Is Buying a House Always a Good Decision?
The American Dream. It’s a symbol of success and adulthood. For some people it can be a sign of status and a source of great pride. It’s a wonderful tax write off. Plus, it can even be used as a source of cash when you need an easy loan.
Why in the world would you throw money down the drain renting when you can build equity in a house? You can’t make more land! You should start saving for your first house the minute you get your first pay check. Sound familiar? This is some of the conventional wisdom you’ve probably heard when it comes to buying a house.
Those Who Control the Past
The housing crisis of 2008 in the United States put a large dent into the argument that buying a house is always a good deal. However, as the economy began to recover and the carnage in the housing market slowed down, the old arguments for buying a house came right back into style. The notion that owning a home is always a great idea is woven strongly into the fabric of our culture.
There can be very good reasons for you to decide to buy a house or upgrade your current home. I own my current house and I am really happy with the decision. Many people I work with make a living in real estate and in flipping houses. You can be very successful in those industries. I am certainly not “anti-house”. However, I am very much against bringing a financial burden into your life.
My focus here is discussing your personal property where you are going to live. There are a lot of myths and false assumptions that people make about buying versus renting, the long term value of a home, and the overall impact on their financial situation. House fever and emotion can lead to a big financial mistake. Although I am optimistic, I do not want people to forget the lessons of 2008.
Dream or Nightmare?
Like so many of the other decisions that you will make in regards to finances, the answer to the question of buying a house comes down to your circumstances. Owning a home isn’t necessarily a good or bad thing. There are factors that should be carefully considered to see if it’s the right thing for you to do.
The problem for many people is that their home becomes a burden to them. Since buying a house is marketed as a slam dunk decision, many have made the mistake of buying the biggest house they can. That usually means taking on the biggest mortgage payment the lenders approve them for.
If most of your paycheck then goes into paying a mortgage, taxes, insurance, maintenance, and utilities, it can quickly become a nightmare. Houses can become a money pit fast. If you do not have cash to back up emergencies and other expenses, it can become a financial sink hole.
My overall advice to clients, especially those considering a house purchase is this: Buying a home is a primarily a lifestyle decision and should be weighed carefully as part of your long term financial goals and objectives. The wrong home purchase could be the fastest way to threaten your financial future.
When you listen to those in the housing industry, the best time to buy a house is always right now. If the interest rates remain down, they could go up and you better lock in that low number! If you can’t afford the 20% down payment that most experts recommend, that’s no problem. There are all kinds of products on the market that can make sure you get into the house.
Still not sure where you will be in 5 years? No problem! The market is hot right now and you can sell the house for a profit in a few years if you have to move. Better yet, you can keep it and rent it out, then take out another mortgage on a new house. That way your tenant will be paying your mortgage for you while you build the equity! In a perfect scenario, that sounds awesome. The problem is when do things ever go perfectly?
I can give you real world examples of people who had the very best intentions using that reasoning and got burned. The reality is that interest rates fluctuate all the time. Trying to time a real estate market is asking for trouble.
No Money – No Problem!
Putting no or little money down on a house can work out for some people long term. It can also lead to big trouble. What if you decide to sell faster than you intended to? Could you afford to pay at closing to get out of a house you need to sell? What if the market gets cold a year from now and you owe more than you can sell it for? This stuff happens all the time.
I know several friends who were uncertain of their career and personal circumstances and bought a house despite being nervous about the decision. Some of them ended up being stuck with a house payment for their old house as well as their new one. Finally, they ended up taking a bath on the house they were desperate to sell.
The ones that decided to rent their house had awful tenants and ended up having to fight to get a small part of the rent money they were desperate for in order to cover the payments. Becoming a landlord is another subject entirely and warrants much more discussion. However, you can see the point. Worse case scenarios? You bet. But, also realities that can happen with a house purchase that you need to consider.
The “I” Word
Once source of conventional wisdom that has been refuted by many scholars and can be confirmed by many of us who have experienced it first-hand is that owning a home is always a good investment. Anyone who owned a home around 2008 can probably tell you a horror story about this nugget of wisdom.
I know the condo we lived in at the time lost about 50% of its value on paper, and in reality we wouldn’t have been able to sell it for that amount for several years. If we would have needed to sell it to relocate, we would have taken a beating.
Even with the market in recovery, we ended up selling it for way less than we paid for it 10 years later. Thankfully, we had equity built up in the property, but all the extra cash we had put towards the mortgage payment could have went toward investments that would have made us money.
I still consider us fortunate compared to many of my friends and family who ended up having to short sell their homes or declare bankruptcy during those horrible economic times. These were all hard working people who had the best intentions with their homes and paying their debts. Many of them had made responsible choices in regards to the size and location of their house.
Of course, there were many factors that led to the deplorable events of 2008, but it really blew the lid off the myth that a house is always a great investment. Many innocent people were taken for a ride due to market shenanigans that led to the meltdown. Thankfully, everyone I know has recovered and done well since, but it was a major blow to their financial goals and led to a lot of stress and disappointment.
Asset or Investment?
A house can be a sensible addition to a solid financial plan. But I do not want you to think of it as an investment from the conventional view. From an economic standpoint, I would recommend the wisdom of Robert Shiller, who is a Yale economist and a Nobel Prize winner.
Professor Shiller analyzed decades of data and found that over a hundred years, home prices only grew 0.3% once you adjust for inflation. The S&P 500 would have done around 6.5% for an annual return. Which one would you rather invest in?
Unfortunately, many people find themselves unable to invest in other assets because they have so much tied up monthly in making their house payments. Buyers have bought large homes at the expense of having adequate cash on hand for an emergency, making retirement contributions, saving for college, and building a well-diversified portfolio. Remember, just because the mortgage company approves you for a large mortgage doesn’t mean you can actually afford the payment.
With the market in recovery and inventory tight, I have spoken to a lot of people who feel they need to buy a house. It is true that rents have skyrocketed in recent years. If you are planning to be in an area long term, buying a house can work out just fine. Just remember there is a lot of emotion when it comes to getting a house.
House fever can be a very dangerous thing. I see it in my neighborhood with young couples looking at the shiny new “Mc Mansions” popping up in the area. A house can be a solid asset and part of a strong financial plan. I just ask people to really weigh the decision carefully based on numbers along with emotion.
I hope the lessons of the recent past continue to leave a reminder. Think about a house purchase carefully along with your life and financial goals. We all need a place to live, just do not let it derail your budget. Do the math, think about your future, and consider the pros and cons.