Jane is thinking about buying a detached house. A mortgage broker, four realtors, and her parents have explained to her that it’s an investment, as “house values always go up.”
Do they? We might indeed be able to say that over the course of, say, 50 years, the value of land underneath a dwelling is very likely to increase. In this case, the owner will see a gain when she sells. And sometimes, the value increases substantially within three months, a year, five years. Score!
Is it all as simple as that, though?
Let’s consider the likelihood that Jane will be able to hold this investment for 50 years, or even 10. Following are some scenarios she may reasonably face over that period (the timing of her surprise circumstances having no respect whatsoever for a temporary dip in the house’s value):
1. Jane falls deeply in love with a person whose custody arrangements require he stay put 2000 miles from her place.
2. Jane divorces, and no longer has two incomes to pay the cost of housing.
3. Jane gets her dream job across the country!
4. Jane’s child develops a severe illness that requires three years of treatment in another region.
5. Jane’s new wife is suddenly posted to another base, parish, or office.
6. Property values in their new location skyrocket, and Jane’s property taxes triple. Insurance and municipal utilities soar, too. On top of the mortgage and heat, the costs are now more than she can manage.
7. Jane loses her job, and it’s two years before she finds another one offering the same pay.
8. Jane’s mom needs Jane to be her full-time caregiver back home for the final eight years of Mom’s life, which arrived earlier than anticipated.
Life happens. When our dating, marrying, work, and care of parents took place in one place from cradle to grave, owning our residence made sense. Generally, it even made sense for 100% of our assets to be our land! Even if a wildfire tore through every couple of decades, our community rallied to help rebuild. Our security wasn’t subject to the whims of an insurance policy’s fine print.
Now? Love, school, health, and work take us all over the country -or the world! At the same time, home prices have reached bizarre levels in many areas. Middle class people are taking on mortgages of $500k or more. Whoa!
And if life goes perfectly? (Yay!) Is buying optimal if owning the house proves to be $2500/mo, when the amount of space actually needed could be rented for $800?
If you live in an area where houses are, say, $60k, you have a great income, you plan to stay put, and you’re able to lock in a low rate for the entire term of the mortgage (or pay it off in the event rates jump to unacceptable levels), owning can be a solid idea. Otherwise, think three times about this idea.
If I’m buying on the premise that proceeds -at whatever time I need to sell- will surpass all costs involved along the way, then I’m approaching the property as a stock. To pick a single stock is to gamble. We’re urged to gamble only what we can afford to lose.
What are some other options?
Rent just the space you need. Or rent a big ol’ house and sublet the excess rooms, part of the yard for a tiny house, and all of the driveway for an RV. Or trade work for housing. If you feel compelled to own, consider a property that is already paying for itself through excess rooms or suites, or investing more broadly until you can own outright, or obtaining a mixer mortgage with reliable people who have similar goals.
However you limit home costs, be sure not to throw away the difference saved. Put some into your solid, low-cost business plan. Put the rest into low-fee index funds -a strategy through which you borrow nothing and own tiny slivers of each of thousands of companies, such that the failure of one won’t take you down.
Do people win when they buy? Sometimes. (I did. However, I was also careful to buy a place that paid for itself from the start through the rental of rooms and suites.) But just as with all gambling, for everyone that wins, a number of people lose. When you have a mortgage of $460,000 and your home’s resale value drops to $300k, you have some serious decisions to make. Continue paying the interest and principle on $460k -even for twenty years if that’s what it takes- until the house value breaks even again? How much do maintenance, taxes, utilities, and insurance cost in the meantime? At which point do you declare your costs sunk and fold, declaring bankruptcy and walking away?
The good news is that many people have found themselves in the worst case scenario -facing one or more of those in the “Jane” examples- and turned their situation around. Some have chosen to continue paying, waiting patiently for the property’s value to recover -putting their payment agreement above any other priority. Some have handed the property back to the bank, rented a place, and started from scratch -they took the lesson and revamped their entire approach to finances.
Don’t be duped by hot markets, the experience of people who owned during a very different era, or folks who make money on your decision to buy.
Buy if it really, really makes sense in your case, i.e. it genuinely costs less than renting, you can easily afford it even if some of your circumstances change a little, and you have a back-up plan if bigger events appear during a dip in your local housing market.
Otherwise, consider how else you might achieve residency in your preferred location and invest the difference in a diversified portfolio.