For decades we have been bombarded with the conventional wisdom that buying a home is a good thing. Over the last few years we've seen the results of those who blindly followed the conventional wisdom.
But if we are honest there are plenty of good reasons why we should NOT buy a home. The world has changed since the days when the conventional wisdom became, well, conventional.
Here's one reason: Most families are two income families. Those two workers must somehow find a home that allows them to triangulate their commutes. If they have kids they have the added challenge of finding a good school district. Today job turnover is very high. People are having trouble finding jobs within a commute-radius of their home. So they must move. When you rent it is far, far, easier and less expensive to move than when you own.
Can you think of another reason?
Reasons Why NOT to Purchase a Home.
I find your conclusion ("you shouldn't purchase a home")to be narrowly supported by the reasons you state. Given different goals, employment or business prospects and economic circumstances, buying a home can be a very financially prudent and economically viable option.
Mine is paid off (after only 19 months) My housing expenses equate to a hair under 2% of my gross income. Property taxes and insurance costing $125.00 p/month. Inflation will impact us minimally.
However, renters will contend with rising rents for the rest of their lives. When they eventually find themselves on fixed incomes, they will especially feel the squeeze.
So, I think this discussion is far from a one-size-fits-all scenario.
Mine is paid off (after only 19 months) My housing expenses equate to a hair under 2% of my gross income. Property taxes and insurance costing $125.00 p/month. Inflation will impact us minimally.
However, renters will contend with rising rents for the rest of their lives. When they eventually find themselves on fixed incomes, they will especially feel the squeeze.
So, I think this discussion is far from a one-size-fits-all scenario.
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mikenotspam
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I would wholeheartedly agree with celliott here, in that we can't all fit inside the same box. We haven't seen "the results of those who blindly followed the conventional wisdom," since the housing bubble was not caused by average people buying one home in which to live - it was caused by speculation, among other things.
My mom told me her first apartment was something like $135 a month in 1975. A comparable room in that neighborhood these days would be $600. Although I'd never dream of keeping a mortgage for thirty years, from a monthly payment perspective, that fixed cost compared to inflation more than quadrupling your rent over 30 years seems somewhat desirable, especially if you ever have occasion to rent or partially rent out a room for income.
My mom told me her first apartment was something like $135 a month in 1975. A comparable room in that neighborhood these days would be $600. Although I'd never dream of keeping a mortgage for thirty years, from a monthly payment perspective, that fixed cost compared to inflation more than quadrupling your rent over 30 years seems somewhat desirable, especially if you ever have occasion to rent or partially rent out a room for income.
I'll agree that not everyone is in the same boat, but using inflation as an argument against renting isn't exactly a nail in the coffin. Through home ownership, you will have taken some of your housing costs out of the grip of inflationary pressures. Property taxes, maintenance materials, garbage collection, etc. will still face inflationary pressure.
Also, flexibility is in favor of the renter. Through strategic moving, I've reduced my rent over a 6 year period by 17%. I live in the same general area, but if I'd purchased a house, I wouldn't have dreamed of putting up for sale and buying another one, just to save money living in a lower-taxed school district.
And Ego's point on job hopping is valid (depending on your industry and current location). It seems that job hopping is a surer path to high-income these days, and unless you live in a densely populated area (or telecommute), that means moving.
Also, flexibility is in favor of the renter. Through strategic moving, I've reduced my rent over a 6 year period by 17%. I live in the same general area, but if I'd purchased a house, I wouldn't have dreamed of putting up for sale and buying another one, just to save money living in a lower-taxed school district.
And Ego's point on job hopping is valid (depending on your industry and current location). It seems that job hopping is a surer path to high-income these days, and unless you live in a densely populated area (or telecommute), that means moving.
Nothing wrong with buying a house you can afford.
Madness buying a house you can't afford.
Conventional wisdom tells you to not spend more than 30% of your adjusted gross income on housing. Duh, this would leave money to purchase other things you need or will need. But people got such big eyes, right? Those McMansions, just pay nothing down, interest only for frigging ever. Yeah, we can do a 450K mortgage, no problem, after all we both make $7.25 an hour. Well, maybe I can find the hand held calculator we got for a wedding gift. Wonder if the battery is still good in it? Honey, do you know how to use one? Me either, dear. Is that why we are in bankruptcy court?
Nothing wrong with buying a house you can "afford", though.
Madness buying a house you can't afford.
