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.
Developing strong relationships with others
Improving the lives of others
Home ownership can create community and the stability of homeownership has positive benefits on children through schooling results and increased mental stability. Should consider some of these other intangible benefits for a true holistic comparison
That’s an interesting perspective. Do you have any data to share on the impact of homeownership on children’s health?
Here is one from Habitat for Humanity.
Another, often quoted research article:
Pre-cursor to above:
Green and White found that homeowners have a significant effect on their children’s success.
The decision to stay in school by teenage students is higher for those raised by home-owning
parents compared to those in renter households.
I’m sure you won’t like the last because its from The National Association of Realtors, however it references both the 2nd and 3rd which are academic research articles.
This seems like an issue of causation vs. correlation. Is it that the manner of procuring the home that causes the children to successful, or is it that the demographic of people who typically purchase also the people who tend to be better parents? The financial arrangement doesn’t cause children to be successful, it’s just correlated to a socioeconomic demographic. I’d argue that someone who rents due to prudent lifestyle and financial planning is probably someone who’d make a good parent.
I fully agree with this post. Home ownership ties you down and takes away your freedom, consumes way too much capital that can be diversified (especially if you’re young), and renting is sometimes a better deal.
I did some math when I moved in to my current apartment, and the owner of the unit must be paying at least 20% more for the mortgage than my monthly rent. Add repair expenses, realtor fees, condo fees, etc, and that just gets out of hand quickly. I know the value of the property is expected to go up, but this is a money sink until it’s sold.
Home ownership may make sense for a stable family with kids that wants to stay in one place, but I’ve seen too many 20-something friends buy houses and sell them a year or two later at a loss.
Home ownership definitely has its pros and cons. Owning a home is really a long term investment that can bring stability and a peace of mind going into your retirement years. Since a typical mortgage is only for 30 years (if you don’t refinance or get cash out), it would eventually be paid off and you’ll be mortgage and rent free. Of course property taxes will always remain but is negligible compared to the cost of rents.
However for someone who is constantly moving from one location to the next, it may not make financial sense to purchase a home. The rents one usually receives when renting out their home is usually less than the total cost of the mortgage, taxes, insurance and maintenance causing a negative cash flow for many years to come.
Yes. I’ve noticed that in popular areas in my state (and in other popular urban areas), it is virtually impossible at today’s prices to be cash-flow positive on renting-out a home.
If you live in metro US then I agree, but here in the sticks houses are cheap and quality rentals are rare. My low taxed inexpensive house has been a great buy. Hundreds of acres of wooded wetlands to explore and lots of peace and quiet while still only eight minutes from work and five minutes from shopping. It depends on where you live. Certainly the places where the old conventional American dream lives on are increasingly rare. Great post!
Steve, I think you got it right. It’s not that home ownership was a bad idea when it first became the “American Dream,” it’s that our values have changed with time. Houses didn’t used to cost so much, and people would commonly have one job their entire lives where they earned pensions for retirement. Building up equity in a house was a fantastic financial decision back then when houses were smaller, maintenance was cheap, and rentals were rare. But as with anything, markets change. There’s so much demand for the urban lifestyle that housing prices in those areas will never justify ownership.
I agree that a house isn’t an investment, unless you’re flipping a house/buying a rental and actually know what you’re doing (many people think it’s easy to make money doing just to find they’re wrong). Heck, if you want to invest in real estate just buy some shares of a low-cost REIT fund. Still make money if housing prices go up without any of the hassle.
But you’re still putting money into a home that eventually you won’t owe a mortgage on, or can sell for a down payment on a new house if you need to. I don’t advocate for buying a house you don’t think you’ll live in for a long time or buying more house than you need, but at least in the city I live in with a favorable price-to-rent ratio and a dearth of available housing I’m glad I have my affordable house. Rents keep on skyrocketing so I’m glad I’ve locked in an affordable mortgage rate. Yes, there’s the risk that we could face another catastrophic housing bubble but there’s also the risk to perpetual renters that we won’t.
IMO, if you can afford your house comfortably, and still put plenty of money away into a 401K, IRA, HSA, etc. you should do so. Is it an investment? Probably not. Is it throwing money away? In a sense, but you have to live somewhere and I think it’s throwing less money away than renting, in the long run.
I don’t get it. You put being debt-free as a goal, but what is rent in the grander picture but a perpetual debt? At least when owning a home someday you can get it down to taxes, insurance, and maintenance only. Something that (in apples to apples comparisons) will be significantly less than the perpetual rent payment.
Then even with a mortgage, if I hadn’t bought my house when I did I’d be paying 2.5x more than my mortgage payment in rent. Rents go up.
It’s a situational math problem, there is no one right answer, but everyone seems to want to sugar coat renting and ignore the negatives.
My point in this article is not that “Renting is greater than owning, for everyone”. It’s that owning has many big drawbacks, can be worse financially for people in many geographies, and is pretty shallow of an objective to be slated as the “American Dream”.
Investopedia did a great article about this, and I wish I could find the link. Essentially, the math behind the issue has a lot to do with the down payment on a house. If you require a large down payment, it actually works out better to rent and invest the money in an interest earning account. So while you may be able to eventually pay off your mortgage, you lose 15-30 years of compounding interest on your down payment that you would otherwise get had you rented. However, if you can buy the house with a low down payment, the math tends to balance out.
Taxes, insurance, HOA fees can come close to or even equal rents in some instances. I’ve experienced it first hand.
Like anything in real estate, it depends. There are no absolutes.
I’d never consider living on a rent for all my life and not leaving my daughter anything to make her live easier. We are actually in the position to leave all our real estate behind, since we’re immigrating, but, in 5-10 years time it’s possible to actually try and get a home there as well. If daughter wants to stay in our new location, it makes sense to sell what we have in my country and get us a proper home.
Alternatively, you could use the money you’d spend on a down payment to fund an interest earning account for your children or to buy an investment property that will generate passive income. There are alternatives to building equity in a home to leave something to your offspring. I have a very mobile lifestyle at the moment, so I’ve had to find creative ways to build wealth. I believe, along with G.E. that there are viable alternatives that in many cases are more effective.
Well, it depends on the country. In mine investments are still in their infancy and, with the scams we already had, at least an apartment or a house in a wildly popular city (such as mine) is still an excellent investment. No matter where daughter will be, she can always rent or just sell the apartments and buy a new house with this money, unless we’re talking a Hollywood mansion that’s millions. :D
I 100% agree. I still want to get a house one day, but I am not in a rush. One reason people say that buying a home is the American dream is because you have full control and now you have space to grow your farm and business. This was true decades ago, but not so much any more due to zoning laws. You are strongly restricted by these laws. If you think you are not, build a chicken coop. At best you neighbors will be asking questions and complaining to you, at worst lawyers will be representing them. Point is homeownership is not what it used to be.