Home ownership has been a pillar of the American dream for decades, is home ownership still a sensible choice?
It is almost taboo in American society to challenge the ideal of home ownership. For decades it has been drilled into us that every family should buy a home, your home is your biggest asset, home prices always go up, and so on. More people are challenging this long-held belief.
Home ownership may continue to be the best choice for many families. But that is not always true.
For many families, renting a home is now a more sensible choice.
Lets debunk some common myths about home ownership so home ownership can be viewed in the proper context;
1. Do home prices always rise in the long-term?
Yes and no.
Yes, home prices generally rise in real terms over time, although even this notion is being challenged in recent years.
No, inflation adjusted home prices barely keep up with inflation, especially when viewing longer term trends.
The house market is very localized. Some markets have appreciated very well and others have dropped in real and inflation adjusted terms.
2. But what about the tax advantages of the mortgage deduction?
There are tax savings associated with the mortgage deduction and property taxes. The advantages rise with you marginal tax rates. For middle class families, the benefit is not that great. Even if your marginal tax rate is 25%, you are paying $10,000 in interest to save $2,500. Is this really such a great deal? In any other context would you trade your dollars for quarters? Especially when you consider that you really do not even own your home, your mortgage holder does, until the note is paid.
3. Up front costs
down-payment, closing costs, and possible home improvements are a few of the larger up front costs home owners must bear before moving in. All of these costs are paid before you move anything into your home.
4. Ongoing ownership costs
In addition to utilities, mortgage payments, property taxes, insurance, home owners association fees, and maintenance are ongoing costs year after year. There are also intangible time costs associated with home ownership.
The home market is driven largely by three factors, two are location specific, population growth and incomes, and one is national in nature, interest rates. The population is rapidly aging. Baby boomers are downsizing into smaller homes or renting.
Aside from the potential financial advantages of renting a home instead of buying, the greatest potential advantage is flexibility. Home ownership comes with large entry and exit costs, with thousands of dollars required to get in and to get out.
If you get stuck in a bad market or end up underwater on your mortgage, you may end up trapped in your location unless you can afford to carry the costs.
Do not rule out home ownership and do not assume it is automatically the best choice because of long held cultural beliefs.
Home ownership should not be thrown out as a viable option. However, it needs to be compared to the other viable options.