Since World War II, owning your home has come to symbolize the American Dream. But the dream of owning a home has taken a beating during the last decade. After everything that's happened, maybe it's time we pressed ourselves on whether it really makes more sense to buy a home instead of renting.
In 2004, people were buying homes they really couldn't afford because they either expected home values to double in a year or believed they'd be priced out of the market forever if they didn't buy right then and there. Since then we've gone from flipping a house in a month to watching them remain empty for months, if not years.
When James Altucher stated that he would never own a home again, he also made a valid, if uncomfortable, point regarding people's expectations about home ownership.
"Few are asking whether the dream was real or not, but rather are asking, when will we be restored our proper rights as citizens -- our right to once again own our own homes?"
During the last decade, the housing and mortgage industry, along with the government, encouraged everyone to believe that not only could they own a home, but that they should own a home. But with home prices on the way up again in several markets, it's worth remembering two ignored and ugly truths:
1. Home values won't always go up.
Home prices are not guaranteed to go up, let alone stay there even if they do rise. The housing market has shown that it's susceptible to bubbles. In this case, we've seen the bottom drop out of housing prices. How confident are you that you'll predict the next one?
2. Home prices don't reflect the real cost of ownership.
Altucher makes the valid point that if you want to own a home, you can't forget about the following:
- Insurance premiums
- Property taxes
- Yard work
- Real estate agent costs
- Closing costs
- Initial remodeling costs
For most people, buying a house will be the largest financial decision they'll ever make. Caught up in that decision is a ton of emotional baggage, because when we buy a house we're buying a home, the place where we'll live and perhaps raise our families. We think it will lead to feelings of security. So the purchase is rarely just about the dollars and cents, despite what we may tell ourselves about our homes being an investment.
In 2004, home ownership hit an all-time high of more than 69%. Since then, that number has dropped to 66.5%. The drop has been attributed to several factors, most notably foreclosures and an inability to qualify for a mortgage now that lenders actually have underwriting rules again.
With all the changes in the market, does that mean you shouldn't buy a house? Barry Ritholtz countered Altucher's position with some of the benefits we still associate with home ownership. When you buy a home, you can select school districts. You also gain the ability to live somewhere as long as you want (as long as you can pay the mortgage). Then there's the possibility of a mortgage tax deduction.
All those things aside, I think the entire issue comes down to two questions:
- How long will you live in the house?
- During the time you live in the house, how much will it appreciate or depreciate?
If you can answer those two simple questions, I can build you a spreadsheet that will tell you whether you should rent or buy. But there's a catch. These simple questions are just about impossible to answer.
Many of us may have parents or know older friends who claim that buying their house was the best financial decision they ever made. I suspect that a person who makes that claim has lived in the house for 20, 30, or even 40 years. The reality is that people my age and younger are moving more, so the idea of settling in a house for a long time seems unlikely.
Realistically, if you make buying a home solely about the dollars and cents, you might not ever buy. Instead, I believe the only reason it's worth buying a home is because you believe just that: It's your home.
At the moment, my family lives in a rental home. It doesn't bother me that we rent, but my wife feels a deep need to live in a home that we own. So we've decided that the next piece of property we buy is the home that we will assume that we're going to live in forever. We'll be making a big assumption about this idea of "forever," but at least we won't be buying it as an investment.
The bottom line for you, me, and everyone else is that we have to stop making assumptions that everyone should own a home. It's not for everyone, and it's not something you can decide based solely on a spreadsheet.
So please, tell me what you think. When do you think it makes sense, if ever, to buy a home?
A version of this post appeared previously at The New York Times.
Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.
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