With mortgage rates continuing to climb (reaching a high not seen since 2008), buying a home grows even further out of reach for millions of Americans.
According to a report from Zillow in July 2022, a typical monthly mortgage payment is 76% higher today than it was three years ago. And as of this past spring, the annual income needed to qualify for a median-priced home of $340,700 had grown $28,000 higher in a year – costs that could squeeze even high-earning individuals.
Yet many of us still feel pressure to buy a home, and the inability to do so can bring up feelings of guilt and shame. In our culture, there’s still a pervasive idea that you haven’t really “made it” until you own a house with a two-car garage and a lawn.
As a result, the ability to own property can become inextricable from professional and personal ambition. You have to achieve a certain salary in order to afford a certain house, and then maintain that salary indefinitely – no matter how much you like or hate your work.
Given the chokehold the myth of home ownership has on many of us, it’s important to remember that not only is buying a home not the only path to financial security, it’s also a potentially ill-advised move if you don’t have a good grasp on all the costs and risks.
Meanwhile, there are many other goals – having a solid retirement plan, shoring up liquid savings for emergencies, or living in the area you want to be in – that could be more important to prioritize, depending on your situation.
So here are some things to consider if you’re feeling anxious about not owning property.
Renting is not “throwing away money”
In a past episode of the Money Confidential podcast, Stefanie O’Connell Rodriguez, (my co-editor at this newsletter), interviewed personal finance expert Shang of Save My Cents about why renting can actually be a great strategy. She overviewed several key points:
The costs of homeownership go far beyond the list price
While you might see a Zillow estimate and think “hmm, that mortgage is the same as my rent,” the true cost is likely much higher. There are many additional costs, from property taxes and homeowner’s insurance to ongoing maintenance costs and HOA fees that can add thousands of dollars, if not tens of thousands of dollars, to your annual housing budget. Even if your mortgage is fixed, incidental costs like these can be somewhat unpredictable and also tend to go up over time.
The costs associated with buying and selling a home are also overlooked, which is why many experts recommend buying only if you plan to stay in a home for at least 5 years.
As Mindy Jensen, licensed real estate agent, author, and host of The Bigger Pockets money podcast shared on another episode of Money Confidential, “It costs a lot of money to sell a house and people don’t think about that when they’re buying a house, but on the front end, buying a house, it costs approximately two to 4% of the purchase price in random closing costs. And that’s not including your down payment on the house. It’s just the random extra costs like your attorney or your title insurance, and all the little things that you can’t imagine actually exist when you buy a house. When you go to sell it on the backend, it’s more like eight to 10% of the price of the house.”
Just because you can buy a home, doesn’t mean you should
Having enough saved for a down payment doesn’t necessarily mean you’re financially ready to buy, especially if that leaves you with minimal savings elsewhere, like in an emergency fund or in your retirement accounts.
“If owning a home actually prevents you from taking care of your future self, then that’s not adulting. That’s digging yourself a hole that’s going to be very difficult to climb out of,” says Shang of Save My Cents. She wishes we celebrated more models of “successful adulting” that don’t necessarily revolve around home ownership.
It’s a sentiment shared by Jannese Torres, host of the Yo Quiero Dinero podcast. “I’m Puerto Rican. My parents came to the United States in the 1980s, and they struggled for a very long time to get their footing financially. When I was about 12 years old, they were able to purchase their first home and that changed our lives. And so I saw that as what you do in order to give yourself a level of stability and how to be financially responsible. So as soon as I got married, those questions started to come up. ‘Okay, when are you guys going to buy a house?’ And so, I figured that’s just what everybody does,” said Jannese on another episode of the Money Confidential podcast.
After finding out she could qualify for an FHA mortgage with just 3.5% down, Jannese tapped into most of what had been her emergency fund to come up with the cash. ”I felt that FOMO, that pressure, like if I keep waiting, I’m never going to be able to do this,” she says.
And it wasn’t long before she found herself regretting the decision. “I was never more broke than when I owned a home. And it was a result of not having that financial foundation in place, emptying out what was meant to be an emergency fund to buy a home, and then the emergencies started happening and I had no other recourse other than to start taking out loans. I had to take out a 401k loan to deal with a $15,000 repair of a sewer line.”
