Never buy a house – good idea or bad?

Never buy a house. Some people say that’s the best advice they’ve ever received. Depending on your personality type, or where you are in life, I get that. So let’s take a look at the pros and cons of not owning your own home.

The case to never buy a house

I think the case to never buy a house comes down to five things.

  • A dislike for maintenance
  • Liking a change of scenery
  • Unstable job
  • Difficulty getting a downpayment together
  • Realizing that there’s more to the American Dream than homeownership
  • A house isn’t an investment
  • Closing costs are a sunk cost
  • The mortgage interest deduction is overrated

All of these are valid things. But I don’t think all of them completely disqualify you from home ownership either. Maybe they do, but I think you should consider each of them.

You don’t like maintenance

never buy a house - home maintenance
Fear of home maintenance is one reason people say to never buy a house. But it doesn’t have to be a showstopper. Everything has a life expectancy so you can plan and budget it.

Owning a home is a fair bit of work. You’ll have chores like mowing the lawn, and it’s a rare year that goes by that you don’t do at least one minor home improvement project. I’ve been in my house 15 years and I’ve replaced the kitchen floor and two bathroom floors, one of them twice. We’ve also painted the house twice. If that sounds like less fun than going to the dentist, then maybe owning a home isn’t for you.

Then again, you could consider buying a townhome or a condo to minimize or eliminate what you have to do outside. It provides a bit of a compromise between owning a freestanding single family home and renting forever.

And if you have to hire the work out, that’s not the end of the world. On average, you spend $1,000 on maintenance each year. Plan for it. Also, a good home inspector can give you an idea how long each of the big-ticket items in a home has left before you buy.

You like to move

Some people like a change of scenery every few years and don’t want to be tied down. In that situation, home ownership can be a nightmare. My dad once owned three houses in three different towns because he changed jobs faster than he could sell the houses we lived in. That was a nightmare.

Then again, I have another family member who’s found a good compromise. She moves every few years, but she always sells the house she has first, then pays cash for her next house. Sometimes she buys something less expensive and banks the difference. This lets her get the change of scenery she wants without turning it into a treadmill.

Your job is unstable

Dad didn’t like to move; his job was unstable. He was a radiologist, and a town only needs so many radiologists. And he was outspoken like me. I don’t know what it’s like to be a radiologist but I know what it’s like for my boss to make a decision I know won’t work. Dad would charge into his office and tell him he’s an idiot. You can only do that so many times before you get fired.

There’s no easy cure for that. I can give you three pieces of advice. One is to find an outlet for your frustrations other than alcohol. If that means learning to play the drums or electric guitar, so be it. The second is to make sure you’re in the right field. Get a cheap used copy of the book What Color is Your Parachute? and work through it. Don’t buy an edition from the 90s, but if you can save ten bucks by buying the edition from two years ago, do it. It’s new enough to still get the job done. The third is to learn everything you can about being the best in your field and about speaking. If you have the best ideas in the room and can articulate them, someone is going to notice that and value it. Be ready for it.

I still have disagreements with my management from time to time. I also have a constant stream of recruiters begging me for a five-minute conversation. More often than not, the job they want to pitch is worse than the one I already have. If it’s better, I have the kind of problem you want to have.

Your job doesn’t have to be a reason to never buy a house.

So, to recap:

  • Find a healthy outlet for your frustrations
  • Find the field that matches your personality and abilities
  • Learn everything you can to be the best you can be at that field and how to articulate your ideas

You can’t come up with a down payment

Coming up with a downpayment takes a while, and when I was in my early 20s, nobody could (or would) explain to me how to do it.

I eventually figured it out, and I’m about to tell you.

The IRS recommends spending no more than 30% of your pre-tax income on housing. That’s a little more than one week’s paycheck. So if you need to save for a downpayment, I recommend you spend less than one’s week’s paycheck on your rent, and bank the rest.

Here’s what I did. Back when I was in my early 20s, I made about $800 a week. I wanted a two-bedroom apartment, but a two-bedroom apartment rented for about $800 a month and a one-bedroom rented for closer to $600. I got by with the one-bedroom. That isn’t enough on its own, but there’s an easy place to come up with the rest of the money.

What your car has to do with affording a downpayment

Here’s the mistake I made. In 2000, I was driving an eight-year-old car. It had never given me any trouble. One night it blew a head gasket, and I let someone talk me into getting rid of it and leasing a new Dodge Neon. Suddenly I was paying $300 a month on a car that was no more reliable than what I already had.

