Don’t Buy a Home for Financial Reasons: Your Home is Not an Investment
A common conversation I have with my young professional clients goes something like this:
Client: “I really need to save up money for a down payment on a house”
Me: “Why do you feel you need to buy a house?”
Client: “If I don’t buy now, I will just keep wasting money on rent. Plus, if I wait too long, I’ll probably be priced out of the market”
Me: “There are many reasons to buy a house, but be careful not to be caught up in the lie that a home is a good investment”
Client: “Wait, what?”
The “American Dream” is different for each of us, but there is one common thread. It has been drilled into our heads for decades that a part of the “American Dream” is to own your own home. Add in HGTV home remodel shows, Youtube videos about making money in Real Estate and historically low interest rates (driving up home prices while keeping mortgage payments down), and you have a recipe for irrational excitement around home ownership. Now, not all the arguments for home ownership are completely off, but it’s important to separate the financial from the emotional. So, let’s look at the facts:
There are Financial Reasons to Own a Home
Home ownership is one of the most favored parts of the tax code. Both property taxes and mortgage interest are tax deductible (although this helps less taxpayers now that the standard deduction has significantly increased).
Also, at historically low interest rates, you can borrow money for up to 30 years at rates similar to long-term inflation. There is no other asset with that cheap of leverage.
Once you’ve paid off this mortgage, you can live “rent free” (more on that below), which is perfect for retirement or just living below your means.
Many people also tout the “forced savings” of home ownership, which allows you to build equity while you make your required mortgage payments. For many Americans, equity in homes makes up a significant part of their Net Worth.
But there are many more financial drawbacks
You are forced to pay property taxes, which increase over time and with inflation. Even after you have paid off the mortgage and are living “rent free”.
Home maintenance adds up significantly over time, just to maintain the value of your home
As styles change over the years, you must update your home or risk decreasing your home’s value.
The average appreciation on a home is very similar to inflation, which is one of the worst long-term investment rates. You could even argue it will be worse in the future, if interest rates rise and less people can afford homes with stagnant wages.
Home sales have some of the highest transactions fees when compared to other investments, with Realtor commissions, title insurance, attorneys fees, mortgage fees, appraisals, etc. adding up to 7-8% of the home’s value.
While you do receive a $250,000 “capital gains exemption” when you sell your home for a higher price you paid, this only applies to homes sold after you have lived in them for 2 years. If you sell your home in a shorter time frame, you may owe significant capital gains taxes.
You can do everything right but a neighbor selling your home unvalued or a negative event in your area outside your control can cause your home value to plumet.
While rare, the government can force you to sell your home using eminent domain.
BUT, there are plenty of emotional reasons to own a home
It’s your own space. You can change paint color, knock down walls, build a garden, anything you reasonably want.
Get to keep it as long as your want, you are not beholden to a lease. (except for eminent domain)
There are many more types of homes available for purchase than there are available for rent. You have options on location, size, décor, lot type, etc, all to your specifications. If you can’t find what you want in an existing house and can afford it, you can build one yourself.
Over the next few decades, the trends suggest that there will not be enough homes to purchase and that many more will be available for rent than in the past. There are compelling reasons to choose ownership over renting, but very few of them are financial. The more likely you are to move in the near future, the less down payment you have available (i.e. more risk of being completely wiped-out by a housing price down-turn), and the more likely you are to increase the size of your family or change jobs, the more you should consider renting vs. owning.
