Examine Your Motives Series: Buying a Home
Marching on with our Examine Your Motives Series, it’s now time to discuss Buying a Home. How appropriate in this current era of falling house prices and rising fear of recessions?
I’ll try to make this a timeless article by ignoring the current market situation and keep things general. I’ll also speak to our own thought process when we bought a home just a few years ago.
It’s just too difficult to outline everyone’s situation without leaving someone out. Some of us are looking for our first home, but we have a lot of debt. Some of us own a home and are looking to downsize. Some of us are living with our parents and don’t think that we ever need to move out (You know who you all are!). But there are basic questions that we can ask before even looking at MLS listings or contacting a Realtor:
Why do you want a home? As an investment, a short-term place to live, or a place to retire?
You have to be pretty good to flip a house and make a profit in any year, much less during a pending recession. If you’re looking for an investment, find an inexpensive place to live (rent or own) and put your disposable income into a retirement account. However, if you want a place to live, then predicting the future 5-10 years down the road is tricky. Buy a place you like, rather than somewhere that is just adequate to get by until the next place.
How long do you plan on living in the home?
Are you buying a studio condo as a starter for just a few years, with plans to move in 3-5 years and make a profit on the sale? Or are you planning on retiring in this home? You shouldn’t buy with expectations of a profit on your sale. And you shouldn’t buy just for a short-term solution. You can’t predict what will happen to the market 3-5 years from now, much less your job, health or family situation, so if you only need a short-term housing, then why not rent? We’ll talk about renting shortly.
Can you afford to buy a home?
Well, duh, can you afford the monthly payments? Lenders are now looking at your mortgage to be no more than 28% of your gross monthly income, but in reality, you need to look at the rest of your monthly obligations and debt to determine how much breathing room will be left over after the bank takes its cut of your paycheck.
When we bought our home, the total mortgage, with principal, interest, taxes and insurance (PITI) took about 29% of our gross paycheck, or about 37% of our take-home pay. Tack on our minimum debt payments (car, credit card and student loans), and we we only had about 30% left to pay for utilities, groceries, gas, tithing and every other incidental. We weren’t hurting, but we didn’t have nearly as much room as we have now.
Currently, our numbers are 20% gross pay, 30% take-home pay and 57% left after our minimum debt payments. However, we couldn’t have known what we would be making in 3 years, so it was a gamble whether we could continue to afford the home.
Are you buying because everyone else is buying?
We jumped on the bandwagon. We didn’t want to be left out, and everyone was talking about rates increasing (they already had been). We were scared and uneducated. We bought our first home without researching very well. Luckily, it turned out alright, and we love our home and location. But why did we listen to gossip, rumors and other uneducated buyers instead of being patient and taking our time to find the right place at the right price at the right time?
Because I was in charge! Actually, we were nearing the end of our lease, rent was going up $200 a month (we had a discount for the first year), and we liked the idea of owning our own home. Ignore the fact that we spent hundreds of thousands of dollars of someone else’s money (the bank’s). Ignore the fact that that we don’t use 2 of the 3 bedrooms except for storage (see the next question). We seriously got a house because people said that’s what you normally do. You get married, buy a home and have kids.
Oh, and you’d be throwing your money away by renting! Aww, that’s a bunch of crap. Give me a calculator and I can prove that renting is cheaper than owning our home in the long term. Why? Because you can usually rent for less than the total cost of your mortgage PLUS home repairs. Ahhhh, you didn’t think about that one, did you? Yep, home repairs can cost hundreds or thousands per year, and by renting, your landlord is responsible for those (unless you pushed your roommate through the wall). Oh, and don’t forget about homeowners association or condo fees. We don’t pay them in our community, but others pay up to $400-500 extra per month!
Are you buying because you need more room?
I look around our house and ask myself “Where did I get all this junk and why do I need it?”. Honestly, we could still be living in our one-bedroom apartment from 5 years ago had it not had mold in the vents. We could have stayed in our rental townhouse, but we jumped on the single family home bandwagon because we thought we needed it. Then when we moved in, we had all these extra rooms, and nothing with which to fill them up. Oh, the horror of an empty space!
Take a look around your home. Do you REALLY need more room? C’mon, look again. Can’t you just get rid of that old desk you found in the dumpster, or that coffee table you keep banging your shin on? Isn’t it just another place to put junk? Would being more organized and efficient cancel your need for more room? Stacie and I actually talk about how we liked the old place and wouldn’t mind living there again. But with all this crap in our house, we could never find room in an 1100 sq. ft. apartment! Sometimes, you just need to take stock of what you need and don’t need, and take control of your stuff!
What can owning a home offer to you that renting can’t?
This is your last line of defense. Ask yourself why you really need to OWN that townhouse instead of RENTing one. Do you really need to have a place you can paint purple? Can you paint your existing rental as long as you paint it white when you leave? Do you really just have the itch to do home improvements? How about joining Habitat for Humanity and working on someone else’s home? Do you really think renting is throwing your money away? Do some research into home costs (including repairs) versus renting.
Don’t just buy a home because your friends are doing it, or you’re afraid of missing something, or because you “want freedom and stability”. Home ownership is not a financial investment. It’s an emotional investment. You probably want to buy a home because you’re imagining your kids running through the house for years to come, or doing whatever you want to the walls, but in the end, you’re really tying up a lot of money into a single material possession when you have other options.
After being homeowners for a few years now, I’d be lying if I said that I would never own a home again. But in the future, we would ask ourselves more questions about our motives for owning the home, and be more patient with the process. We lucked out with our first home purchase, but it could have gone totally wrong. We didn’t educate ourselves about the loans we were purchasing, or the risks and costs of home ownership.
