A friend accused me of “skirting the issue” in a previous blog post about homes in high-cost-of-living areas.
The real issue, he said, is not “What should I do with this home I own?” but instead “Should I buy a home to in the first place?” And a new blog post was born.
The home ownership question is to some extent objective and numbers-based. But let’s face it, it’s largely a game of opinions and emotion. You know what? I think that as long as the numbers part of it isn’t Just Plain Stupid, letting emotions runs the game can be ok.
An Investment or A Place to Call Home
A few years after the recent housing meltdown, I listened to an NPR piece (which I of course cannot now find despite minutes and minutes of Intense Googling) about buying a home. One of the commentators was an economics professor I’d had at Wellesley College. He made a comment that has stuck with me ever since (paraphrasing):
People buy a stove and get utility [fancy economics term for “use”] out of it every day. They don’t expect to then sell the stove after years of utility and get even more back than they paid for it. That daily use is enough, and all that’s expected. Why don’t we feel that way about housing?
I am not suggesting that we live in a house for 5, 10, 30 years and then light a match as we walk out the doors with our suitcase. But I AM suggesting that we are overly obsessed with housing as an investment, when in fact we get more utility out of our home than we do out of Anything Else In Our Lives. Surely, even if we “lose” some money or “don’t make a lot” of money on our house, we can still have gotten great value out of it.
Even beyond just basic utility, the non-financial benefits of homeownership (over renting) are many: replacing that godawful electric stove with a gas one, painting the walls whatever damn color you want knowing that you don’t have to paint it white again, and not having to fear that your home is going to be sold out from under you by a landlord.
When you get something of value at the store, don’t you expect to pay for it? Why is it so different here?
My own mother is selling her home in Virginia (to move close to my kids; thanks, Grandma!), which she has lived in for 40 years, and she’s probably not going to make any money on it, adjusting for inflation.
She’s kinda grumpy about that, but she has gotten 40 years of a place to eat, sleep, change diapers, grouse at teenagers, play with grandchildren, and be unsuitably rambunctious with her old-lady friends… and at least 10 years of that was mortgage free. She could probably sell it for ZERO dollars and I’d still consider it a win.
Admittedly, coastal Virginia ain’t exactly the San Francisco Bay Area, or Northern Virginia, or Seattle. In those areas, with their high prices that seem to get more out of reach with each passing year, people expect, possibly even need, to make money on their home purchase and sale.
But downturns DO happen though (not like the greater Las Vegas area in the housing downturn, but it happens). So buying a home with the primary goal of making money is a very concentrated risk. If you happen to make money, great! But it shouldn’t drive the decision, in my opinion.
Should You Even Consider Buying a Home?
If you’re contemplating buying a home, ask yourself these questions:
Feeling like the Settle Down type? My husband and I just bought our first house last summer. At 39, I became a homeowner for the first time. It wasn’t until I moved to Bellingham, WA that I ever truly wanted to own a home.
Reflecting on that, I realized that it’s because I was never confident I wanted to stay somewhere for the long-ish haul, until moving here. (Yes, it IS that awesome. Now, stay away.) As a lucky fluke, we avoided the real estate tragedy that so many other people endured during the 2007/2008 meltdown, less because we are Savvy Real Estate People and more because we simply weren’t ready to settle down then.
The longer you think you’re going to stay where you are, the less risky a home-purchase becomes. Not only because drops in the real estate market have longer to recover (much like investing in the stock market), but also because you have more time to get utility out of your house.
I don’t know much about other high-tech hubs like Seattle, Boston, Austin, the DC Metro area, etc., but I know that in the San Francisco Bay area, a lot of people leave after a while, often after they start families. Until you are pretty sure you’re going to stay somewhere for a good long while, I advise against buying a home.
Ready to have a job at home in addition to the one at work? Because owning a home brings with it all sorts of work, from researching and haggling with local roofers when a Crazy Wind Storm blows shingles off your garage, to mowing the lawn yourself, to making sure you get the property tax and homeowner’s insurance paid on time, to choosing a new washer-dryer set when yours craps out. Maybe you can pay someone to do some of these tasks, but trust me, you can’t outsource them all.
Do the numbers make sense? Sometimes, renting is much cheaper than owning. When I lived in San Francisco in the 2000s, that was true. The New York Times website has a pretty nice calculator for comparing the costs of renting and owning. See what it tells you about your area.
This isn’t a deciding factor necessarily, but at least don’t delude yourself about how much extra money you’re going to spend to own a home. Is that extra money worth it?
In some cases, you just obviously Can’t Afford to Buy. Disappointing, but it sure makes the answer simple.
Does buying a home you can afford mean making too many sacrifices?
I’m not really talking about the huge dent in your household budget your mortgage will make. I’m thinking more about the tendency we have to move further away (from our job, from the lifestyle we want) just in order to buy a home with enough square feet, with a yard, with a whatever.
Don’t let the frenzy of home buying make you forget (or downplay) the things that are important to you. I personally dislike driving; for me, so I would settle for a smaller house closer to the hubbub. For some people, the larger house is more important than the commute.
How much financial risk will buying a home create for you? Buying a home usually brings a huge debt, and usually the money tied up in your home is very illiquid, meaning you can’t quickly and easily get money out of it.
As a matter of general financial advice, I encourage clients to have a mix of taxable savings (which they can use for anything at any time, without penalty) and tax-protected savings (college, retirement). People often focus exclusively on their 401(k)s because of the ease of contribution and the tax savings.
But if financial emergencies arise, they have no good options: Take on the risk and expense of a 401(k) loan; Put the expense on a credit card and pay exorbitant interest; Beg family for help.
Similarly, if your net worth is concentrated in a single illiquid asset (your home), you won’t have a good way to handle a financial shock. If you can’t save money for emergencies and retirement after paying your mortgage, you likely shouldn’t buy the home.
“Enforced Savings.” A common rationalization for buying a house is that it’s “enforced savings”: If you don’t have the discipline to save money directly, then that monthly mortgage payment will force you to “save” in the form of home equity. The idea is not without merit, but I think it’s less important than most people think.
That “enforced savings” is not in fact money you can use to pay your bills; it’s part of the house. Now, you can get money out of your house by selling it or taking out a HELOC, but the former is a significant lifestyle choice, and the second is an otherwise unnecessary risk and complication. There are other ways to have “enforced savings,” notably, setting up your paycheck to direct part of each paycheck to certain savings accounts. When you need money, you don’t need to ransom part of your house to get it.
Financing is a huge issue, and I’m only touching on it. If buying a house is a good move for you personally and financially, then you’re lucky because it’s still a good time for financing. Interest rates are still at pretty historically low levels.
This should in no way be the reason you buy a house if otherwise it’s not right for you. But if it’s a question of when, might as well strike while the financing is cheap.
I have found The Mortgage Professor to be an excellent resource for all things mortgage, from education to getting mortgages. (And it’s run by a professor emeritus of finance at Wharton who happens to be the former business partner of my daughter’s ballet school owner here in Bellingham. Weird!).
Okay, so you’re going to give me an answer, right? Mmmm, no. As usual, I am Totally Not Telling You the Answer to Life’s Most Persistent Question. It’s just too personal an issue to give you a set of equations to run and then send you on your merry way. A home is so much more than an objective financial decision with a Right or Wrong answer.
But think through these issues I’ve brought up. Sometimes the answer is obvious (“The monthly payment is 80% of my take home pay!” or “I can afford it if I cut back over here and I Really Really want to settle down”). Sometimes you’re just going to have to weigh all the factors and, as long as you are honest with yourself, your decision will probably be ok.
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