So you think you want to buy a home? Ready to fulfill your destiny and achieve the American Dream?
Before you take the plunge, consider these four reasons not to buy.
1. A home is not a financial investment
Source: WoodleyWonderWorks.
For many Americans, the home purchase is the single largest purchase they will ever make. Many see it as a crowning moment and representative of success, particularly financially.
The problem is that, frankly, home ownership hasn't represented financial success for a long time.
Home price appreciation over the last 50 years has barely kept up with inflation. There is also the issue of saving up what can be a tremendous sum of cash for your down payment, and don't forget that your mortgage interest is lining the pockets of dubiously motivated Wall Street bankers.
Buying a home is not exactly the pinnacle of financial success. Many Americans don't understand this, and in the name of doing what everyone else is doing, are willing to buy a house and take on...
2. A lot of debt
Over the past several years, the median household income in the U.S. has hovered around $50,000 annually. Over the same period, the median price for a new home was just north of $200,000.
Are you really comfortable taking on four times your annual, before-taxes income in debt?
A 20% down payment on that house would be $40,000. Are you willing to put down that kind of cash just to qualify for a traditional mortgage? That's 80% of your total pre-tax income in a year, spent on one purchase.
Following this path is not necessary, and in many cases is inadvisable. Look no further than Europe to see examples where renting is preferred over owning.
According to this story from Quartz.com, about 80% of Spaniards live in owner-occupied housing. In German, by contrast, only about 40% of citizens live in homes they own. Germany is the strongest economy in Europe, and its industries and people are among the most productive and efficient in the world. The unemployment rate in Germany is just 5.2%; in Spain, that number is 27%.
This is not to imply that the German housing system is the driver in these differences with Spain. Causation and correlation are two very different animals. However, it does show you can be very successful financially without taking on the gigantic debt load of a mortgage.
Home ownership is great, until something breaks!
3. Owning is often more expensive than renting
Renters have the benefit of living in a home, without the obligation to spend money to maintain it. When heaters break in the middle of a "snow-pacolypse" or when the AC goes down on a hot July day, it's the homeowner who foots the bill to get the system fixed, not the renter. And that's just the start. A recent article on LearnVest.com put it:
There are a lot of costs that come with home ownership besides your down payment. One of the most common home-buying mistakes people make is thinking that they're merely trading a rent payment for a mortgage. You'll also want to estimate the property taxes and insurance of any property you consider, plus any renovations you'd need to do, then decide if the place is within your reach.
4. When you buy, you limit your options for change
One consideration, particularly for younger potential home buyers, is mobility. Buying a home is a serious anchor to your current town, job, and lifestyle.
Have an opportunity to accept a big promotion? Better hope the new job is close by, because moving is going to be a major challenge. Your home may not sell for two, three, six, or even 12 months after you've listed it for sale. Can you afford paying for two homes until it sells? And don't forget selling your home will cost you at least 5% in sales commission -- that can quickly eat away any price appreciation you may have, or even cause you to lose money on the "investment."
The changing needs of your family are another area where the flexibility of renting has real benefits. Single but thinking about tying the knot to that special someone? Let's hope he or she is on board with your home. Otherwise you're stuck in the same situation as above; you could consider renting the home out, but that brings on a whole new set of problems and expenses.
Buying a house is a financial decision, not an emotional one
After reading this, you may conclude buying your new home is the right decision. If that's the case, congratulations. I made the same assessment and currently own the home in which I live.
But for many Americans, the benefits of home ownership simply do not add up to overcome the benefits of renting. Everyone should evaluate their own financial situation, understand what you can (and cannot) afford, and make prudent, reasoned decisions.
The largest purchase of your life shouldn't be motivated by emotion. It should be made logically to maximize the financial and non-financial benefits to you and your family.
