The Three Worst Reasons for Buying a Home

The book The 10 Commandments of Money: Survive and Thrive in the New Economy lists the three worst reasons for buying a home as follows:

1. It will be a good investment.

2. I'm tired of throwing away money on rent.

3. I need the tax deduction.

Here's my take on these:

1. A home may or may not be a good investment, but I don't look at it as one. Among the few homes I've owned, I have lost money on two, broken even on one, and made money on one (enough to balance out the losses.) If we were to sell our house today, we would have lost money over the years. So I agree -- don't buy a home because you think it will be a good investment unless you have some compelling reason (and perhaps data) for thinking so.

2. The rent versus buy debate seems to go on and on. All I can say here is that you have to compare costs of renting versus owning to see which is the best deal. You also need to consider the other pros and cons with each option. For instance, renting usually requires a lot less upkeep on your part while owning a home often provides more room and a place you can tailor to your specific needs/tastes.

3. I never understood people who were willing to spend $1 to get 20 cents back. Seems like a bad deal to me. ;-) Yes, the tax deduction on mortgage interest will make the price of your home less costly than it would be without the deduction, but it's still an expense.

Any thoughts to add?

Comments

[KH]

Don't forget...if you have kids, buying your own home may be the key to getting them into a good public school vs. a bad or even unsafe public school. If you have to pay to send your kids to private school, if you have to have one parent stay home and home-school them, if you end up sending you kids to sub-optimal schools where they won't get a good education---that's costly. All too often, you can't find anything to rent in a good school area--you have to buy.

[jbhk]

Rent or buy, we have been thinking many times about it, especially during the buyers' market a few years ago. Although we are able to afford a decent house with only one main income, I'm glad that we are still renting. The main reason we stay to rent is we don't feel the area is for us, we cannot commit to stay long enough. Also, we have been paying the same amount of rent since day one which I find we are paying at least $250 lower the market. Now, we decide to move somewhere else, good that we don't need to sell a house.

[Michael Goode]

I have to disagree with KH -- there are affordable apartments and rental houses in most above-average to high-quality suburban school districts and many elite districts. For example, the Clayton, MO public school district had, a few years back when I lived in the area, more affordable rental housing (including decent houses) than the housing available to be bought in the nearby Maplewood public schools, which were markedly inferior. It would have even been cheaper to rent in Clayton than to buy in the nearby Dogtown neighborhood of St. Louis City (with its poor public schools) back during the bubble years.

[Michael Goode]

I think the best way to conceptualize housing is in two parts: land and house. The physical house is a depreciating asset that will be worth less over time than the money paid to construct and maintain it. It depreciates very slowly. The land can either depreciate (like in Detroit or frankly, anywhere in Michigan over the last 10 years) or it can appreciate wildly (in a good area where there is population growth.

[RS]

The other advantage to buying is that, once you pay your house off, it's an expense that disappears. While it usually takes quite a while to get to that point, at the end of the day, a house IS an asset that has historically appreciated in price.

I think most readers here would agree that its better to buy a car than lease one, because eventually, you stop paying for the car. I view buying a home the same way.

[Tim @ Faith and Finance]

I was just discussing this with a coworker yesterday. He sold his home to buy a new one at a great deal - twice as big for a fraction more than his home was originally. Since their family was growing, it was a good move for them.

He didn't view it as an investment though. After running the numbers on his previous home, there was no way anyone would call it an 'investment.'

Paying to have a roof over your head is an expense IMO.

[Nick Knight]

One of the big pros of home ownership is not having to deal with Landlords, who can jack up the rent, and make like difficult. No, thanks! I like being King of my own castle.

[indio]

The mortgage deduction adds an interesting angle to this. My house in the suburbs of NY city would rent for $2400-2800 in this area. After property taxes and mortgage interest deduction it costs me $1050 per month to live here. Yes, I have to maintain the place - paint it, install new roof and other stuff like that occasionally, but it still averages out to be cheaper. To me, the best part is that I can do whatever I want to the place and I don't have a landlord complaining that I took the carpet out or that my chickens are too loud.

[ryan]

Nick Knight, I'm guessing you haven't rented in a while. Landlord isn't going to jack up the rent all of the sudden or they lose tenants. You can also negotiate with them, if you aren't lazy and can make a good arguement.

Rent vs Buy is just like personal finance...it's personal.

[Pop]

"The land can either depreciate (like in Detroit or frankly, anywhere in Michigan over the last 10 years) or it can appreciate wildly (in a good area where there is population growth."

Exactly, Michigan is a cheap state in which to live for a reason (actually, several).

Ask any Californian who bought a house between 1940 and 2001 if they made a good INVESTMENT. The only ones who'll say no are the ones who refinanced and extracted hundreds of thousands of dollars from their homes to buy various toys and now find themselves under water.

[AZ]

I've "broke-even" on a house before, but still came out ahead when considering cash flow. I purchased a home for $100,000 and sold it 4 years later for $100,000 after commission. However, had I rented that same home, I would have been paying $750 a month. Total rent over those 4 years would have been $36,000 (assuming rent wouldn't have incresed). My total ownership expenses over that same time frame (insurance, taxes, interest, repairs/upkeep) was around $6k to $7k / year and with closing cost, my total cost was around $26,000. So after four years, I still came out $10,000 ahead. I did not have any major repairs, but I did have a home warranty on all major appliances and systems that would have prevented any major expenses.

