Owning a home is the American dream and, no matter how bad of a deal it becomes, people are still fixated on it. People who are wise with money every other way in their lives will insist that buying a house is a smart financial move, yet nothing is farther from the truth. Buying a house is consistently one of the worst financial moves anyone can make.
According to the Census Bureau homeownership peaked at 69% in 2004 and has been trending steadily downward ever since. Today that figure is 64.4%, lower in the Northeast and West where home values tend to be higher. Despite the fact that it’s a terrible economic deal, the main driver of the decline in homeownership is stagnant salaries. Less than half of people making less than the median family income of $53,657 own a home while 80% of people over that income own one.
While wanting to escape the petty tyranny of a landlord and rising rents is totally understandable, but that doesn’t make owning a home any more financially attractive as an alternative. Here are the most common reasons people jump out of the financial frying pan and into the economic fire of owning a home.
We’re Building Equity, Not Paying Rent
Another phrase you’ll hear is that “you’re throwing money away renting.” That phrase almost always starts with a real estate agent and it might be true, depending upon how much money you put down on your home, but probably not. The way mortgages are structured makes that statement mostly not true and, for the most part, people don’t like hearing that hard truth. The first reaction is usually denial, even if you show people on paper how little of their monthly house payment actually results in building any equity. Anyone considering buying a home should also ask what that home equity actually buys them. You can’t spend equity, so the only way to monetize that equity is to either sell the house or borrow against it. Home equity loans are a really bad idea and one of the worst financial moves you can make in life.
We Can Deduct The Mortgage Interest
That’s probably not true. With mortgage interest rates as low as they are most people are going to be farther ahead taking the standard deduction. The majority of homeowners don’t itemize expenses, so how, in that case, are you going to get any benefit from the mortgage interest deduction? The mortgage interest deduction works best for people with lavish homes who itemize. If that’s not you, then it’s really nothing more than a balm you put on the hurt of a very bad financial decision.
The Mortgage Company Can’t Raise Our Payment
Wrong. Homeowners discover that mortgage servicing companies are masters at finding ways to raise your escrow payment, the amount of money that is set aside from your payment for taxes and insurance. In the last conventional mortgages we had, our mortgage payments went up every year, regular as clockwork. That escrow money is essentially an interest free loan and banks are hesitant to let go of that cash, judging by the number of people who get dinged for late taxes and have their insurance canceled because the mortgage servicer dragged its feet on making a payment.
We’re Putting Down Roots
70 or 80 years ago that might actually have bought you some goodwill in the community. Back then all banks were local and invested in the community but that’s no longer true today. Today mobility is both a tactical and economic advantage. People not saddled with a mortgage are free to move when fresh economic opportunities present themselves. They can choose apartments closer to where they work and slash their transportation expenses. It comes as a surprise to people to discover that high rates of homeownership also correlate with high unemployment (http://www.voxeu.org/article/high-home-ownership-driver-high-unemployment). The connection between owning a home and unemployment is not just true in America, but in industrial nations all over the world.
Sometimes buying a home is the right choice but not until you understand the numbers well enough to see past conventional wisdom. It means understanding the opportunity cost of what you could have done with that down payment cash instead of sinking it into a house. It means understanding the cost of being nailed to the ground and the reality that school district boundaries can change at any time.
The bigger truth is our housing options, renting and buying, are poorly suited to our modern lifestyle. We need better choices but we’re not getting them.