Read This Before You Buy A House
In my first post for 20s Money, I discussed how to analyze your personal financial statement. One of the major points I tried to make in that article was that “home ownership is not all it’s cracked up to be.” When I originally wrote that, I realized that it might be slightly controversial and I indeed received a few emails disputing my claim.
So, with this post, I want like to expand on my original statement and make a more complete argument AGAINST home ownership, especially for people who are in their 20s. In addition, I want to explore the relationship between home ownership and the “American Dream.”
According to Wikipedia, the concept of the “American Dream” was first expressed by the American writer and historian James Truslow Adams in 1931. In his remarks, Mr. Adams championed the idea that, regardless of one’s rank in life, every American had the opportunity to achieve a “better, richer, and happier life.” This has since become one of the fundamental tenets of American society and an idea that I fully embrace. Since 1931, the idea of the “American Dream” has evolved and we have become voracious consumers of everything we needed to announce our arrival to the middle class, including our very own home. This I disagree with.
In addition to being a status symbol, so-called experts (the government, bankers, lawyers, accountants, etc) told us that we should buy a home because:
- You just HAVE to have a place to call your own. A place where you can paint the walls any crazy color you like and where you can feel a sense of safety and stability.
- Historically, home values ALWAYS go up. It’s a good investment.
- There is a significant tax benefit to home ownership because you can deduct mortgage interest and property taxes from your tax return. In addition, you don’t have to pay taxes on any gains as long as you have lived in the house for 2 of the past 5 years.
- You can build up equity over time. It can be your nest egg.
Well, we listened and we bought. As a result, home prices indeed rose pretty steadily from 1970 to 2000. In 2000, prices began a run unlike anything ever seen before until 2006.
By now, we all know that, starting in 2006, home prices suffered an epic collapse, wiping out an incredible amount of equity for millions of Americans and bankrupting millions more. The collapse also brought our nation’s financial system to the brink of failure and obliterated the idea that home prices always go up. Looking back on this collapse, I think it serves as a good inflection point to rethink the notion that home ownership is a good idea (especially for people in their 20s) and to explore the next evolution of the “American Dream.”
Let’s rethink home ownership first. Above, I highlighted several of the traditional reasons FOR buying a home, but now let’s take a look at several reasons NOT to buy a home while you are in your 20’s:
- Career Stability: According to a 2008 Bureau of Labor Statistics report, the average American will hold 10.8 jobs in their lifetime, with the 2/3rds of the job changes occurring between the ages of 18 and 27. Based on this report, it is clear that the average 20-something doesn’t have the career stability needed to justify the purchase of home, especially in the current economic environment. I firmly believe that you need to have a minimum 7-10 time horizon before you even think about buying a house. Unless you have the career stability to commit to a home for this period of time, I think it’s wise to rent.
- Home Prices: The chart above clearly demonstrates the fallacy of the idea that home prices always go up. They don’t! Which is exactly why you need to have some career stability and a 7-10 year time horizon before you buy a home. With a regular paycheck and a long-term outlook, you will have the tools to keep paying your mortgage through any downturns in the housing cycle. Unfortunately, these two things don’t usually occur in the required quantities until a person reaches their late 20s/early 30s. Again, I would advise you to wait and rent until you have a significant amount of career stability and a 7-10 year time horizon.
- Debt: There is no reason to take on a mortgage in your 20s. Why? Because when you purchase a home and sign a mortgage, you are committing to 30 years of loan payments…30 years! Let that sink in…for the average 20-something, that is longer than you have been alive! It is a massive commitment and it shouldn’t be taken lightly. The size of this commitment is exactly why you need a great deal of career (and life) stability to ensure that you are able to honor it. SIDE NOTE: I DO NOT subscribe to the theory that a mortgage is “good debt.” That whole theory is predicated upon the underlying asset appreciating in value over time. We now know that this is not always the case with homes. Debt is debt. Don’t view a mortgage as a monthly payment, but as a pile of money that you owe the bank IN FULL. “I owe GMAC $150,000” sounds a lot more daunting than “my payment is $1,000 a month.” Renting a home doesn’t require the assumption of a massive amount of debt. Save your money and put it towards your emergency fund.
- Maintenance: Many potential homeowners focus exclusively on saving for a down payment and neglect to factor in the cost of the upkeep required to maintain a home. By upkeep, I mean lawn maintenance, basic repairs, and renovations. Buyers spend all of their money for a down payment and don’t save anything for maintenance expenses. What happens WHEN (not if) the air conditioner or refrigerator breaks? Guess what? It costs a lot of money to fix. If you haven’t planned for an expense of this magnitude and you have to borrow to fix it, it can be a major setback to your personal finances. This is exactly why you need an emergency fund BEFORE you buy a house. Even better, if you rent, these items are the landlord’s responsibility! The money you save by renting can be used for your emergency fund.
Lastly, the biggest reason I would advise against buying a home in your 20s is that the world has changed significantly over the past 5 years. Rising income levels, annual bonuses, and job security have become things of the past for many people. When this is combined with falling home prices and rising credit card debt, it creates a toxic combination. In order to fight these economic maladies, we need to be as lean as possible in our personal lives. We need to pursue increasing levels of education and not be burdened by a tremendous amount of debt and material clutter. We need to be ready to go wherever and do whatever it takes to ensure our upward mobility. A big mortgage and an illiquid asset (your house) can be major impediments to this approach.
As a result of the current levels of uncertainty, I think that the American Dream needs to continue to evolve. If the old American Dream was about MORE (more stuff, bigger house, vacation home, multiple cars, and exotic vacations), the new American Dream should about LESS (less stuff, renting a home, keeping your car longer, and less debt). It NEEDS to be about less. We NEED to learn to live with fewer of the trappings of material comfort and push ourselves to learn and compete and continue to grow. Nothing is assured any more. We have to be ready to go get it and this is probably the biggest reason not to buy a house.
Written by Patrick S Graham. For more insight and occasional hilarity, follow him on Twitter (@PGrahammy) or check out his personal blog.