It’s likely that you’ve heard at least one of these pieces of advice:
“Real estate is a safe bet!”
“Houses always appreciate!”
“Don’t throw your money away on rent!”
“Owning a home is the best way to build wealth!”
The “American dream” of homeownership is ingrained in our culture, but it’s not a guaranteed way to build wealth. In fact, depending on your circumstances and goals, homeownership may not be the best path to financial security for you.
During the first half of this year, it seemed like home sellers everywhere were making hefty profits that far outpaced stock market returns. The median price of an existing home sold in May was $407,600, a record high and up almost 15% from a year ago, according to the National Association of Realtors (opens in new tab). But after several Fed rate hikes, home prices are beginning to cool – with estimates that prices will dip 10% (opens in new tab) in most markets by the end of the year.
Even as housing costs are beginning to come down, home prices in some markets are still nothing short of staggering. The median price of an existing home sold in Silicon Valley during the first quarter of 2022 was $1.88 million. The median price in the Boston and Denver metro areas hit more than $600,000, while the median price in the Seattle area is north of $700,000.
But remember that there are always housing booms and busts — and some are quite severe. The 1990s housing crash was mostly caused by interest rates that rose to 12% to 14%. Homeowners with big mortgages suffered, and the rates kept people either on the sidelines or joining the ranks of the “house poor.”
However, the housing bust of 2007 and 2008 was a real wake-up call in how bad things could get. Fueled by defaults on subprime and high-risk mortgages, an economic recession and a propensity to treat home equity like an ATM, the housing bubble burst, leaving homeowners unable to make payments and descending into foreclosure. Others found themselves severely underwater with their mortgages, meaning they owed more than their home was worth.
There are plenty of reasons to buy a home — and plenty of reasons to either wait or opt out altogether. But don’t base your decision on these common myths about homeownership.
Myth No. 1: A House Is an Asset
An asset is something you own. A liability is a debt. So, is a home an asset or a liability?
It’s both. Yes, you can sell a home and hopefully pocket a profit (asset), but you also have a lien on the property (liability). A home is an asset for the mortgage company or bank, since they make money on the mortgage interest you pay. If you default on the loan, the bank gets the house.
As a homeowner, you’ll need to sell the home or pay off the mortgage to turn it into an asset.
For homeowners going through the Great Recession, their home was most definitely a liability and not an asset. In fact, some just walked away from their “asset.”
Many people consider their home a retirement asset. This can be true if you sell and downsize or move to a less costly location and invest the sale proceeds. But most retirees stay put, wanting to stay near their families and communities and in a home filled with memories.
If you’re one of those retirees who want to stay put, you could consider a reverse mortgage as a way to tap into your home’s equity for living expenses. Reverse mortgages had plenty of bad press in the past — most of it well-deserved. But today, the industry is much more regulated, and government-backed reverse mortgages can be considered quite safe. It may not be the right option for everyone, but it is a way to turn your home into an asset.
Myth No. 2: You Won’t Be Sorry You Bought
Despite high prices, the U.S. homeownership rate (opens in new tab) increased by 1.3 percentage points in 2020, the highest annual rise ever. Millennials made up 43% of those home buyers (opens in new tab) — the most of any generation — up from 37% last year. Many feel the pressure to buy and are going to extremes to make it happen.
The most common way Millennials responded to the market was by increasing how much they were willing to spend, with 46% expecting to max out their budget. At a time of surging fuel and food costs and inflation rates not seen since the 1970s, that could be a dangerous financial risk.
Millennials are also more willing to make rash decisions (opens in new tab) to afford a home in a competitive market, including buying a home sight unseen (90%), purchasing a fixer-upper that needs major repairs (82%) and making an offer above the asking price (80%).
A seller’s market can lead to buyer’s remorse. Nearly two-thirds of Millennials (opens in new tab) regret buying a home. More than half (51%) feel stressed or anxious about homeownership, with more than 40% fearing a potential housing market crash.
Being “house poor” is no fun.
Myth No. 3: Paying Rent Is Just Throwing Money Away
Especially in a seller’s market, it can cost less to rent than to buy. If you have to move due to a job switch or just want to change your living arrangement, you can more easily do so as a renter. You don’t have to worry about recouping closing costs if you sell only a few years later.
Renting can be a smarter decision if you have to stretch your budget to buy a home or deplete your savings. If you lose your job or have other life changes, you could lose your home, which would negatively impact your ability to get credit for years.
