreement to buy a home. They had 4 co-owners, my two sons and two other friends. My son Daniel said:

"The operating agreement was critical, it helped us all get on the same page. We had good discussions upfront to head off any future misunderstanding."

5. Down Payment Assistance: Down Payment Assistance programs ("DPA") are encouraged by Federal, State, and Local governments. This is in recognition of U.S. affordable housing challenges. The good news is, there are lots of DPAs and other mortgage assistance available. The challenge becomes researching and matching the best DPA to your needs. If you suspect you may need down payment assistance, the best place to start is with an independent DPA marketplace provider. A great example is Stairs Financial. They are a technology company that has aggregated most DPA data across the U.S. Think of them as a one-stop shop for DPA information. Also, wrapping your DPA and other homebuying information in a great decision process is essential. More data has a way of being confusing unless it is part of a structured decision process. A little later, we discuss Definitive Choice as a tool to help you make decisions.

To achieve homeownership, it will help to engage professional advisors. Your home buying team may include both:

  • A realtor: someone to help you find a home, and

  • A mortgage loan officer: someone to help you get a mortgage.

The best part about your professional advisors is that your success is aligned with their success. That is, their job performance evaluation is enhanced when you close on your new home. There is some nuance to the realtor’s incentives. They are incented to make sure the house transaction closes, but not necessarily at the best price for you. You may consider the realtor as part of a 3-way negotiation:

  • seller - wants to sell at the highest price

  • buyer - wants to buy at the lowest price

  • realtor - wants the transaction to close with as little work (cost) to them as possible.

This incentive misalignment is not such a bad thing, since getting on the housing ladder is most important. As we show in the next section, your final price is not so important when you view it as part of a long-term series of housing transactions. Finally, with today’s information and decision tools, it may be possible to buy a house without a realtor. [ix]

The pro is - you should save money on the commission. The con is - you will be trading your time value for the expertise a good realtor provides.

For first-time homebuyers, I recommend using a realtor. For more home buying information, including tools to help make the best home buying decision, please see our article: Making the best home buying decision.

At the beginning of the house-hunting process, be sure to get pre-qualified for a mortgage loan. Particularly for first-time homebuyers, an experienced mortgage lender will help you learn the important aspects of mortgage lending. Next are a few suggestions for first-time homebuyers:

  • Educate yourself! There are many resources. The Consumer Financial Protection Bureau is a good place to start: Buying a house

  • Pull your basic information together about mortgage qualification, including how much money is available for a down payment and closing costs plus your monthly income.

  • Down payment funding is typically a challenge for first-time homebuyers. If your family is willing to help, now is a good time to ask.

Learning about the mortgage process is critical for managing your long-term stoic’s arbitrage-based wealth. Most important, you will learn what you need to do to be successful both now and in the future. You will be amazed at the number of mortgage options available. If for some reason you do not qualify for the house you had in mind, remember this is not a “Yes or No” result. It is a “Now or Not yet” intermediate step toward homeownership success.

There is certainly more to home buying than the mortgage. You will also need to weigh your many homebuying preference factors. Such as size, location, schools, rental readiness, neighborhood type, and many more. Our brains have some amazing strengths, the preference weighting process is NOT one of them. Multiple criteria, costs, and multiple home alternatives create a burden for our brains to process. This is especially true since:

  • Home buying is infrequent, and

  • Home buying often combines the unique needs of multiple buyers.

Those in the real estate business train their brains to handle these decisions. For the rest of us, the volume of information and lack of process transparency may create confusion and a lack of confidence.

The good news is that there are affordable decision science-enabled apps available to help! I suggest using simple and effective decision apps to help you weigh and order your preferences, costs, and home alternatives. I‘ve used Definitive Choice in the past.

Decision apps are like “pocket confidence!” It is reassuring to know where you stand and when to walk away from a home sales negotiation.

Earlier, we discussed the potential bias found in loan assessment algorithms. Keep in mind that bias, more broadly defined, simply describes part of a process leading to a less-than-accurate outcome. This can happen to anyone. Decisions apps and housing education are your greatest countermeasure. By actively owning the homeownership decision process, you are increasing the likelihood of the best result.


5. Risk management

Most people, particularly younger buyers, should not worry about the degree to which a house is perceived to be "overpriced" or "underpriced." In this section, we provide a risk management approach that hedges market volatility.

