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Read This Before You Buy A House

6 October 2010 9 Comments

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.

9 Comments »

  • chemkrafty said:

    I would agree. I bought a home at 26 and it has been great. I had roomates while single and am about to start a family with a daughter due any day and the memories are great.

    I think it comes down to situation. The post makes some great points about mobility, but if you are stable, it makes sense if that's something you want. My biggest caution is be smart about your purchase. I saw a lot of my friends buy WAY more house than they needed because it was nice and they could afford it. I made just as much, but chose to live in a small (1050 ft^2) house with moderate payments. The value only dropped a couple grand during the bust (I bought in 2006).

    There are arguments on both sides and BOTH SIDES make sense depending on your place and desires in life.

  • TaJ said:

    I have to agree that buying a home in your early 20s is a bad idea. You want to keep flexibility in mind – both the freedom to change your living situation as needed, and the "freedom to fail", ie, the ability to recover from adverse events or the consequences of taking risks.

    Of course for that matter I'd make the same argument against getting married in your early 20s, so to each their own. :)

  • @FinancialPlan said:

    If you are working and building your career, and are creating a good financial life, you will want to spend some of your money on the things that you enjoy. For many people a house is a part of that. Don't let anyone convince you otherwise if that is what you want.

  • wingtipwalker said:

    Also in some markets, you can buy a house for what it costs to rent…after taxes and depending on how long/what shape the place is in after maintenance and upkeep. If this is the case it makes sense to buy! Even if you only break even on the sale, or possibly even lose a little, you stand to get all of your principle payments back and possibly some of the interest.

    If you think the housing market in your area is stabilized, as I do since Texas really didn't see the dips like lots of places, you can really compare the interest costs of a mortgage to rent, and consider the principle payments as some sort of long-term savings. Even if you're not getting a big return, you're saving on rent and forcing yourself to save cash that is accessible even if it's not liquid.

  • Green Tea Party said:

    I am a bit puzzled by this post. Gold as a store of wealth, a cornerstone message of this blog, ties heavily to the idea of coming inflation. With that in mind, it would seem that mortgage rates could begin an upward trend in the coming years. With rates so low now and homes becoming reasonably priced mixed with a view of coming inflation, why wouldn't right now be seen as a window of opportunity to buy a home that's within one's budget (don't get the extra bathroom that you can't pay for)? I say save the 10-20% downpayment and go for it!

  • Steve said:

    While I can see the danger in relying totally on your home as an investment, and effectively using it as an atm, I think under the right circumstances, home ownership could actually prove to be a valuable investment to someone in their 20's. I know several guys in their 30's who started out in condos or townhomes in their 20's, got married and started families, bought new homes, but kept their townhomes as investment/rental properties.

    For a single 20's something, home ownership can actually be especially attractive if you plan on renting out your extra room(s.) In my area, often owning a home (I'm talking 2 or 3 bedroom townhome or condo or very small house) actually works out about the same or less as renting, and if you have room mates you may even come close to breaking even or make a small profit. Regardless, owning and then renting out your extra space is going to be less than paying rent.

  • Steve said:

    Also, just for discussion purposes, even if you are only going to be in the home for 5 years or less, why not consider a ARM? These can be had for insanely low rates, and if you are not planning on staying anyways you wouldn't have to be as concerned about rates increasing again.

  • Ricky said:

    It seems to me that many of your objections are mitigated by simply purchasing a home you can truly afford. In this market there are attractive condos for as little as $35,000 in Colorado Springs. Save up $10 or $15k for a down-payment (we saved 20k for our 43k home) and your mortgage will be approximately $100/month. A few years later the unit is payed for, it can be rented out or sold (depending on the market) and you are no longer tied to the location.

    My story is a 43k condo, 1000+ ft in a good neighborhood, 20k down, resulting in a mortgage of $128/mo. We pay as much as five times that every month and our condo will be payed off in no time. My wife and I have a combined income of well under 20k/year. This is vastly cheaper than rent, and when it's payed, we have an avenue to make an extra few hundred every month.

  • شات دلع مصر said:

    To create a business that we have become larger, of course we need the funds can be obtained through bank loans. Therefore, I think there is nothing wrong if we think about these alternatives, but we must be ready with all the risks.
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