Paying cash doesn't make it smart

Wes wants to know if paying cash for a "tiny house" is a good idea. Dave doesn't think so, and he explains his feelings here.

QUESTION: Wes asks Dave’s opinion on paying cash for a “tiny house.” While the answer may not be cool, it does make sense from a long-term and short-term point of view.

ANSWER: This is a very un-hip thing to say, but I would not buy a tiny house. The problem with the tiny house idea is that there’s no track record on it, and it could be a fad. Another problem is that you’d have a very tiny market when it comes time to sell your tiny house. Translation? They probably won’t go up in value. They may actually go down in value.

There’s a thing in economics called the supply-demand curve. The higher the supply is versus the demand, the lower the price. The higher the demand is versus the supply, the higher the price. The tiny house has a tiny demand, and it doesn’t have a broad market appeal. It only has an appeal for early adopters, and people who think they’ll never be able to afford a house, or people who think it’s cool — which is an even lower appeal. It’s not got a broad appeal when you get ready to sell it, and thus you have a problem.

I have a friend who built a $4 million lake house in an area full of $600,000 houses. The market for $4 million houses on that lake is tiny. He likely will never sell it, and if he does he will sell it cheaper than he would if it were a $4 million house parked among other $4 million houses. So, he gets to live with this house a while. He did not build it wisely in terms of resale. Where there’s a low demand for something, it drives the price down. That’s the problem with the tiny house movement.

If you think I’m wrong, and enough people buy tiny houses and they become a real part of our culture, then maybe they’ll do okay. But it’s an unproven product line. It’s an unproven concept that appears to be a fad. So, I wouldn’t buy a tiny house. If you could sell me a tiny house at half of its current value, I still wouldn’t buy it because I’m afraid it would drop to a fourth of its current value. There’s no proven record of these things going up in value.

Paying cash for something that goes down in value versus buying something that goes up in value, that’s a bad deal. At that point, paying cash for it doesn’t make it smart.