Conventional wisdom tells you to not spend more than 30% of your adjusted gross income on housing. Duh, this would leave money to purchase other things you need or will need. But people got such big eyes, right? Those McMansions, just pay nothing down, interest only for frigging ever. Yeah, we can do a 450K mortgage, no problem, after all we both make $7.25 an hour. Well, maybe I can find the hand held calculator we got for a wedding gift. Wonder if the battery is still good in it? Honey, do you know how to use one? Me either, dear. Is that why we are in bankruptcy court?
Nothing wrong with buying a house you can "afford", though.
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George the original one
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The people who got burned in the housing bubble were the people who weren't savvy about what they were doing.
Yes, if you're not planning on staying in one location for more than 3-5 years, then rent. And rent cheaply.
Us homeowners in the USA, however, do enjoy the fruits of ownership. Being able to make property changes to suit our lifestyle is one of them. Having the potential to sell at a tax-free profit after living in the home for 5 years is another benefit (is that one of the Bush tax cuts that might expire? I've lost track).
Yes, if you're not planning on staying in one location for more than 3-5 years, then rent. And rent cheaply.
Us homeowners in the USA, however, do enjoy the fruits of ownership. Being able to make property changes to suit our lifestyle is one of them. Having the potential to sell at a tax-free profit after living in the home for 5 years is another benefit (is that one of the Bush tax cuts that might expire? I've lost track).
This is such a localized and personalized decision that there is really no one right answer. As far as the price is concerned, I do like using a rule of thumb such as the price ought to be less than 20 times annual rent (or 15 is even better). The first decision, however, is how much you are willing to pay given your other savings goals.
Here is an article about the buy v. rent decision with a little calculator to mess with:
http://www.nytimes.com/2010/04/21/busin ... hardt.html
Here is an article about the buy v. rent decision with a little calculator to mess with:
http://www.nytimes.com/2010/04/21/busin ... hardt.html
If youre in your early 20s, you will probably move quite a bit. In with your girlfriend, out when you break up, to a new city for a job opportunity, to a new country to work and travel, etc.
I`d like to buy a place with a long term fixed interest rate soon though because inflation is outpacing rates, and its bound to get higher. Then I will be getting paid to buy a house or land.
I`d like to buy a place with a long term fixed interest rate soon though because inflation is outpacing rates, and its bound to get higher. Then I will be getting paid to buy a house or land.
I think one thing we can agree on is that the notion that "a house is always a good investment" is wrong in that generalized form and highly dependent on other factors.
I guess one reason it might be good advice for big spenders is that it forces them to put their money into something that doesn't just evaporate.
But if it's a good investment depends highly on price, value and income - it has to compete with other investment opportunities to be viable.
I guess one reason it might be good advice for big spenders is that it forces them to put their money into something that doesn't just evaporate.
But if it's a good investment depends highly on price, value and income - it has to compete with other investment opportunities to be viable.
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LiquidSapphire
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It really does depend.
Pros: Lock in part of your housing costs, more control over your property (you can paint the walls!), choosing your school district, etc. Sense of stability in your life. You own it, so as long as you pay the bills, no one can take it from you, it is yours.
Cons: You are far less flexible as the OP states, you are to a degree subject to the whims of the city with regards to property taxes, etc, there are things outside of your control that can impact your property value (huge building goes up to block your view, neighborhood starts heading south, etc) and while you don't necessarily have neighbors on either side of you attached to the wall, you have virtually NO control over your neighbors (unless you own those houses too) and it's much harder to leave if it's unpalatable. You're on the hook for insurance, repairs, etc, and if you are an ERE-r you will be doing most of the repairs yourself. I personally enjoy knowing that all I have to do is make a phone call and all that ails me will be repaired. Another con is you are (usually) tying up a huge part of your net worth in one quite illiquid asset. Of course examples abound where houses are cheap, etc.
Now in my life which is an example of N=1 and therefore is worth about as much, I actually did have many opportunities to move and, being a single 20s something, did so, and man oh man did it pay off huge. I am so glad I hadn't jumped on the housing bandwagon along with everyone else. How many cities would I now own underwater properties in? For crying out loud OMG. No money would be worth the headache. I am finding that I value flexibility so much more than ever, even now. Owning property somewhere takes away from that flexibility. In fact, in my last lease, I built in a higher rent for a clause that stated I didn't even have to clean upon move out. I just wanted to be able to pick up and GO and not hassle with getting every speck of dirt on the blinds. It sure paid off, moving is stressful and that was one thing I didn't want to deal with. That was a unique situation though.
I would also argue if you have inflated property prices in your area it definitely makes sense to rent for the time being.
