When I first graduated, I ended up renting an apartment for a year.
From there, I moved in to my first home (which I have since considered to be a bit of a mistake in how big it was and how we over-financed). I bought it direct from the owner. Then I sold it “for sale by owner” for a small profit.
From there, I bought my second home right before the housing crash, in 2007, and it may have just recently creeped back to the value of my purchase price.
Overall, I’ve enjoyed being a homeowner. I like fixing things. I like the responsibility. I like the pride that comes with improving something. I like the freedom to do what I want with it. I haven’t made money on home ownership. But I haven’t lost money either.
That being said, I’m not pro-home-ownership for everyone. Not even close. In fact, when purchased for the wrong reasons, it can be an absolute personal finance killer.
So I wanted to offer up a bitter dose of reality to those who are considering home-ownership, who might not be a prime candidate for it. If one of the following 7 things is true, don’t walk – run away from buying a home.
1. You View Home Ownership is a Right of Passage
Let’s face it – buying a home has a certain allure to it. It gives you something to talk about. Something to focus on.
After you graduation, finding a significant other, getting a decent job, what else does everyone else do? They buy a home!
It’s (the old) American dream, after all.
And if you’re buying a home to simply follow the script everyone else is following, that’s warning sign #1 that you need to walk away.
The majority of Americans have no clue what they are doing financially – so why would you follow the script that everyone else follows?
2. You Haven’t Looked at your Area’s Price-Rent Ratio
As part of any examination on whether buying a house makes sense in your locale, you’ve got to look at the price-rent ratio, as we just discussed in detail.
The lower the ratio, the more affordable housing is in that area, relative to renting.
If you’re on either coast or a desirable metro, you’re probably looking at a much higher price-rent ratio.
A high price-rent ratio doesn’t ALWAYS mean that buying a house is a bad decision. It does mean that you really need to carefully the risk of buying in your locale and the risk of having too high of a percentage of your income wrapped up in housing costs. And most importantly – what is the value of buying relative to renting. If you live in an area with high income and limited space for new development (think San Francisco, Vancouver, NYC, DC), the extra price you pay for a home, relative to renting, will likely not enhance your quality of life proportionately.
3. You think of a Home as an Investment
Homes are not investments. Period.
A house can provide many good things – including cost savings if you have properly spec’d out the total cost of homeownership.
But an investment?
Not unless you rent it out.
4. You Don’t Have the Money
No, I’m not trying to insult your intelligence with this one.
You see, your real estate agent, your mortgage broker, and even some of your friends/family want you to buy the biggest home you can afford.
As everyone, including banks and lawmakers, get more comfortable about the present state of the housing marketing, I anticipate us going back to the same problems that put us in to the housing bubble: buyers without much savings over-financing homes that are bigger than they need, with no to low down payment, and PMI payments or a HELOC.
Even if you do have a decent amount of savings for a down payment, you probably won’t after you make it.
Rule of thumb: If you don’t have at least 50% of the value of the home you are purchasing in assets, you probably shouldn’t buy a home.
Oh, and lets not forget the closing costs. That’s about 2% of the housing cost you will never get back.
5. You Think Deducting Mortgage Interest is a Legitimate Reason to Buy a Home
At some point, the mortgage tax deduction is going to be wiped out. I’m not sure when or where, but it will happen.
Meanwhile, its benefits rank amongst the most over-hyped and delusional of just about any personal finance cliche.
A few years back, I crunched the numbers on a $200,000 mortgage tax deduction scenario and discovered that the actual tax benefit over a standard deduction between property and mortgage interest deductions was the equivalent of a bag of dogfood – $45! But that doesn’t even explain what you’re giving up to get that $45 in tax savings: $12,500 in interest and property tax payments!
Let’s put it this way. If someone came up to you and offered you $41, in exchange for you giving them $12,500 you’d probably laugh at them and run away.
And with the new tax reform rules that are in place from 2018 to 2025, with standard deductions nearly doubling, it makes even less sense to buy a home for the mortgage interest deduction.
You can buy a home for a number of reasons – a tax deduction should not be one of them.
6. You’re Young. And you’re Not Going to Stay Put
Unless you older, have a dream job you want to work in for the rest of your life, a family that won’t grow – you’re probably going to move at some point. Actually, multiple times.
The average number of jobs held between age 18 and 44 is eleven. Most career movement comes in your twenties. And when you do, do you really want the burden of trying to sell a home?
Don’t tie yourself down to a location. If you don’t plan on staying put for at least 5, and preferably 7+ years, don’t buy a home.
7. You Live in an Area Prone to Natural Disasters
Global warming is a bitch when it comes to the price of home ownership.
Any area with frequent tornado destruction, earthquakes, flooding, or hurricanes means that you’re going to not only have to worry about mortgage payments, taxes, repairs, etc.. – but also huge home insurance premiums.
You need home insurance – actually, banks require it, if they are going to lend you money. And just like a driver who lives in an area with a huge amount of theft/accidents, you’re going to pay higher premiums for your choice of disaster prone locales.