Thursday, July 22, 2010

Does Buying a House Make You More Financially Responsible?

The Wealthy Boomer did a piece on the financial habits of homeowners and non-homeowners. The piece quotes from a survey that concludes that homeowners are more financially fit. This study is reasonable as far as it goes, but the conclusions confuse correlation with causation.

Among Canadians who own a home, 65% pay off their credit card balances each month compared to only 48% of non-homeowners. This and other statistics leads Genworth Financial president and COO Peter Vukanovich to conclude that “homeownership helps people focus on their financial situation and get their fiscal house in order.” The idea is that buying a home somehow makes you better at managing your money.

This last part is a theory based on the correlation uncovered by the study. Another theory is that people who cannot manage their money well are less likely to buy homes. Personally, I find this theory more plausible. Maybe there is some truth to both theories, but the statistics do not prove either one.

This whole business is like examining the height of basketball players and concluding that you can grow taller if you start playing basketball. In this case it is quite obvious that causation goes in the other direction; people who are tall are more likely to be drawn to playing basketball.

This problem with the conclusions of studies comes up very frequently. The next time you read about a study, try looking for unjustified leaps to convenient conclusions.

7 comments:

  1. What a fantastic analogy! Love it.

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  2. I suppose there is some cause and effect relationship here, but I wouldn't say it's conclusive any means. Are people who collect coupons better savers than those who do not? No doubt people who don't manage money well aren't able to afford a home in the first place.

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  3. @Preet: I struggled to find a good analogy and almost gave up before thinking of the basketball idea. That was fun :-)

    @Financial Cents: I agree that there is likely a cause and effect relationship here, but it's not obvious.

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  4. Is anyone else surprised by the stat of 49% of people put 20% or more down on their purchase?

    Is that not a huge boost of confidence for the stability of the housing market knowing that so many current owners have significant equity in their homes? If you were to believe the doomesday theorists, you'd think everyone had a 0-5% down 40 year am mortgage.

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  5. @nmm66: Half of home buyers with a down payment of 20% or more sounds pretty good. But, I don't know what percentage did this before the credit crunch.

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  6. Did you know that there's a causal link between your parents having children and you being a parent? Chances are, if your parents were childless, you won't have any children either.

    A good example I heard of the causation confusion was a city planner who determined that commercial zones have slow-moving traffic and lots of traffic lights. So, he designed a new commercial area with lots of superfluous traffic lights, only to find that people were aggravated by the slow commute and no one was interested in developing there anyway.

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  7. @Gene: That city planner story is too much. Perhaps it would have worked if he had added some extra smog.

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