Oh, and our last rental was $700 less per month than our current mortgage (with PITI). That’s a little more than what we get back in taxes each year on our interest paid. We have more room, a yard, a pool, and a better location, but is it worth the hassle of maintaining the home ourselves? Time will tell.
Photo Courtesy of dbking
Great post and I agree with most everything you wrote. However, I have to disagree that “Home ownership is not a financial investment. It’s an emotional investment.”
I’d say it’s both. To say that home ownership is cheaper or more expensive than renting isn’t my point. But buying a house is the largest single purchase almost all of us will make. It constitutes a large portion of most people’s net worth. It usually makes up a large part of their monthly expenses.
So I think it’s incorrect to say it’s not a financial investment. Whether it is a ‘wise’ financial investment is debatable and isn’t my point.
KMC, you’re right. I didn’t really intend it as a black/white statement. I did mean it as “should not be meant as a financial investment”.
Hi,
I agree with this post. The given questions are very helpful and important especially for people who are planning to apply for a home loan. Anyway, great post!
I would agree that owning a home is not for everyone. However I firmly disagree that renting is just as good if not better than owning. Feel free to bust out that calculator if you need to, but there is no denying that creating equity by owning is a much better option than giving someone else that money. And if you are complaining about the ‘cost of ownership’ then perhaps that house wasn’t right for you.
The problem with renting is that you will never see that money again. However when you buy, you are constantly putting money into the equity of the property. Sure you’re going to have additional overhead like utilities and general maintenance, but that’s minor stuff in the long run. Besides, real estate has proven itself to (overall) be a consistent and reliable investment (averages about 7% a year).
Let’s see you do that with what you would be paying in rent. Oh wait,.. your landlord would be the one profiting on that.
Oh one more thing,.. you mentioned the paradox of whether you need more room vs. more space to accumulate junk. While I agree in principle, you obviously don’t have kids yet.
Rob, you seem to have missed yesterday’s post about having kids.
No, we don’t have kids, and the ability to accumulate junk when you have kids isn’t lost on me. However, just because you have kids doesn’t mean you need to give them every toy in the world, or have 10 pairs of shoes cluttering up the closet.
Yeah I saw that one and yes, I’m aware that you don’t have kids. The way I wrote that was a little pointed, I’ll admit.
But I’m not talking about giving kids toys. That’s another issue that society in general should learn to curb. I’m just talking about the extra living space another person tends to take up. Even when that person is only a foot and a half tall, they require space. And when they get up and walking,.. they’re off to conquer the world. It’s just all the stuff (not junk,.. stuff) that we use in life. In the baby example, you have a changing table, crib, a reasonable amount of toys, clothes, storage for diapers, etc… It just blows up on you. Point being, an 1100 sq. ft. place begins to feel a lot smaller once you start adding kids to the mix.
Sorry by the way,.. I’m not trying to come off as critical or rude,.. just realistic. I’m a big fan of your blog, but this one seemed a little biased. You sound like you are regretting your house purchase.
What I regret is not doing the financial research. I like the house and location, but I didn’t ask myself why we wanted to get a house in the first place. We just figured since we were married, we should buy a house instead of rent. We liked where we were renting, but the home buying thing pushed us into moving.
And you mean you can’t just have your kid sleep in the bathtub and wear the same clothing every day? You could just hose them off when they get dirty!
My girlfriend and I have been talking alot lately about when we will want to move to a larger home. I bought a small house (about 900sq ft) four years ago and it has served me really well so far and we are generally content with the amount of space we have. However when we get married and have our first kid I feel like the 900 sq ft would be very difficult to feel comfortable in, similar to Rob’s initial point. For the two of us it’s a great house and the location is ideal.
Great post. I agree, my husband and I are second time homeowners with a break in between the first and second purchase to rent (new city). We were astounded at the money we saved while renting.
So we worked up a rent vs buy spreadsheet considering all of the inflow/outflow items involved with owning vs renting (closing costs, PITI, HOA dues, maintenance, home improvement, home appreciation, alternate investment opportunities with additional funds, realtor fees on the ultimate sale, etc).
We considered a 3% annual appreciation on the home, as in a normal market that is the mean. And we added in an amount proportional to the value of the home for maintenance and repair – seperate from home improvement which we valued at a 80% return (optimistic IMHO), home improvements were added @ the 80% to the value of the home so it could appreciate at the same 3% annual appreciation. Also, home improvement is a bit of a hobby for us so we knew in advance about what we would spend per year on this.
On the rent side, we did come to a net savings and invested those funds at a point higher than the interest rate on the house.
We found our breakeven point came at 3-5 years of home ownership.
So now the question is – will we be staying at our home for that amount of time? (it helps to keep this timeframe in mind as a minimum during the home shoppoing process) – AND now that we had the hard numbers in front of us – would it be worth it emotionally to take the financial hit in years 1-3 just to be living in the home we chose? (In case due to some unforeseen circumstances we had to move.)
The answer in our case was yes – but I can think of many points in my life where renting was and would always be the better solution. (Even with our two big dogs.)
Case in point baing the inital move to a new city – a 6 month lease gave us enough time to fully invesigate the city and neighborhoods to find where we wanted to buy a house and the house itself. In the meantime we saved a tidy sum for the downpayment (in addition to profit from our former home – and yes, the tax consequences for the profit if a home was not repurchased within 2 years was taken into the rent vs buy consideration).
Thanks for the post – just my 2 cents.
WOW! I love this article. I am in the process of buying a house–have been for 9 months. There is a part of me that just can’t shake the HUGE commitment and costs associated with it. This post has been an eye opener for me. Even though I have read, researched, googled and read more..the way you put things here, makes so much sense to me. Thanks a million!