You’ll never win a game of one-upmanship with cars. Nobody cares what car I drove 18 years ago. What I should have done is take that car to a AAA-certified mechanic to get an opinion, then either have them fix the car, or ask them to recommend something reliable that I could buy outright or pay off in no more than three years. Today you can go to Dashboard Light and compare different cars in the same class to find the best one to buy. Used Toyotas and Hondas tend to be really reliable, but expensive. Dashboard Light will help you find the car that’s 90% as good but 30% less expensive. It will also tell you how anything else compares to what you’re driving now.

Buy the $10,000 car instead of the $30,000 car and bank the savings. Between the cheaper car and the cheaper apartment, you can have enough for a downpayment in three years in most parts of the country.

The American Dream doesn’t require homeownership

There’s a big generational divide in the United States right now, and home ownership is one of those rifts. It drives Baby Boomers nuts that Millennials don’t want to buy their houses. The market for their kind of house among Gen Xers isn’t as big as they would like either.

At the turn of the century, I remember radio commercials touting a big house as being the American Dream, and offering a shortcut to get it. The 2008 Housing Crisis was the result.

Gen Xers and Millennials had a different experience, but both came to see the home very differently than the Boomers did. Certainly they see it as riskier.

I’ve long argued that the version of the American Dream that Boomers presented is wrong. The American Dream isn’t about piling up as many monetary possessions as you can. It’s about ensuring that each passing generation has better opportunities than the last. Note that I said opportunities. The outcome is still up to the individual.

It’s perfectly okay if you don’t want or can’t afford a house that’s 1,000 square feet bigger than the one you grew up in. My dad never owned a house as big as the one he grew up in. My house is a mere 54 square feet bigger than the smallest one he owned.

Yes, I own a home. So I think rejecting home ownership entirely and saying to never buy a house is an extreme reaction to 2008 but I understand where the sentiment came from.

A house isn’t an investment

never buy a house - is it a sunk cost?
Don’t think of your house as an investment, but don’t go to the other extreme and think of buying a house as a sunk cost, either.

One of the contributing problems to the 2008 Housing Crisis was people treating their home equity as a piggybank. Then, when one too many emergencies happened, they didn’t have their home equity available to bail them out.

The home you live in is an expense, and there’s no getting around that. When you own a home, you will always owe taxes on it and you will always have ongoing maintenance costs.

Some argue that means you never truly own your home. Okay, but let’s look at the numbers a different way.

I’ve lived in my house for 15 years and own it outright. That’s an achievement, but not at all unreachable. One of the standard terms of a mortgage is 15 years. Owning the house outright, it costs me between $200 and $250 a month, or $2,500 and $3,000 a year, to live here between taxes and maintenance.

If I bought the house today at market rate and had a mortgage on it, it would cost me about $1,000 a month, or $12,000 a year, to live here between the mortgage, taxes, and maintenance. That assumes a 30-year mortgage.

In today’s market, the house would rent for at least $1,250 a month. That’s $15,000 a year.

I could also gut out a 15-year mortgage. My monthly costs would then be closer to $1,400 a month due to the higher monthly mortgage payment. That’s more expensive than renting, but in 15 years it’s over, and my monthly housing cost drops to a couple hundred bucks. If you never buy a house, the payment never drops.

The disadvantage to renting

I have one rental house comparable in size to the house I live in. Every time it comes on the market, it’s the biggest house in the zip code. If I set out to rent a house comparable to the one I own, I would have a small selection and a lot of competition with other potential renters. A good landlord won’t raise the rent every year, but it’s likely the rent will increase over the course of 15 years, and at a higher rate than the property taxes increase. And in the event that I move during that period, it’s almost assured that my rent will go up each time I move.

I don’t consider the house I live in an investment. But I own other houses I rent out. Those certainly are investments, and it’s a good investment. That difference in cost of ownership for a year–likely $3,000 or somewhat more–is my profit for shouldering the responsibility of paying taxes and maintenance, finding the house to begin with, and coming up with the down payment and closing costs. If you never buy a house, someone else does, and then passes the cost on to you while pocketing a bit of profit.

Houses do tend to appreciate

Although those who say to never buy a house point to houses not appreciating much historically when you go back to 1890, it is an upward trend. Houses don’t depreciate like cars. If you do the annual maintenance and you don’t go all HGTV on your house chasing trends that look cool for five years and then look hopelessly outdated afterward, your house normally will increase in value, but it may take 10 years for it to happen.

But like stocks, houses do go through periods where they are undervalued and overvalued. They were certainly undervalued from 2009 to about 2015. When you start hearing a lot of commercials on the radio about house flipping, that’s a good sign houses are overvalued.