Pros: Lock in part of your housing costs, more control over your property (you can paint the walls!), choosing your school district, etc. Sense of stability in your life. You own it, so as long as you pay the bills, no one can take it from you, it is yours.
Cons: You are far less flexible as the OP states, you are to a degree subject to the whims of the city with regards to property taxes, etc, there are things outside of your control that can impact your property value (huge building goes up to block your view, neighborhood starts heading south, etc) and while you don't necessarily have neighbors on either side of you attached to the wall, you have virtually NO control over your neighbors (unless you own those houses too) and it's much harder to leave if it's unpalatable. You're on the hook for insurance, repairs, etc, and if you are an ERE-r you will be doing most of the repairs yourself. I personally enjoy knowing that all I have to do is make a phone call and all that ails me will be repaired. Another con is you are (usually) tying up a huge part of your net worth in one quite illiquid asset. Of course examples abound where houses are cheap, etc.
Now in my life which is an example of N=1 and therefore is worth about as much, I actually did have many opportunities to move and, being a single 20s something, did so, and man oh man did it pay off huge. I am so glad I hadn't jumped on the housing bandwagon along with everyone else. How many cities would I now own underwater properties in? For crying out loud OMG. No money would be worth the headache. I am finding that I value flexibility so much more than ever, even now. Owning property somewhere takes away from that flexibility. In fact, in my last lease, I built in a higher rent for a clause that stated I didn't even have to clean upon move out. I just wanted to be able to pick up and GO and not hassle with getting every speck of dirt on the blinds. It sure paid off, moving is stressful and that was one thing I didn't want to deal with. That was a unique situation though.
I would also argue if you have inflated property prices in your area it definitely makes sense to rent for the time being.
As an antidote to the conventional wisdom, I will push on with a few more reasons why buying a home might NOT be good for the ERE individual.
- Renting allows you to have the exact size home in the exact area you need or want. Homeowners frequently buy houses that they plan to grow into. When they are old they live in over-sized empty nests. There is a lot of inefficiency there. Because much of the costs of these inefficiencies is front loaded, their time-value significantly reduces the long-term, nest-egg advantage of ownership.
- Housing arbitrage. As Chris points out above, strategic relocation allows one to lower their rent, even in a market where rents are increasing. But the ERE individual can take it one step further. I can rent in Mexico. In Thailand. I can pay less in annual rent on a beachfront place in India than the average American homeowner pays in property taxes. This is the kind of thing ERE is all about, right?
- I read somewhere (patrick.net I believe) that the average mortgaged homeowner relocates every 5-7 years. With each relocation they've restarted amortization on a new mortgage. Anyone who has ever looked at an amortization table knows how foolish this is. They never make a dent in principal.
- Non-monetary advantages: If my neighbor is loud or obnoxious, I can easily move. If the roof leaks or the refrigerator dies, the landlord deals with the problems and pays the bills. If I lose my job, I can easily downsize and move to the cheapest place possible.
Renting provides the renter with Darwin's most important strength - the ability to adapt to a rapidly changing environment.
- Renting allows you to have the exact size home in the exact area you need or want. Homeowners frequently buy houses that they plan to grow into. When they are old they live in over-sized empty nests. There is a lot of inefficiency there. Because much of the costs of these inefficiencies is front loaded, their time-value significantly reduces the long-term, nest-egg advantage of ownership.
- Housing arbitrage. As Chris points out above, strategic relocation allows one to lower their rent, even in a market where rents are increasing. But the ERE individual can take it one step further. I can rent in Mexico. In Thailand. I can pay less in annual rent on a beachfront place in India than the average American homeowner pays in property taxes. This is the kind of thing ERE is all about, right?
- I read somewhere (patrick.net I believe) that the average mortgaged homeowner relocates every 5-7 years. With each relocation they've restarted amortization on a new mortgage. Anyone who has ever looked at an amortization table knows how foolish this is. They never make a dent in principal.
- Non-monetary advantages: If my neighbor is loud or obnoxious, I can easily move. If the roof leaks or the refrigerator dies, the landlord deals with the problems and pays the bills. If I lose my job, I can easily downsize and move to the cheapest place possible.
Renting provides the renter with Darwin's most important strength - the ability to adapt to a rapidly changing environment.
I'm not really sure Ego is saying that buying is bad, but that it is not the "be-all-end-all" pancea many would like us to believe. Even a few people on here sound a little defensive.
If you bring this topic up on a normal personal finance blog you get drawn and quartered, as they BELIEVE.
