The Basics
The 3 worst reasons to buy a house
Buying a home . . . that's what everyone says you should do, right? Get the lowdown on home values, costs of ownership and your own financial situation before making a big commitment that truly isn't for everyone.
If you’re feeling pressure to buy a home, you’re not alone.
Home prices are spiraling ever upward, indicating a demand that’s outstripping the available supply. Wait too long to buy a house, many people fear, and you could find yourself priced out of the market -- or at least out of the neighborhoods you like best.
Meanwhile, mortgage lenders are bending over backwards to give people money to buy homes. They’re allowing people to take on more debt or get loans with worse credit, than ever before.
But that doesn’t mean everyone should be a homeowner. It’s a bigger commitment and more expensive than most first-time buyers ever realize. You should have a clear idea of what you’re getting into before you commit to 30 years of payments -- and you shouldn’t let any of the following popular myths guide your decision.
‘A house is a better investment than the stock market’
It’s become popular, with the current anemic stock market, to tout homeownership as the new best way to build great wealth. When, oh when, will we learn that past performance is no guarantee of future results?
It’s true that owning a home can be a good financial foundation, because it forces you to save (in mortgage payments that build your equity) and offers you the potential for great leverage. Leverage, simply put, is the ability to invest just a portion of the purchase price, borrow the rest and reap outsize rewards from any appreciation.
Say you put down $20,000 on a $100,000 home, borrowing the balance. If your home appreciates 10%, your equity in the home has grown by 50%. ($110,000 minus the mortgage of about $80,000 equals $30,000, or 50% more than you invested.) Home prices, however, don’t always go up.
Ask homeowners in Boston, Dallas, Houston, Anchorage and Southern California -- all of which suffered major real estate recessions in the past 20 years.
After dropping more than 20% in the 1990s, Los Angeles home prices took almost 10 years to regain their peak, says real estate expert John Karevoll, an analyst with Data Quick Information Systems. Anyone who lived here during that time knows people who were “upside down” -- owing a bigger mortgage than the home could be sold for. Thousands of people simply walked away from houses they couldn’t sell, trashing their credit ratings in the process.
It’s hard to know, in advance, when you’re buying into a real-estate bubble. That’s why you should be relatively sure you won’t need to move anytime soon if you buy a home. Three years is probably a minimum, five years is better and 10 or more will help you ride out all but the worst real-estate crashes.
‘I’m tired of throwing away money on rent’
You’re not really throwing money away when you send a check to your landlord. You’re exchanging it for a place to live. You’re also getting flexibility and freedom -- things you sacrifice when you buy a home.
When you’re a renter, it’s the landlord, not you, who is generally responsible for maintenance, repairs and fixing the toilet that blows up in the middle of the night. If the neighborhood should start to slide, or you get or lose a job, you can up and move with a few weeks’ notice (less, if you don’t mind losing your deposit).
The 3 worst reasons to buy a house continued
