The view of housing most people carry around with them has its roots in the 1950s. In those days housing was frequently collocated with jobs and factories that no longer exist. While our working world has changed dramatically we somehow retained our colonial approach to housing and today the two are hopelessly mismatched. Owning a home frequently locks people into areas where jobs are scarce and makes it difficult to pack up and move to where the jobs are more plentiful.
Changing how you think about housing will change the decisions you make when it comes time to choose between buying and renting. These are the most common mental mistakes in homebuying.
Thinking a House Is An Investment
Outside of a few select real estate markets, owner-occupied homes are a dismal investment. In fact, just about anywhere else you could put your money would yield a better return. Thinking about a house as an investment is the greatest con the real estate industry has been able to pull on the general public. That’s not to say a house is a bad purchase and that’s the key to framing the decision. By thinking of a house as an expense rather than an investment, you can keep the true impact on your finances in perspective.
Ignoring Opportunity Costs
Not only is a house a terrible investment, it also carries a huge opportunity cost that most people overlook. When you buy a home instead of renting you are, literally, nailed to the ground. Opportunities for a better job, temporary assignment or nicer scenery are out of reach without incurring significant effort and expense selling that house. Houses are also expensive and tie up a significant portion of your income. Another opportunity cost is what you could have made investing your down payment in a stock market that produces average returns of between seven and ten percent.
Thinking Your Income Will Grow Into The House
The most painful scene in real estate is watching a young couple stretch to buy more house than they really need thinking their earning power will grow as they get older. Since the 1970s wages have remained relatively flat. The idea that your income is going to go up relative to inflation is a fantasy. What they’re doing instead is handicapping their finances for decades, just like people who take on too much in student loan debt.
Thinking Neighborhoods Never Change
One of the most devastating changes to a community I’ve ever personally witnessed was watching Titusville, Florida, adjust to the end of the space shuttle program. At one point there were something like 8,000 abandoned homes in that part of the county. The job losses at NASA rippled through the community; businesses that had existed for generations closed their doors. It doesn’t even take change on that scale to undermine the quiet enjoyment of your home. Something as simple as a traffic change by the city can turn your quiet street into a death race. Neighborhoods can also be decimated by changing school district boundaries or a change in the airport traffic pattern.
Underestimating Ancillary Costs
Ancillary costs of owning a home include repairs, which can be expensive, but also the routine expenses of heating and cooling. People who bought into the McMansion craze of the early 2000s discovered they were paying geometrically more money to heat and cool space they rarely used. Utility costs go up an average of two percent per year, so your utility bill to heat and cool wasted space is going nowhere but up.
All of these common mistakes can be avoided by simply changing how you view housing from an investment, that only pays off under very narrow set of circumstances, to an ongoing expense. Let’s face it; everyone has to live somewhere. You will incur some expense keeping a roof over your head. Do yourself a financial favor and keep the perspective that every dollar you spend on housing is a dollar out of your pocket.