Is it a good time to buy a home?
Is it a Good Time to Buy a Home?
In 1950, the average income was $3,300 and the average home cost $7,350. That’s a ratio of 2.2. In 2019, the average income was $68,700 and the average home cost $380,000. That’s a ratio of 5.5. Inflation combined with stagnant wage growth is a bitch!
Why the 30-Year Mortgage SUCKS
You have been conditioned to think owning a home is a sign of success. However, if you take out a 30-year mortgage for $200,000, did you know you won’t own even half your home 15 years later? The majority of each mortgage payment — for the first 15 years — goes towards interest and not principal. You can run the numbers yourself in an amortization schedule:
Related Reading: The 30-Year Mortgage Sucks
The Opportunity Cost
I have a friend who hates her job and dreams of moving abroad, starting a food truck or getting certified to teach yoga. The only problem is she doesn’t take action. After all, she has the best excuse: I have bills! I have a mortgage! I can’t just quit my job and go live in Europe!
People don’t calculate the opportunity cost of buying a home because it’s too depressing. In the case of my friend, she did everything she was supposed to do: She got married, had kids, took out a mortgage to buy a beautiful home, etc. So why isn’t she happy?
If you have dreams, I do NOT recommend trapping yourself in a mortgage. If you buy it cash, absolutely, go for it because you can rent it out. But otherwise, no. Today’s economy is volatile, globalization is expanding and remaining flexible is priceless.
Related Reading: How to Listen to Your Heart
Homes are Expensive to Sell
Unlike renting, a homeowner can’t just walk away. It can take months, sometimes years to sell a home. And did I mention doing so is expensive? According to Dave Ramsey, the average cost to sell a house is 15% of the sale price. So if you sell a home for $250,000 you will pay around $37,000 just to sell it.
Related Reading: Is a 401k Worth It?
Rules, Rights and Regulations
When you buy a home, you don’t buy the land (the government owns it). This means that if you don’t pay your taxes, the government can take away your home. New homeowners are also shocked to learn about the Homeowners Association (HOA). These groups exist to maintain consistency and maintenance in a neighborhood. They charge between $40-$400 a month and come with rules such as the following:
Related Reading: How to Survive Retirement
A Home is a Money Pit
Let’s say you want to buy a $350,000 home:
- Down payment (10%): $35,000
- Interest on a $315,000 loan @ 4% over 30 year period: $226,388 (amortization schedule here)
- HVAC, roof, lawn care, repairs, etc. over 30 year period: $75,000
After 30 years, you’ll have paid around $650,000 on your home. If you want to access your equity at any time, the bank is happy to facilitate. They will charge you thousands of dollars in fees and if you tapped equity by refinancing, the amortization schedule restarts with 99.9% of each payment going towards interest. In other words, buying a home is trapped capital.
No Tax Benefits
Mortgage bankers tout the tax benefits of homeownership but these tax benefits were eliminated in the Tax Cuts and Jobs Act:
- The standard deduction was increased to $12k ($24k for couples) which means most homeowners can no longer itemize housing costs
- Deducting state and local taxes (SALT) is now limited to $10k. In high tax states, this severely limits the deduction of property taxes
- Mortgage interest deductions are now restricted to mortgages less than $750k ($375k for single filers)
In other words, renters win again.
Related Reading: The Income Tax is Unconstitutional
Is It a Good Time to Buy a Home?
The American Dream is a nightmare of debt. We are supposed to graduate high school, go to college (using debt), get a job, get married, buy a home (using debt), have kids, buy cars (using debt), go on vacation (using debt) and then retire at 60, travel the world and then die.
Debt crushes the spirit. There is no proof that homeowners are wealthier than renters, but the argument can be made that renters are wealthier in spirit than homeowners because they are free. Renters can jump at opportunities, move whenever they want and remain flexible in a fast-paced world. Homeowners on the other hand, often live complacent and fear-driven lives because they have a mortgage to pay.
Am I wrong? One final point:
- A tenant pays rent to occupy a property
- A homeowner pays interest on the mortgage he borrowed from the bank
- Thus, a homeowner’s interest payment is the rent he owes to borrow money