3 Really Bad Reasons to Buy a House
If you're buying a home, make sure you go in with your eyes open.
- There's no rule that says you must buy a house, especially if you're not truly ready.
- Buying while prices are elevated can cost more over time, even with historically low interest rates.
Full disclosure: My husband and I own our home. After years of moving in and out of the U.S. and up and down the West Coast, we desperately wanted a place of our own. We rented for years, because that's what made the most sense. And perhaps that's the point: You have to do what's right for you, just as we did what was right for us.
As red hot as the housing market is, you don't have to buy a house. In fact, it can be one of the biggest mistakes you ever make. Here are three really bad reasons for taking out a mortgage and committing yourself to a piece of property.
1. Because you have FOMO
Fear of missing out is a bear. It's what makes kids go to parties when they'd rather stay home and watch a movie with a friend. It's what makes adults buy a house because the media tells them "everyone" is trying to snag a home.
Unless you have a specific purpose for homeownership – like wanting kids to be in a specific school district or being a business owner who needs property zoned for residential and business – take a beat. Don't call a real estate agent just yet.
The ancient playwright Sophocles wrote tragedies – heartbreaking stuff. He once wrote, "Quick decisions are unsafe decisions." While I doubt he had real estate in mind, he's right. Jumping into the housing market because you're afraid you're going to miss out on something great can lead to a rash decision that you come to regret.
2. Because it feels like the “adult” thing to do
Maybe you've reached a certain age and realized that you're not "following the rules" by doing what's expected of you. You have a job, maybe a car, and your life is fairly settled, so the next big step is to do your part to uphold the "American Dream" by buying a house. Before you do, think about why you're considering homeownership.
What started this push?
Every wonder how homeownership became part of the American Dream? Turns out, the writer James Truslow Adams coined the term "American Dream" in a popular 1931 book. For Adams, that meant life in America being better and richer for everyone, regardless of social class or circumstances of birth.
In 1941, at the start of the U.S. entrance into World War II, fewer than 44% of Americans owned their homes. As soldiers returned home from that war, President Franklin Roosevelt signed into law the G.I. Bill of Rights, a bill remarkably similar to the Build Back Better plan proposed by President Biden. Roosevelt's plan addressed health care, education, and unemployment. It also offered returning soldiers a government-backed, low-interest, fixed-rate mortgage with no money down.
Homebuilders went wild constructing neighborhoods, and by the 1950s homeownership was up to 55%. Somehow, during those fevered, patriotic years, homeownership became intertwined with James Truslow Adams' view of the American Dream.
75 years is a long time
Do you really want to buy into an antiquated view of the American Dream? If it's really about living a better, richer life, doesn't today's American Dream include ignoring the urge to do something that may make you less happy and less rich?
3. Because rates are still low
Home prices in our neighborhood have increased by nearly 30% over the past two years. That's not great news if you're a buyer. Let's look at what those low rates mean in terms of monthly payments. Here's the same house, on the market in 2019 and 2021. The difference is that the price is higher in 2021 and the interest rate lower.
|Year||Home Price||20% down payment||Interest Rate||Monthly Principal and Interest Payment (30-year fixed rate)||Total Interest Paid Over Life of the Loan|
Looks like buying at the lower interest rate saves money over the life of the loan, right? After all, the total interest paid over 30 years for the house purchased in 2021 is $16,438 less. Here's the problem: Buying the home at an elevated price in 2021 means coming up with $18,000 more for a down payment to avoid private mortgage insurance (PMI).
When you factor in that additional $18,000, the total cost of paying for the house over 30 years was actually lower in 2019, even though the interest rate was higher.
We have no crystal ball
If fear of double-digit interest rates or exploding house prices is driving you to buy, slow down. While interest rates are creeping up, that's normal. Historically, the higher the interest rate, the lower the price of buying a home. What's tripping us up at the end of 2021 is low inventory due to several factors, including supply chain issues and Baby Boomers who aren't moving out of their houses like their predecessors did.
Supply chain issues will not always be a problem. There will not always be a shortage of homes, and houses will not always sell for more than they appraise for. I can't tell you when house prices will normalize, but I can tell you that they have to at some point.
And what if you're one of those buyers who overpay for a house just to snag a historically low interest rate? You may find yourself underwater when home prices soften. Being "underwater" means owing more on a property than it's worth, and it's a bad place to get stuck.
I love my house, but part of the reason I do is that we bought it when the time was right for us. We didn't look at what anyone else was doing, or measure our perceived success against theirs. We waited until we found a property that seemed a bit undervalued, snagged a decent interest rate, and haven't looked back.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.