As a planner, I am often asked by clients and friends, “Should I buy a home?”
While owning your own home can be an indicator of prosperity and be part of your American Dream, it can become your American Nightmare if these five truths are overlooked. So before you meet with your realtor, take a look and consider the following:
It may not appreciate as much as you’d expect. I have a client wanting to get out of his mortgage. Nine years ago, he bought a house in Largo for $360,000; its current value is $300,000. It has actually depreciated by 2% a year. This is not what he expected when he bought the house. And unfortunately, this is not an isolated incident. It can happen anywhere where there is a change in industry, businesses close, natural disasters hit, overcrowding, or any number of other reasons.
The national median housing prices have been increasing at a rate of 5-6% during the last several quarters due to lack of inventory. However, homes in the U.S. have historically increased at the general rate of inflation. Currently, the Federal Reserve has a target inflation rate of 2%. I think it is wiser to assume it will be closer to 3% over the long-term. Keep in mind those are national median housing prices, each neighborhood is different. Ask your realtor for historical numbers and factors that could influence the value of your home.
Buyers often underestimate upgrading and renovation costs and their value to the home. A friend of mine recently purchased a house in DC. Their plan was to renovate the basement, which they thought would cost $20,000. After their successful purchase, the actual quote was $80,000, quadruple their initial estimates. It’s your home, and you want it to reflect your style so upgrades and renovations are desirable. They make it yours and more pleasant to live in. Just remember to get actual quotes and realistic value-added predictions before making an offer. Keep in mind, as a general rule, most renovations will not raise the value of a home dollar for dollar.
You lose flexibility – and may be “throwing away money” – when you buy. I hear people say, “I really want to buy, because I’m just throwing away money in rent.” The truth is, you may also end up losing money if you sell your home a few years after buying.
Buying a house typically becomes a profitable venture the longer you stay in that property, since there are upfront and tail end costs associated with buying & selling. If you need to move unexpectedly due to a job change, or you need to take care of a family member who falls ill, then it will throw off the numbers. If you end up staying in the property for less than 5 years, you may be better off renting. In fact, a study by HelloWallet revealed that over 40 million households purchased their homes during time periods when average homebuyers would have been better off renting and investing their extra cash.
4. Your mortgage will eat more of your budget. Having a mortgage forces people to save through home equity, but the total cost (principal, interest, taxes, insurance, house maintenance costs) will likely be more compared to renting. Think about how this may impact your other goals, like traveling, having an emergency fund, donating to charity, or saving for retirement.
5. Your house will demand your time. I’ve come to realize that whenever I purchase something, that commodity demands my attention and time. If I buy a new dress shirt, I’ll need to wash it and iron it. If I buy a new car, I’ll need to take it to the dealer, clean it, take it to emissions testing. Importantly, the same phenomenon applies to purchasing a home. You will have to make decisions regarding repairs and upgrades. How much is your time worth to you?
There are many benefits to owning your own home. You can’t get kicked out by a landlord. You’ll no longer be subject to unexpected rent increases. You can decorate and renovate your home to reflect your personality. And you may improve your net worth. The previous five truths are not meant to discourage you from buying. But they should help raise your awareness, allow you to factor in all the variables, and help you make a more informed decision to ensure you get – and ENJOY – the American Dream.
Buying property may be the biggest purchase we will ever make. We want to be sure it’s the right decision. Consider working with a financial planner who can more accurately and objectively crunch the numbers for you. Schedule a free discovery call with us today.