But lately, people are realizing that it isnt always the smartest financial move.
Should you buy a home, or keep renting?
Homeownership isnt a good or bad idea on its own.
Like so many financial decisions, it has everything to do withyour own situation.
Sometimes, buying a home is the smart thing to do; other times, it really isnt.
Whether or not its smart for you will depend on a few different factors.
Heres what you should keep in mind.
But a lot of people overestimate the return on this investment.
People tend to believe that homes are appreciating assets, but this isnt always true.
Yale economist and Nobel Prize winner Robert Shiller debates this topic openly,having crunched the numbers.
His take is that that, overall, the housing market doesnt have a great long-term return.
It barely outpaces inflation, in fact.
It is a provider of housing services…Capital gains have not even been positive.
From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.
The S&P 500, on the other hand, had an annual return of 6.5%.
Thats an awfully big difference.
But a lot of peoples portfolios are mostly made up of their home value.
Thats the argument against buying a home as investment.
But most experts agree: While housing is an investment, its not agreatinvestment.
So if this is your only basis for buying a home, its probably not the best one.
Of course, this just gives you a ballpark figure.
It doesnt consider your net worth or your other financial goals.
When you rent, you own nothingthe money goes to someone else.
This argument touches onopportunity cost: the value of an option youre giving up to choose something else.
If you choose to rent, youre missing out on owning an asset.
Even if it doesnt outpace inflation, who cares?
You have an asseta houseto show for all your money.
But its not that simple.
You also have to consider the opportunity cost of buying.
Theres the down payment.Closing costs.
The mortgage interest payments.
Whats the opportunity cost of those?
How much could you earn by investing that money in the market instead?
Sometimes, you’re able to actually earn more money over time by renting and investing than buying.
Down payment and mortgage interest rate: Same story here.
In some cases, youd have more than the value of your home.
Your rent prices and home prices may be a lot different than the national averages.
The New York Times has auseful interactive calculatorthat considers all of this.
But this calculator factors opportunity costs into the equation, which makes all the difference.
Its a general guideline that will depend on other factors like age and risk level.
As weve said, the point is: Your home should not be your primary asset.
You shouldnt give up your entire savings, especially your retirement savings, just to become a homeowner.
Avoid being house poor
Weve talked aboutfollowing the 20% rule.
It makes more sense to put less down and invest the difference.
Its too much of your net worth to give up at once.
You dont want to be house poor.
Twenty percent down or not, the concern aboutbeing house poor is a valid one.
Obviously, you should have enough, after your down payment, to cover your mortgage and monthly expenses.
But beyond simply making ends meet, you want to double-check youre financially secure, too.
This is why its important to consider your net worth.
And as weve said before: You donthave tobuy a home.
Dont forego financial basics and buy a house for emotional reasons or because itsexpected of you.
Its usually better to rent than it is to be house poor.
The risk of living hand-to-mouth isnt worth it.
Of course, beyond the money factors, you also want to consider your long-term goals.
Maybe youll move for a job.
Maybe youll want a bigger home for a family.
Your own individual milestones should play a part in your decision.
Ultimately, buying a home is a personal choice youll have to weigh, considering your own circumstances.
But weighing these considerations should at least point you in the right direction.
This post was originally published in 2015 and was updated on June 30, 2020 by Lisa Rowan.
