It’s been a rough few years.
I’ve dealt with more clients in bankruptcy and foreclosure since 2008 than I have during my entire professional career prior to that. I’ve had clients with multiple foreclosures, with the financial consequences dragging out for years. So it should come as no surprise that many people are wondering if owning a home is such a good idea these days.
The case against ownership is based on what you see going on around you every day. As of last fall, the total value of residential real estate had fallen by (wait for it) SIX TRILLION DOLLARS. That’s a staggering amount of lost equity, and if you’re a homeowner, some of those losses belong to you.
Owning a home can also be problematic in another way. The modern economy is based on mobility – the tradition of a recent college graduate working for the same company for thirty years and then retiring is deader than disco. According to the Bureau of Labor Statistics, the average worker is going to change jobs ten times during his or her lifetime – and sometimes that’s going to require a change of address, as well.
But when you own a home, you’re financially tied to the community where you live – even when that community has been devastated by layoffs. You’re stuck trying to find a job where no similar-paying jobs may exist.
Not Surprising Fact Department: The cities with the highest rates of home ownership (prior to 2006) are also the cities hardest hit by unemployment. Workers in these cities (think Detroit) are less nimble with regard to where they live – they can’t just move to where the new jobs are.
All that being said, the depressed real estate market and extremely low interest rates make a compelling case to invest in a home. The laws of supply and demand would indicate that real estate values are likely to increase long term, and inflation is likely to rise as the economy recovers, but a fixed rate mortgage at today’s lower rate will protect you from that (a little).
But there’s more. As people have been foreclosed upon, they’ve become renters rather than homeowners, and so in some markets we’re starting to see a shortage of quality rental properties. What happens when a commodity becomes scarce? You got it – in some markets the price of rent has gone up by double digits during the past two years.
So should you rent or buy?
I’m not here to answer that question for you, but I can give you a couple of things to think about as you make the decision.
Are you dug in? If you were born and raised in Metropolis and that’s where all your family and friends live, you may have decided that you’re in for the long haul. If that’s the case, then making a long-term commitment might be right for you.
But if you’re committed to moving up in your company or your profession, and moving up might require relocating to a different market, you might want to think twice about owning a home. The rule of thumb is that, all things be otherwise equal, it takes about five years for owning a home to start paying off.
Is buying a good deal? As I said in my first blog post, run the numbers on your mortgage and then run them again. Now is the time to snatch up some incredible bargains on real estate – but don’t be a fool and decide to buy more house than you could have afforded otherwise, and then lock yourself into a bigger mortgage than you need.
The rule of thumb here is that your mortgage and escrow payments should not be more than 28% of your monthly income. This is all about cash flow – your mortgage payments should be low enough that you’re still able to be making your other obligations AND…AND…AND still be saving for retirement.
Let me say that once more, because while your home is an investment, it should NEVER be your only investment. Don’t swap mortgage payments for contributions to your 401(k) or your IRA.
My last bit of advice is to simply know yourself. Buying vs. Renting is as much about lifestyle choices as it is about finances. If you really hate yard work, for goodness sake don’t go out and buy yourself a yard to work in. Makes sense, right?
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