I got into an argument once with the guy who writes Simple Dollar. I proved his assumptions were wrong with math and that renting was the better option, in that instance. Yet, he still denied I was right. Of course, he denied it without any facts backing him up and never changed the blog post, even though it was wrong.
I continue to rent because it is cheaper in my area to rent than buy if you are willing to hunt for cheap places and because I feel that owning takes away some control I have over my life.
If you bring this topic up on a normal personal finance blog you get drawn and quartered, as they BELIEVE.
I got into an argument once with the guy who writes Simple Dollar. I proved his assumptions were wrong with math and that renting was the better option, in that instance. Yet, he still denied I was right. Of course, he denied it without any facts backing him up and never changed the blog post, even though it was wrong.
I continue to rent because it is cheaper in my area to rent than buy if you are willing to hunt for cheap places and because I feel that owning takes away some control I have over my life.
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themoneymonk
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There are a ton of reasons why renting is better for most people, and most of them can be summed up under a single term: risk.
You are paying to not have the many risks associated with homeownership. Some of these risks are:
- Mechanical failure/repairs and maintenance
- having to move
- home losing value
- having to continue mortgage payment in the event of job loss/disability or other loss of income.
-Etc.
So renting is sort of like insurance. If you rent for the rest of your life you will most likely pay more than if you stayed in the same house the whole time and paid it off, but how many people ever really do that?
Renting also allows you to more accurately budget monthly expenses. Rent may be $800 a month, and mortgage $650, but what about the one-time roof repair that costs $5000? or the AC, etc.
You are paying to not have the many risks associated with homeownership. Some of these risks are:
- Mechanical failure/repairs and maintenance
- having to move
- home losing value
- having to continue mortgage payment in the event of job loss/disability or other loss of income.
-Etc.
So renting is sort of like insurance. If you rent for the rest of your life you will most likely pay more than if you stayed in the same house the whole time and paid it off, but how many people ever really do that?
Renting also allows you to more accurately budget monthly expenses. Rent may be $800 a month, and mortgage $650, but what about the one-time roof repair that costs $5000? or the AC, etc.
While the month to month arrangement exists in many areas, so does the 1 yr. lease. You cannot just easily pick up and move because of a lousy neighbor. (I moved into a nice apt. complex only to be subjected to the neighbor college drunk from Hell! I had to wait 6 months for the lease to expire before I found my house in a wonderfully quiet neighborhood. I didn't have the freedom you tout. I can sell my house easily in the same span of time and relocate if I desire.
If I want to live in Mexico, or Thailand, or Costa Rica (as I did for 3 years), As an ERE homeowner I can rent out my house (using a rental management company) and partially live on the net proceeds.
Other situations (cons) you mention may or may not occur. Not all buy houses larger than they need. Not all end up in lousy neighborhoods, with lousy neighbors. I'd actually contend that renters are far more likely to end up in hellholes because most rent in geographical areas made up of mostly, well...renters.
What I save in rent easily pays for any repairs needed. I have the OPTION to repair myself, or pay someone to do the repair. I think renters conveniently forget that the cost of all those repairs they don't have to perform are already factored into the rent check they send in every month. You're already paying for the repairs, maintenance, cleanings, taxes, insurance, interest and principle of the property you're renting, plus, often a little landlord cash-flow to boot. Don't kid yourself.
Having said all that, the best argument for renting is that ability to move more easily and often. If that's your lot in life, than buying a house wouldn't be advisable. That much we agree on and it's a fair point.
If I want to live in Mexico, or Thailand, or Costa Rica (as I did for 3 years), As an ERE homeowner I can rent out my house (using a rental management company) and partially live on the net proceeds.
Other situations (cons) you mention may or may not occur. Not all buy houses larger than they need. Not all end up in lousy neighborhoods, with lousy neighbors. I'd actually contend that renters are far more likely to end up in hellholes because most rent in geographical areas made up of mostly, well...renters.
What I save in rent easily pays for any repairs needed. I have the OPTION to repair myself, or pay someone to do the repair. I think renters conveniently forget that the cost of all those repairs they don't have to perform are already factored into the rent check they send in every month. You're already paying for the repairs, maintenance, cleanings, taxes, insurance, interest and principle of the property you're renting, plus, often a little landlord cash-flow to boot. Don't kid yourself.
Having said all that, the best argument for renting is that ability to move more easily and often. If that's your lot in life, than buying a house wouldn't be advisable. That much we agree on and it's a fair point.
Of course, your rental neighbor from hell could be your next renter in your house you might not have been able to sell in a down market.