There are other reasons that renting may make sense. If your goal is to sell your home and downsize and purchase a different home, you’re probably not going to save as much as you think you will.
There’s still maintenance, home improvements and repairs to pay for, not to mention property taxes and insurance. If you sell and then rent, you might not have to buy a new lawnmower or have to fix or incur costs to make repairs. And as a renter, you will need to insure only your belongings, which is less expensive than homeowners insurance.
Myth No. 4: Everyone Is Buying Except Me
In a seller’s market, home prices rise, often seemingly without reason because inventory is tight, and it seems like everybody is trying to buy. The seller holds the cards, and the buyer has little negotiating power and feels the pressure to waive inspections or to pay over list price.
FOMO (fear of missing out) is real, but it can be financially advantageous to wait for the cyclical return of a buyer’s market. Markets correct themselves. And more potential buyers are taking to the sidelines and waiting it out. The number of Americans who say that now would be a good time to buy a house fell to 19% — the lowest level since October 2011 — according to a recent Fannie Mae survey (opens in new tab).
Myth No. 5: A House Is a Better Investment Than the Stock Market
Compared to stocks, homeownership is an inferior investment, according to Yale economics professor and Nobel laureate Robert Shiller. He points to data that, on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.
In the housing market’s best 30 years (1976-2005), real price appreciation averaged only 2.2% per year. In the worst 30 years for housing (1895-1924), real price appreciation averaged a loss of 2% per year.
That’s partly because homeownership comes with a slew of costs, including maintenance, property taxes, insurance and possibly private mortgage insurance (PMI) and HOA fees.
And getting to homeownership is pricey. Closing costs, with upfront fees for taxes and insurance, title search and points, among other fees, are in the range of 2% to 6% of the purchase price.
A $350,000 home with closing costs of 5% will set you back more than $17,000.
Myth No. 6: Mortgage Interest Is Tax Deductible
This is not exactly a myth, since property taxes and mortgage interest might be tax deductible if you itemize, but about 90% of taxpayers take the standard deduction.
If you are among the 10% who do itemize, you’ll have to do some math to decide if the tax savings is enough to make buying a sensible financial decision. In the early years of your mortgage, when you pay the most in interest, the tax savings can be substantial.
Be aware that even if you live in a high-property-tax area, the cap on the property tax deduction is $10,000.
If You Do Decide to Buy
Owning a home is more than just a financial decision. If you love to do projects, homeownership will provide hours and hours of DIY entertainment. There’s pride of ownership and the ability to personalize your surroundings. Want to paint your front door purple? Go ahead (as long as your HOA doesn’t chime in on your color choice). Put that swing set in the backyard for the kids.
But don’t let emotions cloud your financial judgment. You may be getting that fixer-upper at a great price, however home repairs and maintenance costs could potentially eat away at those savings. Even newer homes have unexpected costs. More than 20% of Millennial homeowners (opens in new tab) say they were unprepared for maintenance and upkeep costs.
The rule of thumb is to expect to spend 1% to 3% of your home’s value on basic maintenance. On a $350,000 home, set aside a bare minimum of $3,500 per year, or about $300 per month. Older homes will likely have higher maintenance costs.
The ability to work remotely can also work in your favor when you’re shopping for a home. While home prices in some markets have soared, there are still relative bargains to be found. In Buffalo and St. Louis, the median sale price is just over $200,000. The median home price is under $300,000 in Philadelphia, Louisville, Kansas City and Milwaukee.
I advise my clients who are weighing the pros and cons of homeownership to picture their next stage of life and then estimate when that stage will happen. Are you planning to retire in five years and take to the open road in an RV? Looking to start a family in two years and dreaming of a three-bedroom center hall colonial? Planning to go back to school and switch careers and possibly relocate? Will you need to stay in the area to help care for elderly parents?
Start with a clear vision of your future needs, be honest about your desire (or no desire) for homeownership and your financial situation. Only then will you be able to evaluate the buy vs. rent decision. Instead of succumbing to the “American dream,” you can invest in the dream that is right for you.
If you need some help crunching numbers, here are a few calculators that can help you get started.
Rent vs. buy calculators:
Home affordability calculators:
Securities offered through Cetera Advisor Networks LLC, Member FINRA / SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisors. Address: 14600 Branch Street, Omaha, NE 68154.
Erin Wood is the Senior Vice President of Financial Planning at Carson Group (opens in new tab), where she develops strategies to help families achieve their financial goals. She holds Certified Financial Planner, Chartered Retirement Planning Counselor and Certified Financial Behavior Specialist designations.
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