People worry that they may be buying in a bubble or at the top of a housing market. This may or may not be true. Regarding real estate market forecasting, the three things I have learned are:

  1. Markets are cyclical,

  2. The current market cycle always lasts longer than I thought, and

  3. The current market cycle always changes faster than I thought.

This means - the season will eventually change, I’m just not sure when. Be that as it may, we all must live somewhere. This leads us to an important point - do not just focus on the gain or loss of a house as a single buy and sell transaction. Think of your housing decisions as a series of transactions over decades. This series of transactions approach provides a hedge that means it doesn’t matter whether a single transaction is a gain or loss. In the context of housing as a series of transactions, your long-term housing value is hedged with a serial collar. This fancy-sounding finance word means:

A gain on a single transaction means you are likely to buy your next house for more. If you buy a house, sell it, and it goes up in value - that is good news just for that transaction. In the graph, this is 1. The home was bought “B” at the beginning of the yellow period and sold “S” at the end. Notice the house transaction was bought below the dotted line and sold above the dotted line. However, you still need to buy your next house. The next house you buy will likely share the same higher market value dynamics. All you have done is moved your gain into the higher price you had to pay for your next house. The gain is a wash.

A loss on a single transaction means you are likely to buy your next house for less. The same concept works on the downside. If you buy a house, sell it, and it goes down in value - that is bad news just for that transaction. In the graph, this is 2. The home was bought “B” at the beginning of the blueish period and sold “S” at the end. Notice the house transaction was bought above the dotted line and sold below the dotted line. However, you still need to buy your next house. The next house you buy will likely share the same lower market value dynamics. All you have done is moved your loss into the lower price you had to pay for your next house. The loss is a wash.

Housing markets are very challenging a) to predict when they will change, and b) the speed of change is often very fast. As such, trying to predict them is like trying to catch a falling knife. You may get lucky but you are much more likely to get bloody instead! As such, use this serial collar approach to have confidence that whenever you buy your home, over the long run, you will be better off regardless of the point in the cycle it was purchased.

Nobel laureate Richard Thaler said: "Generally we won’t quit until it’s no longer a decision." [x] Dr. Thaler's comment relates to the natural challenge to "quit" renting. This means people are not only slow to change their minds but often will not change their minds unless forced. Changing from renting to owning is certainly a change of mind. This article shows many good reasons to quit renting and buy a home. This should help overcome your natural aversion to change. Earlier, we gave you $9mm good reasons to change your mind!

Nobel laureate Daniel Kahneman [xi] teaches us that people are weirdly more sensitive to losses as compared to gains. Dr. Kahneman said: “A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.” As such, buyers tend to "lock up" when it is perceived a housing market is peaking. Our risk management approach provides "peace" for those perceived losses. The serial collar provides confidence it is ok to buy or sell, even when you think the market is at the top. The most important takeaways are 1) you are fooling yourself if you think you can time the market and 2) use your risk-enabled insight to overcome your natural loss aversion negatively impacting your willingness to change your mind.

Market psychology plays into market timing. When combined with the serial collar hedge, the need to time the market is effectively eliminated. Market timing is a function of the aggregated market participants. You may or may not be near a market top. The top will only be revealed after the fact and after there is nothing you may do about it! Most sellers have established "paper" gains. These are like psychological anchors. These paper gains are based on sales prices over the last year or so. Sellers are emotionally protective of those anchored gains. The next graphic overlays standard change psychology from pioneering researcher Elisabeth Kubler-Ross upon the typical real estate market cycle. The Kubler-Ross’ “4 stages of change” model appropriately describes the seller’s mindset in a transitioning real estate market. It takes time, plus signals from other sellers, for the seller to adjust their sales price expectations.

The market tends to transition from a seller's market, then to a "wait-and-see" market, and finally to a buyer's market. In a wait-and-see market, the investment bank-funded buyers have already exited, the sellers are in the "Denial" or "Resistance" phase of change, and the remaining buyers are waiting for a market drop. The challenge as a buyer is that when the wait-and-see period ends and sellers are moving to the "Exploration" and "Acceptance" phases of change, the best properties and selection will be gone. I suggest buying when the appropriate alternative is available and negotiating the best price you can. Be confident that the serial hedge will protect you over multiple transactions.

To be clear, this is not to suggest doing your homework and negotiating the best price is not important. It is. Allow your decision-making to benefit from a long-term risk management perspective. In the end, do not use the “market is too high to buy” mindset as an excuse not to participate in the housing market. Especially for first-time homebuyers, you have the advantage of time and the likelihood that you will be “trading up” via multiple transactions throughout your life. As we explored in section 2, the time value of money takes time to accumulate. As such, the opportunity cost of renting is generally highest for younger buyers, especially when delayed.

