Home ownership is part of the American Dream and many personal finance pundits insist you need to become a homeowner in order to be financially successful and create wealth. While it’s true that owning a home can be a significant key to building long-term wealth and financial stability, that isn’t always the case. There are many instances where buying a home can actually do more harm than good and could actually put you in an even worse financial situation.
Why do people buy homes? Obviously, there is something to be said about owning the place you live versus just paying rent in return for living there. Beyond that there’s a common belief that over time your home will increase in value which in turn creates wealth. This is the same belief most of us hold regarding the stock market. But as we’ve seen in recent years there are also times when this doesn’t hold true. Just like anything there are good reasons and bad reasons to buy a home.
Why Should You Buy a Home?
There are many good reasons to buy a home:
- Mortgage interest and generally property taxes are tax-deductible.
- The possibility of not paying taxes on the gains when selling a home (up to certain limits).
- Increases your net worth by building equity.
- Possible appreciation in value of the home.
- Freedom to build, design, and fully control the look and feel of your dwelling.
- Interest rates are historically low. Compare mortgage rates.
These are all nice benefits when owning your own home. You can save money on taxes, your mortgage payments build equity (although often slowly) which can in turn be sold for a profit in the future, and you have almost complete freedom in regards to how you want your home, yard or garden to look inside and out. Of course there is a downside to everything, including home ownership.
Why Shouldn’t You Buy a Home?
Even good things have bad counterparts:
- The tax benefits may not be as substantial as you thought.
- Real estate values do not always go up, or increase fast enough to guarantee a profit when you sell.
- If you are young or uncertain where the future will take you, owning a home doesn’t provide the flexibility to move on short notice.
- No more landlord. You are the landlord and when something breaks, you need to fix it yourself or pay to have someone fix it.
- General maintenance can eat up a lot of time and money.
Finding the Balance Between the Pros and Cons
Buying a home is a very big decision. Everyone has a unique situation and just because conventional wisdom leads you to believe you must own a home sooner than later doesn’t mean it is right for you. Take a look at your situation to see if the benefits will outweigh the negative issues.
Ask yourself these questions: Will the tax benefit really have that much of an impact over your standard deduction? Are you certain you will be working in the general area for years to come and won’t have to move? Do you have the time and money to put into maintaining the home? If any of these answers are uncertain you need to really consider whether or not buying right now is the right decision for you.
Some People Say You Can’t Go Wrong Buying a Home
Wrong. You can do great harm to your financial future if you buy a home for the wrong reasons. This is especially true for people who either like to move frequently or have an job situation that may lead to a move within a few years. If something arises that requires you to move from your newly purchased home within the first few years you are looking at the possibility of losing a substantial amount of money, especially in this real estate market.
First, the real estate market is a bit unpredictable which can be seen in real situations recently. If you need to sell a few years after you buy do you think the value has increased enough to be profitable? Even if the value has increased greater than inflation will that amount be enough to cover the thousands of dollars in fees and closing costs associated with selling the home? Also, don’t forget that in some areas a home may take many months if not a year or more to finally sell for the price you’re looking for. If you are pressed for time you may have to substantially reduce the price to get rid of it in a timely fashion.
Second, homeownership simply isn’t for everyone. If you enjoy city life it can be virtually impossible to find affordable housing in or around the city. It some situations may be far more beneficial to rent. For others, they are simply too busy to tend to the issues that come from owning a home. If you have a lawn, it needs to be mowed. If you live in an area that gets snow in the winter your driveway and walkways will need to be cleared. If your water heater breaks you will need to go buy another one and have it installed. Young professionals can find themselves too busy to tend to these issues, and while they require time, more importantly they require additional funds that you don’t have to worry about when you don’t own a home. These types of things alone can account for hundreds or even thousands of dollars a year.
As you can see, just because the talking heads on TV and in most finance books tell you that owning a home is a path to wealth doesn’t mean you should jump into a new home. Don’t feel like you need to rush into buying a home just because all of your friends are or that you feel you need to in order to start building equity instead of throwing away money on rent. Clearly there are benefits to owning a home, but if you make the decision too soon or for the wrong reasons you can find yourself actually doing more harm than good. Stick to the basics and analyze your situation carefully.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.