In the end, Jannese had to spend so much maintaining her home, she actually lost money by the time she finally sold it. To hear more from Jannese about her financial lessons learned from that process, tune into the rest of the conversation, “I bought my first home – and it was a mistake.”
Flexibility is an underrated benefit to renting
As a new parent in my mid-30s living in a rented basement apartment in Seattle, I can sometimes get in my head about how I’m “behind” in life. We’re a fifteen-minute walk from my childhood home, which my parents owned when I was born. The contrast feels…symbolic.
The truth is, though, I love renting. I love not having the responsibility of maintaining a house, I love living “light,” without a bunch of stuff to my name, and I love that renting allows me to live in an expensive area without the pressure of paying for a high mortgage. While I technically have enough to buy a house in a cheaper area, and I do eventually hope to buy property, I’m not in a rush. I would rather stay where I am – at least for now.
My co-editor, Stefanie, is a renter as well, in an even more expensive area, New York City. But she too feels confident in this choice, given that she’s not sure where or how she wants to be living five years from now, where work and opportunities may lead her or her husband, or whether or not they’ll choose to expand their family in the future.
“I think each person needs to stop and ask themselves what is the long-term goal?,” said real estate investor J Scott in a Money Confidential episode about the number one thing you should ask yourself before you buy a home.
“At the end of the day, the single best reason to buy is because that supports something in your life where buying is important. So good schools, living close to your job, living close to your family. Those are good reasons to buy. Don’t buy because it’s a good financial decision,” says J.
Buying a house isn’t the only way (or even the best way) to build wealth
To those who lost their homes during the 2008 financial crash, the idea that a house might not work out probably seems like a no-brainer. But our cultural memory is unnervingly short, and the ideals of home ownership persist despite these historic catastrophes.
“I know a lot of people say buying a house is a great investment. Well, as a full-time real estate investor, I would argue that buying a house isn’t a great investment, “ said J. “We could argue all day whether buying or renting is better. And I could probably provide 20 studies and I could do really detailed spreadsheets to argue one or the other, but it’s close enough that I would never tell somebody rent for financial reasons or buy for financial reasons. It’s up to you to determine what is the time commitment, what is the money commitment, what is the risk tolerance you’re willing to take, and then choose the solution from that, as opposed to going the other way and say, this is going to be my living situation or my investing situation, and just hoping that the time commitment and the money commitment and the risk tolerance suits whatever you happen to pick,” he continued (tune into the rest of the episode here).
After selling her home at a loss and returning to renting, Jannese shared how she found her financial footing and started to build meaningful wealth without the responsibilities of homeownership,
“I have been able to save and invest more money as a renter than I ever was as a homeowner, just because I am dealing with a lot less financial responsibility as a renter.”
“So this idea that home ownership is the only way to achieve and build generational wealth is just simply not true,” says Jannese.
It’s a sentiment echoed by nearly every finance and real estate expert interviewed on the show, including Dr. Daryl Fairweather, chief economist at real estate brokerage Redfin, “I think you should just ignore all that noise and really just focus on what you can afford. And if what you can afford is a kind of home that you would want to stay in for at least five years. ‘Cause that’s really the only consideration, is this a home that you’ll be happy in? Is it within your budget? And will you stay there for at least five years? Because over the course of five years, whether the housing market goes up or down, you’ll be able to ride that. And if the answer is no, if you’re looking at what’s on the market and it’s just not up to your standards and you don’t wanna be there for five years, then renting is a completely acceptable answer.”
“There’s nothing wrong with putting your money in the stock market instead of into the housing market.”
“If you look at how much money people made off of the housing market from when it bottomed out in 2012 to today, had they put their money into the stock market they actually would’ve made more money.” (Listen to the rest of the episode with Dr. Daryl Fairweather at: I Want to Buy a Home. Will prices ever return to normal?)
The bottom line
While buying a house might make sense, it’s certainly not the only path to financial security. In order to evaluate that decision clearly, we have to extricate our practical interest in buying property from the emotional desire to fulfill a certain ideal.
And in the words of J Scott, “If buying is the right thing for you, buy. If buying’s not the right thing for you, don’t buy. Don’t try and time the market.”
Image: FG Trade/ E+ via GettyImages