Home size and unwinding your series of housing transactions. Let's say you have been using this serial collar strategy throughout your life. You have been "trading up" through a series of housing transactions. At some point, it may be time to downsize or move to a retirement community. The following are economic observations related to home size:

  • Less expensive homes generally have more people eligible to buy them. A higher stock of demand generally provides more price competition and home value stability.

  • More expensive homes, conversely, generally have fewer people eligible to buy them. A lower stock of demand generally provides less price competition and home value volatility.

Thus, when it comes time to "trade out" of homeownership, look for a way to sell into a market increasing for more expensive homes. The 2021 pandemic time period provided such an opportunity for those ready to trade out.

Risk management summary: Whether a single housing transaction results in a gain or a loss, you have a serial collar hedge because the next housing transaction should share similar market dynamics. Also, given you will likely buy and sell multiple houses over many decades, do not get too hung up on the current sales price. In the big picture, this is akin to jumping over dollars to get to pennies. The most important assumptions when executing this serial collar strategy are:

  1. The housing markets you are selling and buying are relatively homogeneous. Meaning, that the selling and buying housing market value changes should be correlated. The good news is that housing markets are often correlated. Rarely do housing markets move in opposite directions.

  2. The transactions of a) selling your current house and b) buying your next house - occur relatively close in time.

  3. Trying to time the market is both unnecessary and fraught with hidden costs. Delay includes large opportunity costs, especially impacting younger buyers.

  4. In the long run - i.e.: across multiple business cycles - the housing market is increasing above the rate of inflation. With very few exceptions, this has been occurring in the U.S. for centuries.


6. Conclusion

Clearly, the homeownership effort is its own reward.... with the reward estimated at $9 million for retirement! Finally, do not forget Voltaire's very relevant admonition:

"Perfect is the enemy of the good."

That is, don't let "FOMO," fear, and our natural, but not helpful loss aversion biases [xi] get in the way. It is your curiosity and desire to learn, long-term value focus, adaptability, and risk management understanding that power a great home-buying decision.



[i] Office of the Comptroller of the Currency (OCC), Mortgage Banking, Comptroller's Handbook, 2014

See the background section for a nice mortgage market summary.

[ii] Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, 2016

[iv] Financial crisis programs such as:

[v] Knudson, Mortgage Rates: February 3, 2022, The Curiosity Vine, 2022

[vi] A natural reaction is, then "Why doesn’t the government just fix rental prices?" This is known as "rent control." Rent control has been used in the past and still exists in some large cities like New York City and San Francisco. As we discuss in our article, demand-side policies like rent control have been shown to be contrary to affordable housing goals. This means, when the government “squeezes the balloon,” what pops out has a higher cost than the squeeze benefit.

[vii] Bond convexity is a way to compare bond risk. Comparing only expected yield could be deceiving. Convexity is generally derived by a mathematical calculation. What follows is my intuitive definition of bond convexity related to RMBS and SFR bonds.

A bond may be described as the functional relationship between the market interest rate and the bond price. Convexity involves the first and second derivatives of this functional relationship. Bond prices and interest rates typically move in opposite directions. All bonds have pricing and yield volatility. Basically, "good" convexity is when there is upward interest rate volatility, the bond yield improves more than the yield declines when there is downward volatility. Just the opposite, "bad" convexity (or concavity in the extreme) is when there is upward interest rate volatility, the bond yield improves less than the yield declines when there is downward volatility.

It is important to compare the convexity characteristics of rent-backed (SFR bonds) v. mortgage-backed (RMBS bonds) securities. Since the collateral of both SFR and RMBS bonds are a) based on single-family homes and b) generally similar (a basket of single-family homes) there is reason to believe these two bond types share similar convexity characteristics. But as some wise person said, "Hope is not a strategy." As such, it is always good to confirm bond risks.

See the mortgage and adaptability sections for more information and examples.

[ix] Steve Levitt in his book Freakonomics does a nice job describing the nuanced realtors’ incentives and the potential impact on the buyers. Levitt, Dubner, Freakonomics - A Rogue Economist Explains The Hidden Side Of Everything, 2006

[x] An interview, People I Mostly Admire, Steven Levitt with Annie Duke, “Annie Duke Thinks You Should Quit”, episode 93, 2020.

[xi] Loss aversion is a potentially destructive cognitive bias. It is covered by many behavioral economists. Below is a sample:


The Stoic's Arbitrage: Your Personal Finance Tour Guide

Core Concepts

Making the money!

Spending the money!

10. Budgeting - Budgeting like a stoic

14. College choice - College Success!

Investing the money!

Pulling it together!


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