You can always find better leases than 1 year leases. Plus, you can usually swing a deal with landlord.
"You're already paying for the repairs, maintenance, cleanings, taxes, insurance, interest and principle of the property you're renting, plus, often a little landlord cash-flow to boot. Don't kid yourself."
Yet, my rent still works out to be cheaper than buying were I live. So, no, repairs, maintenance, cleanings, taxes, insurance, interest and principle are not always completely factored into the cost of rent. Don't kid yourself.
You can always find better leases than 1 year leases. Plus, you can usually swing a deal with landlord.
"You're already paying for the repairs, maintenance, cleanings, taxes, insurance, interest and principle of the property you're renting, plus, often a little landlord cash-flow to boot. Don't kid yourself."
Yet, my rent still works out to be cheaper than buying were I live. So, no, repairs, maintenance, cleanings, taxes, insurance, interest and principle are not always completely factored into the cost of rent. Don't kid yourself.
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secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
It's interesting how emotional people get on this issue.
I own, largely so that I can rent it out and because I predicted (rightly) that home values in Manhattan would go up largely thanks to the international demand for property here. Also, living in a tourist hotspot with a lot of transient workers means that I can rent my place out for the short or long term at the drop of a hat. When renting, I earn about 7.2% on my capital.
Does this mean I prefer home ownership? Absolutely not. Some markets (downtown Chicago springs to mind) offer better rent than homeownership, at least from when I last looked. The difficulties in offloading the property and real threat of depreciation/lowered housing demand would make me nervous about going into most housing markets.
Also, I would never buy a single-family house, mostly because the fear of upkeep and major repairs. This is a personal emotional trauma; it was only discovered after I sold my first house that it was sinking and would cost about $50,000 to fix (about a third of the house's value). The benefit of owning a condo/co-op is that you outsource landscaping and external repairs, for which you pay a premium. While this goes against Jacob's philosophy, it fits my personal needs and current abilities rather well.
I believe that more handy people would be better suited for single-family homeownership, so I wouldn't use my own preference as a guide for other people.
I own, largely so that I can rent it out and because I predicted (rightly) that home values in Manhattan would go up largely thanks to the international demand for property here. Also, living in a tourist hotspot with a lot of transient workers means that I can rent my place out for the short or long term at the drop of a hat. When renting, I earn about 7.2% on my capital.
Does this mean I prefer home ownership? Absolutely not. Some markets (downtown Chicago springs to mind) offer better rent than homeownership, at least from when I last looked. The difficulties in offloading the property and real threat of depreciation/lowered housing demand would make me nervous about going into most housing markets.
Also, I would never buy a single-family house, mostly because the fear of upkeep and major repairs. This is a personal emotional trauma; it was only discovered after I sold my first house that it was sinking and would cost about $50,000 to fix (about a third of the house's value). The benefit of owning a condo/co-op is that you outsource landscaping and external repairs, for which you pay a premium. While this goes against Jacob's philosophy, it fits my personal needs and current abilities rather well.
I believe that more handy people would be better suited for single-family homeownership, so I wouldn't use my own preference as a guide for other people.
"It's interesting how emotional people get on this issue."
I completely agree. I always get fired up because so many homeowners immediately talk down to renters. When it's the math that matters for the financial side of the argument. However, most people don't bother with the math and just assume homeownership is better financially.
I completely agree. I always get fired up because so many homeowners immediately talk down to renters. When it's the math that matters for the financial side of the argument. However, most people don't bother with the math and just assume homeownership is better financially.
It's interesting how people confuse logic with emotion.
This argument (outside the OP's main argument) will depend largely on your location. You can argue for or against all you want, but if your geographic location is very different from mine, then we're all just getting windy. The virtues of home ownership work for some and not for others. I'm simply arguing against the dogmatic viewpoint either way.
I've been both a renter and a landlord. I've lived from California to Costa Rica to Oklahoma and the housing ownership pros and cons based on financial advantages vs. disadvantages vary greatly between all three locations.
I don't see how you can be dogmatic either way without a specific location in mind.
This argument (outside the OP's main argument) will depend largely on your location. You can argue for or against all you want, but if your geographic location is very different from mine, then we're all just getting windy. The virtues of home ownership work for some and not for others. I'm simply arguing against the dogmatic viewpoint either way.
I've been both a renter and a landlord. I've lived from California to Costa Rica to Oklahoma and the housing ownership pros and cons based on financial advantages vs. disadvantages vary greatly between all three locations.
I don't see how you can be dogmatic either way without a specific location in mind.