[Financial Independence]

If we are talking about buying with cash it maybe a good thing - to have a place to live vs investing money somewhere else.
Markets go up and down, but you still need a roof above you. If it is a mortgage it is quite a different thing.

We can not predict home prices, baby boomers are retiring, many of them will try to cash in on downsizing. In long term buying a house as investment is not a good thing.

[Matt]

The housing crash has change the reasons for owning a home. The new reality is housing will not appreciast like it use to and in some intances can be a very poor investment. Look at all the people upside down on their mortgage.

I look at a house as a place to live and where I am in control of what I want to do to the house.

If I look at all the pluses and minuses I would say I am ahead but that is marginal due to the depression of housing prices.

I also look that when I retire the house will be paid for and I just need to pay taxes and homeowners insurance at the tune of around $250 a month where a person renting the same house would be looking at well over $1000.

[Alotta Lettuce]

Don't buy a home because everyone around you is and you feel like it's the thing to do, or the expected thing at this particular stage in your life.

[Nikki]

It seems like people that talk about the rent vs. buy debate don't think about the retirement aspect of it. If I buy a home now in a place that I think I'll stay in for a very long time, I can have it paid off by the time I retire, thus making retirement a helluva lot cheaper because I don't have a mortgage, just property taxes/insurance/maintenance. Those costs don't add up to what I'd pay in rent if I rented the rest of my life.

And if I decide to move one day -- as long as I stay long enough and ride out the crappy market -- I'll have all the equity built up in the house I own that'll get me a lot closer to paying off the entire mortgage of the next house before I retire. If I rented, I'll just have to keep spending more and more as prices go up with inflation faster than my retirement savings earn interest. Buying a home, as long as you're smart about getting one that's not too big for you and getting it at a good price (like you can right now) seems much smarter for my future.

[Mark]

@Matt: There is no "new reality". It's the same reality it always was. I am a contrarian. The fact that "everyone" has convinced themsleves that buying is bad almost certainly means the reverse is true.

@Financial Independence: The issue of mortgages does not totally determine whether a house is a good investment or not. I think the option to borrow money at 4.5% for 30 years is a fantastic bargain. It makes buying an even better deal, not worse.

[Scott Messner]

I'm not sure why you wouldn't buy a house if you love the area you are in and are in it for the long haul. If you live in the same house long enough you will get through any recessions in the housing market.

[Jonathan]

Mark, I agree wholeheartedly. Just as the stock market overreacted a couple years ago (it was off over 50% from its high, and is now back nearly all the way!), I think real estate is significantly undervalued (in many markets) and current pricing is unsustainably low. And you make a great point about locking up low-interest long term loans!

[Stacey]

How about #4: Because you can't find a place to rent that will take your dog. Can you believe we lost money on THAT house when we relocated less than two years later and had to sell it?!?!

[Old Limey]

Reasons why buying our home in 1977 has worked beautifully for us:

1) It was paid off in 1992 when we retired - no monthly payments to make.
2) Our property taxes are only $2,173/annum thanks to California's Prop. 13 law passed in 1978.
3) The fact that it has increased in value by a factor of 10 is not an issue because we will never sell it.
4) Our 4Br 3Ba 2,500sf ranch style home is on a 1/3 acre lot in the best custom development in the city and at the bottom of a quiet court close to 2 shopping malls, the library, fire station, and emergency services.
5) Every home in the development shows tremendous pride of ownership and is not spoiled by lots of parked cars and neglected landscaping. The city maintains an attractive, planted median strip that enters the development between two stone walls - the only one of its kind in the city.
6) Over 33 years I have built a wonderful, secluded garden that brings us a great deal of pleasure. We have fruit trees, ornamental trees, flowering shrubs, about 100 Rose bushes, many red & green Japanese Maples, Cymbidium orchids, a large fish pond with a multi-level waterfall, several large stone Japanese lanterns, outdoor lighting, a large vegetable garden, and a large shady patio. This year I was invited to put our home on the "Garden Tour" but I declined for reasons of privacy. Try to find a rental home like that, in perfect condition, at a price you don't mind paying.

[Georgia]

I have only owned 2 homes. My husband and I bought a much older house in our small town for $7,500. They were asking $15k, but when my husband asked about it, they cut it in half. The two men worked together at our local school. We sold it 11 years later for $3k, just the lot price.

My mother-in-law died and we received her lot and double wide trailer. I am still in it. It is 45 years old and we did much to fix it up - new roof, all new windows, insulated siding, etc. I am now doing a little at a time on the inside.

My utilities are about $160 a month average, although costs are going up thanks to DNR. (And I really mean thanks.) Our sewer system in this small town and others which are larger (including Hannibal)are over 100 years old and DNR says we must all upgrade. I'd rather do it now that 5-10 years in the future because of a major break in it.

The only downside to all my home ownership ($4,500 in 44 years of marriage) is: Why didn't we have more savings. I must admit. I am the one at fault. The best thing we did though, was to be out of debt when we both retired.

[Mike]

Policy is a tool used to change society. Long ago we decided that a community is a good thing. And they are formed at a faster rate with a little guidance. If people believe they have a stake in the "game", they will do the right thing. ie, pay their taxes, go to PTA meetings, pickup their dog's steaming leftovers, drive slow through the neighborhood,; A rent society makes it obvious which "class" you are in. ie working-class or other. Homeownership as a policy helps smooth over the implicit feelings of frustration people have that they will never be able to do better. In many ways it's doesn't make financial sense, since renting is cheaper, and if you are in the working class, it's easier to find a better paying job if you can move.