Also, unlike stocks, you can time the housing market. When you see a lot of for sale signs and they tend to linger, it’s a good time to buy. If the for sale signs are disappearing from yards within a week, that’s a seller’s market, and it’s a good time for you to hold off.

No question 2017 wasn’t a good year to buy a house. That doesn’t mean 2019 won’t be.

Closing costs are a sunk cost

I nearly bought an investment property in 2009. I bailed partly because I didn’t see the point in paying $3,000 in closing costs to buy a $30,000 house.

That was an extreme case. Closing costs of $3,000 on a more typical house priced at $150,000-$200,000 is a lower percentage of the overall cost. It still stinks. That’s a lot of money.

Then again, it’s a one-time fee. The price difference between renting and buying each year is about three grand. And it’s usually amortized as part of the loan, so you don’t have to pay it all at once. If I were to rent houses for 30 years, I’d pay $90,000 more than I would paying a mortgage on a comparable house for 30 years. Okay, call it $87,000, since I’d have to pay closing costs. But 87 grand is a lot more than three grand. If I banked that money instead of paying it out in rent, I could retire at least a year earlier. If you never buy a house, you miss out on that opportunity.

One other thing to keep in mind: When you shop around on interest rates, inquire about closing costs too. Closing costs aren’t always three grand, and some of the line items are optional. Sometimes you can trade a higher interest rate for lower closing costs, then recover some of the difference by paying off the mortgage early.

The mortgage interest deduction is overrated

This is a fair point. The mortgage interest deduction is a popular tax deduction. But depending on the tax laws surrounding the standard deduction, you may not even be eligible for it. If you are eligible for it, you’re getting a 25 percent rebate, in effect. You’re spending a dollar to get a quarter.

The mortgage interest deduction can be enough to let you afford a more expensive house, in some cases, which is why it’s popular.

I most frequently hear it as an argument against paying off a mortgage early. It’s flimsy for that. It’s even flimsier as an argument to never buy a house.

Advantages of home ownership

The people who say you should never buy a house say that the cost of a mortgage, taxes, and improvements aren’t always built into rent. I don’t know where anyone gets that idea. I happen to be a landlord. When I buy a house to rent out, I look at the projected rent. Then I look at what the mortgage, taxes, and maintenance will cost per year. If I can’t turn a profit renting the house out, I don’t buy the house. And that profit better be four digits starting with a crooked number to make it worth my while.

You may be able to find a landlord who owns the property outright and is willing to rent it out for less than market rate because he or she doesn’t have a mortgage, but I haven’t found one yet.

Security

One day in the spring of 2016, I had a very bad day. I was working in sales, and my biggest customer decided to try to bully me into a deal that meant I had no hope of making my sales quota that quarter, or the next. But I owned my home and my car outright. I don’t know what he did that evening. But I got into my car, drove back to my home, and sat down on my couch to figure out what I was going to do. I own all of that stuff outright. He doesn’t own all of his outright (I checked) and he assumed I didn’t either, and therefore he could ruin me.

I made some phone calls. It took me about seven months to find the right job for the next stage of my career, but one of those phone calls I made that day set that in motion. In the meantime, I took the financial penalty of not meeting my quota for two quarters. I felt it, but it didn’t ruin me, since my monthly cost of living was several thousand dollars a year less than his.

Home ownership doesn’t have to be a treadmill

Detractors of home ownership say you just lose your down payment each time you move because you buy a more expensive house each time. But it doesn’t have to be like that. At least once a year someone tells me I need to move to a more expensive neighborhood. But it’s not their decision.

I bought the house when I was still in my 20s and single. I could barely afford it then, but it wasn’t too big for me to take care of while I was single. It was big enough to raise a family in. And it wouldn’t be too much to take care of when I’m old. It’s not a perfect house. But it’s adequate at worst. The expenses of upsizing while I have a family and downsizing after they leave the nest are optional.

Buy the right house at the onset, and you can live in it for 70 years. You can look at that downpayment as a sunk cost, but I look at all the years I didn’t pay any rent or mortgage. If you never buy a house, you never get that benefit.

Never buy a house – in conclusion

I’m not a fan of the philosophy to never buy a house. I am all in favor of living within your means in a house you can pay off as fast as possible close to where you work. Sometimes leasing makes sense. Stop leasing when it stops making sense.

I understand the philosophy. Living in a 3,500-square foot McMansion won’t make you happy. But living in a 1,500-square-foot home that I own outright certainly takes a lot of stress and uncertainty out of my life. If removing stress and uncertainty is the goal, home ownership can be part of it. You may just have to go about it a slightly different way than your parents did, and there’s nothing wrong with that.

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