Owning a Home is Not For Everyone

A podcast listener asks:

My family argues that the mortgage interest tax deductions, rent savings, and potential home value appreciation make it worthwhile to buy a home. After looking at all the numbers, it seems to make more sense to keep renting, save more money, and avoid the risks of homeownership (repairs, illiquidity, leveraged investment). My family and my partner’s family all think I am wrong.

People around me keep saying that buying a house is a great “investment” because prices in Seattle seem to keep going up. I disagree and see a home purchase as a leveraged purchase, with a lot of potential downside (and upside). I don’t feel like I am in a situation where I can or want to take this risk. Am I missing something here?

Michael and I discussed this one on the podcast this week:
 

• We’re in a great school district for my kids.
• It provides stability and a sense of permanence in our life.
• It was a new build so we got some say in the design and decor.
• There’s a level of psychic income involved in that there are non-monetary benefits.
• A fixed-rate mortgage helps with financial planning because I know exactly what the outlay will be for this many years into the future.
• It’s possible the value will continue to appreciate in the future.

However there are downsides to owning a home:

• There are loads of ancillary costs involved (repairs, upkeep, property taxes, interest costs, transactions costs at closing, filling it with furniture, etc.)
• The financial gains or losses are nearly impossible to calculate precisely because of the many costs involved (including opportunity costs).
• Owning a home provides stability but also decreases your flexibility because it’s an illiquid asset (especially for younger people who may still need to figure out their career).
• You can’t spend your house unless you take out the equity you’ve built.
• The switching costs when you decide to sell can be onerous.
• A house is not an investment but a form of consumption.
• It’s a leveraged investment that can work for or against you in big ways.

There are plenty of good reasons to own a home but peer pressure and price appreciation shouldn’t be at the top of that list.

People often say a house is the best investment you can make (not necessarily true).

They’ll tell you how it’s the logical next step in life (an outdated concept).

Then there are the tax breaks (taxes are rarely a good reason for spending a boatload of money), the fact that you won’t be “paying someone’s rent anymore” (misses all of the costs involved in homeownership) or the fact that grandma and grandpa bought their house for $35,000 and sold for $300,000 fifty years later (this big number analysis never takes all costs or actual return into account).

Everyone considering buying a home should run the numbers to understand how the math works out in their area.

But even if the numbers look immaculate, you shouldn’t take the plunge into homeownership unless you’re emotionally ready to make this purchase.

A home is one of the most emotionally-driven assets there is. How could it not be? It’s literally the roof over your head.

If you take this leap when you don’t want to those emotions are likely to work against you no matter what your family and friends think.

The financial implications of owning a home are important but they’re not everything.

Further Reading:
Some Thoughts on Investing in Real Estate

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Here’s some more from this week’s podcast on why financial education doesn’t work, the problem with 401k plans, how to fix the U.S. retirement system and how to get more people to save more for retirement:
 

• The 3 point line vs index funds (I’m Late to This)
• Can anybody be taught to manage money? (Humble Dollar)
• Should we be worried about tech stocks taking over the world? (Dollars and Data)
• Preparing for lower returns (Irrelevant Investor)
• What’s your sell discipline (Krueger & Catalano)
• In case you were wondering (Belle Curve)
• Why do American homes have so many bathrooms? (The Atlantic)