When most Millennials rent, I decided to buy a house at the age of 28.
I actually bought a 2-bed, 2-bath condo in September of 2015. I decided a condo was much more practical to own than a traditional single-family house. I have a HOA that takes care of all lawn maintenance and snow removal. So, my days off aren’t
wasted spent mowing a lawn, pulling weeds or shoveling a large driveway of 10 inches of snow (I live in Colorado, and I love snow but hate shoveling it).
I am not the typical millennial in this case. Most millennials rent and have no plans to buy a home any time soon. Mostly, because they cannot afford to break into the housing market.
“Homeownership rates among Americans under age 35 are barely more than half the national number, at just 34.1 percent” according to The Washington Post (link). However, even though most millennials ages 24-35 years are renting or still living at home, most are still in pursuit of the “American Dream” – homeownership. Millennials still want to buy and own their own homes just as the generations before us have.
But, should this still be the “American Dream”?
I read a very interesting blog post recently about buying real estate and the debatable financial fidelity of it all (It’s by JL Collins- who is well-known in the “Financial Independence, Retire Early” or FIRE community). It is really well written, highly amusing, as well as thought-provoking. It is worth reading.
You can read the blog post here.
Here’s the synopsis: Is buying a home really all it’s cracked up to be and is it truly a smart financial move for most people?
I think it definitely depends on the person, their situation and their life goals.
I ran my own personal numbers and decided to buy, instead of rent for a few reasons:
Predictability. Unlike rent, my fixed-rate mortgage payments don’t rise over the years .
Freedom. This home is mine. I can decorate it any way I want and choose the types of upgrades, DIY projects and renovations that appeal to my lifestyle. In addition, if I ever wanted to move I could sell it somewhat quickly (on average less than 45 days in the current Denver housing market!). Much quicker than waiting, or trying to get out of a lease. Or, currently I could easily rent it out since Denver has a hot rental market.
Stability. Remaining in one neighborhood for several years allows me to build long-lasting relationships within my community. I also don’t have to worry about a landlord refusing to renew a lease, and forcing me to move.
Tax benefits. The U.S. Tax Code lets me to deduct the interest I pay on my mortgage and property taxes every year on my taxes.
Appreciation & Equity. Historically, real estate has had long-term, stable growth. In fact, existing-home sale prices have increased on average 5.2 percent each year from 1972 to 2014, according to the National Association of REALTORS®. The recent housing crisis has obviously caused some to question the value of homeownership, but even in the last ten years (which included quite a few horrendous years for housing) values are still up 7%. On the flip side, money paid for rent is money that I’ll never see again, but mortgage payments let me build equity in my home. And when/if I sell, I can take up to $250,000 ( or $500,000 for married couples) as a gain without owing any federal income tax.
Savings & Inflations. If inflation goes up, my housing costs (ie mortgage) are not indexed to inflation and won’t increase (whereas rentals prices will). Although, the value of my home will likely increase with inflation, which is a win for me!
The Do’s and Dont’s of Buying a Home:
Don’t buy a home because you’ve been told that’s what you’re supposed to do as an adult.
Don’t buy a home because you think it will be a good, short-term investment for the future. It’s not really a guaranteed good investment. It’s best to be in it for the long-haul, but even then, there are no guarantees.
Don’t buy a home because you might get married one day and have a family and a dog and you are dreaming of the picturesque ideal house for this hypothetical future.
Don’t buy a home because you’re trying to “keep up with the Joneses” . This will just hurt you finanically and make you fall further behind in the long run. Realistically, “the Joneses” are probably up to their eyeballs in debt.
Buy a home because you are ready and it 100% makes financial sense for you.
Buy a home because it’s better for your bottom dollar and budget than other housing options (ie renting) available.
Buy a home because it’s what you want and you know you can handle all the challenges of homeownership.
You should think about buying a house/condo only if:
You are debt-free or your debt is manageable under control. It helps immensely when applying for a home loan if you don’t have a large amount of student loan debt. Banks scrutinize student loans very closely, and they don’t care for IBR programs. Your debt-to-income ratio has to be less than 43 percent in order to get financing.
You’re certain you’ll stay in the same area for at least the next 2 years, but 5+ years is better. Anything less than that is gambling with home value appreciation and you have to remember that it costs quite a bit of money to sell a home (ie realtor fees, closing costs, etc). And, no one can predict the future, especially the housing market.
You won’t outgrow your home right away. While, that 2-bed, 1-bath craftsman-style bungalow looks cute & fabulous and has enough room now, will it still work just as well if your family grows and now you have 2 little ones, 2 dogs, and a cat? But, you don’t want to overbuy for your current needs either.
You aren’t intimidated or afraid of regular maintenance or minor renovations. Even if you end up hiring a job out, make sure you are budgeting ever year for these possible repair and renovations. But, learning to be handy and DIY home projects and renovations can actually be fun and can save you a lot of money.
Update: I have owned my home for 19 months now. Here’s how much much money I have saved over renting plus the increase in home value: $58,315!
Buying a home is a big decision with a large financial impact. Buying is not for everyone. Make sure you have run your individual numbers carefully and considered every aspect of buying a home before jumping in. But, I think buying a home should not necessarily be a part of the “American Dream”. The “American Dream” should be about living a happy, financially healthy life.
Your Turn: Do you rent or do you own? What do you prefer? Is buying a home necessary?