How many times in your life have you heard that “Owning a home is achieving the American dream”, or words similar to that effect? In a recent survey, 56% of millennials, 59% of Gen X’ers, and 68% of Boomers chose “owning a home” as the top ingredient to the American Dream – so my guess is “at least a few”.
I believe that “home ownership is the American dream” was likely a brilliant meme cooked up by the real estate industry many decades ago that simply never died (kind of like the diamond industry creating the arbitrary rule that every marriage proposer should spend three months of income on a diamond engagement ring). Or, maybe it was simply that a nation built on consumerism anointed a consumer status symbol – and the most expensive one, at that – as its mission statement.
Either way, if it’s a meme that you believe in and are going to build your life around, isn’t it at least worth questioning why? Let’s start off this conversation by first killing a few of the big myths around the financial benefits of home ownership.
“Your Home is an Investment”
No, your home is not at investment. At least not a good one. With recent rapid housing price increases, I think we’re venturing back into housing crisis 2.0 bubble territory again. But even if you believe these prices are legit and will continue to climb, the inflation adjusted housing price index has only doubled since 1890. Not 1980, 1890. In other words, an average gain of 0.78% per year.
What other “investment” would you look at a 0.78% return and say “Gimme some more of that!”?
Of course, that 0.78% return assumes zero financing costs, zero taxes, zero maintenance costs, zero home insurance costs, and zero any other costs. And none of those things are reality.
“Homes are Great for the Tax Deduction Benefits”
I’ve covered in depth why you should not buy a home for the mortgage deduction.
And then there is the property tax deduction. As a result of the Republican tax reform law, the state and local tax deduction (aka the “SALT deduction”), including property taxes, is now limited to $10,000. Previously, 100% of SALT tax payments were deductible if you itemized your taxes, unless you were subject to the alternative minimum tax (AMT). If you live in a highly taxed home, you’re gonna feel some serious pain from this.
Only 25% of taxpayers chose to itemize their tax deductions in recent years. Post reform, with the standard deduction doubling, it’s projected that only 10% will itemize. This dramatically decreases the value of home tax deduction benefits.
In short, even if you’re among the one-in-ten that will itemize your tax deductions, you’re paying a lot (in mortgage interest and in property taxes) in order to save very little in taxes.
“Buying a Home Will Save you Money Versus Renting”
While a home can be a way to build equity versus sending rent to a landlord, it’s not a given that this will always pay off. With home prices being so inflated in so many desirable geographies, there is no guarantee that equity built (assuming equity is built, which is also not a guarantee as we witnessed in 2008) will be greater than expenses incurred.
Instead, one should consider all costs associated with home ownership and look at the price-to-rent ratio to better determine whether buying makes financial sense in a given locale.
Then, there’s the Negatives
To name just a few:
- Maintenance & Repairs: from the moment you move in to a house, you inherit an ever-nagging list of maintenance and repair work. Homes are money pits – and they can be a huge time suck. You have none of that with renting.
- Reduced Cash Flow: when you factor in mortgage payments (including interest), insurance, property taxes, association fees, and other home costs, owning a home can be shockingly more expensive than renting. That can create a lot of risk in the event of income loss. And reduced cash flow can add stress to your life and all of the ill effects that may bring.
- Reduced Mobility: the ability to move anywhere in the country is increasingly a requirement for upward career mobility, career satisfaction, and income growth these days. There is no doubt that feeling tied down by a home can limit your mobility. With renting, at worst you have to find a sub-leaser for a few months.
- Less Liquidity: need to supplement your cash flow for big expenses like improving your education, health or other emergency expenses, a vehicle, or job loss? Owning a home can limit your ability to do so.
- Increased Liability Risk: your home presents all sorts of legal liability risks for those passing by or within. That’s partly why I have added an umbrella policy on top of my home insurance.
In fact, 68% of millennial homeowners experienced regrets for buying a home, with the top regrets being:
- Costly to maintain (20%)
- Realized there was damage after moving in (20%)
- Space doesn’t work well (19%)
- Should have put down more money from the start (19%)
To What Benefit? & Whose Dream?
What is left as a benefit for home ownership that could give it the lofty status of unlocking “the American dream”? As noted, the financial benefits are not what they are made out to be, and depending on individual scenario, could actually be a net negative. That leaves us with the other commonly cited benefits (and their realities):
- More space (to fill with stuff)
- More stability (less mobility)
- More ability to modify (more work and costs)
Exactly whose dream are we fulfilling with home ownership?
I’ve owned homes for the last 14 years, and I can tell you that in having done so, I don’t feel like I’ve achieved some sort of idealistic reality. I would suggest that you invest your time, money, and efforts into other dreams first that are much more worthy of the “American dream” label. To suggest a few:
- Finding and following your passions, whatever they may be
- Becoming debt-free
- Becoming financially independent
- Developing strong relationships with others
- Improving the lives of others
The “home ownership is the American dream” meme has been drilled into our nation’s psyche for decades. For the betterment of all, it’s time we kill it. We have much bigger and more admirable dreams to pursue than shallow status symbols.