Today’s 20-somethings and those in their early 30s came of age in what may have been the worst national real estate market on record since their grandparents were born. Now realtors want to persuade them that it’s high time to take a risk; that it’s time to walk away from paying rents and pay high prices to buy their own homes.
The fact that interest rates are near historic lows, while rents are high in many urban areas, also tilts the balance.
Trulia is urging millennials to push the envelope . Buy a house and eat ramen noodles to make mortgage payments for a year or so, because after a raise or promotion or two, that new apartment or house will look like a bargain and be a much easier financial burden.
But for many Americans, the tradeoff isn’t that easy. And it shouldn’t be. The ideal of home ownership is wonderful – and there are many advantages.
But if you don’t plan carefully, your dream of home ownership can end up as a financial nightmare. Here are the points to ponder.
Trulia is arguing that millennials should stretch themselves financially, basing that argument on a hypothesis that may – or may not – be valid: that they can expect their incomes to rise and their personal financial outlook to improve. You’ll need to be ruthlessly honest with yourself: is that likely to be the case with you?
More than any other single factor, what anyone wrestling with the buy v rent decision needs to ponder is the extent to which they are stable. That means how stable their job is (and how likely they are to get promotions and raises over the coming years), how stable their relationship or marriage is, and how stable their career path is. If the answers to any of those questions signals doubt – that they might not be committed to staying in that house for the next five or more years – then regardless of what the mathematics says, buying probably isn’t a good idea.
That’s because while a house purchase can make sense – even tenuously – when you run the math, it may still not be wise when you examine life circumstances. A great many homeowners found themselves in a predicament during the housing crisis: needing to sell because they were relocating, because they were elderly or because they were military families asked to deploy overseas, but unable to find buyers because of the market conditions. So, evaluate your circumstances.
Be equally honest about your finances. Of course, in some markets where both rents and housing prices are high, the market may impose this discipline on you, making it impossible to save enough for a down payment.
But the costs of home ownership don’t stop with the mortgage. You’ll also need money to pay property taxes, and an insurance policy on your new home. When you were renting, there’s a chance that your landlord covered some of your utility expenses: almost certainly he paid a water bill, and possibly either heating or power. Now, all that will be your responsibility.
You’ll also have to keep putting money into your retirement savings plan, because your house can’t end up being 100% of your nest egg.
This might not even be the right time to buy, anyway. Sure, rental prices are high, but chasing housing prices higher is rarely a wise plan. You may feel that houses are becoming less and less available, and less and less affordable, and you’d be right on both counts. Home prices have risen at 13 times the rate of the typical American’s earnings in recent years, which is in part due to the fact that the number of homes available for sale has been running well below the number that realtors say is required for the market to be in balance. Still, it’s rarely a good idea to get involved in a bidding war simply to ensure you’re buying instead of renting.
Millennials who are mulling the renting v buying tradeoff should also ponder some of the long-term market dynamics that will affect the housing market now. If they buy today, with a minimal down payment, they won’t have much of a cushion to protect their primary asset from any erosion in value in the future. And there are at least a few reasons why such a selloff might occur.
First of all, there’s the market itself. We just don’t know what the reaction will be to a rise in interest rates and mortgage rates. Nor do we fully understand how many properties are left over from the financial crisis and the related real estate debacle that have been repossessed by banks or whose owners still inhabit them but remain in default on their mortgages. Many more of these homes could make their way onto the market in the coming months and years.
Then there are the baby boomers, whose retirement savings fall far short of being able to generate an adequate income for their golden years, and whose homes are by far their largest asset. For many, who are approaching retirement in the next five to 10 years, that will mean selling their home – and flooding the market with another wave of properties for sale.
And while it’s true that low interest rates are tempting to home buyers, if you’re using those low rates in order to make a costly purchase, that’s problematic. A potentially more alluring scenario might be to continue living in a small and inexpensive studio and sock away at least some money in a savings account, and then down the road make a much larger down payment. If you’re borrowing less, your monthly payment might still be the same, but with a big down payment you’d be a bank’s preferred customer and a seller’s preferred buyer in a competitive bidding situation.