The fallacy of homeownership

To be American is to know and love taglines.  They are the cliffnotes of life that make you exempt from comprehensive understanding of a subject so long as you can drop that catchy sentence to buy you credibility for a few seconds.

For example, it’s not unusual for someone to speak passionately about the Constitution of the United States and to defend or critique it because you know…“Life, liberty and the pursuit of happiness” sounds good.  Similarly, MLK and the “I Have a Dream” speech are practically synonymous.  Yet, most people haven’t actually heard the speech in full, or actually read it from beginning to end.  Side note, life, liberty and the pursuit of happiness is actually a snippet from the Declaration of Independence.  I digress.

The same is true with homeownership, which has managed to maintain it’s position at the pinnacle of the American Dream for years.  Yet, there is plenty of evidence to suggest that at best, homeownership is the equivalent of the WWF InterContinental championship belt. An accomplishment?  Maybe?  But for many people, it’s the crown jewel of success because “it’s an investment” and “it’ll appreciate over time” and “we got a really good rate” and “we’re going to grow into it” and “I can always sell it” and “we’re building equity” and on and on and on.  Owning a home is touted as one of the single most important investments you’ll ever make.  But riddle me this? 

If homeownership was such a sure shot to building wealth, wouldn’t we know more wealthy people?

I know TONS of miserable homeowners but I don’t know nearly as many wealthy people.  I could unload for years against the merits of homeownership but here are a few points that should cause you to think twice before jumping in headfirst to homeownership. 

1.The average home size has increased considerably over the last 17 years.  By building newer and larger homes, the industry essentially forces people to buy larger homes than they actually need.  This is also counter-productive given the size of American families has decreased steadily since 1976.

2. Despite the constant push by the media and banks about how affordable mortgage rates are, a 30 year mortgage is a commitment to paying 67% higher than the loan amount when you look at the TOTAL cost of the loan.  Using a super-simple example, assume you purchased a $100K home, put 20% down ($20K) and borrowed the remaining $80K at a fixed 30 year rate of 3.8%.  Your monthly payment is $372.77 but the TOTAL cost of that loan is $134,195.72.  Put another way, you gave the bank $20K for the right to borrow $80K which will cost you at least another $54K over time.

Keep in mind, you’ve not paid for insurance, repairs, furnishings and other fees yet. This also assumes you have excellent credit and are eligible for that low 3.8 % rate.  As that interest rate creeps higher, so will the total cost.

3.  Studies show that the typical American family may only regularly use 40% of the space in their homes.  It’s not surprising to know that the kitchen, bedrooms and family areas are likely the most widely used areas in a home, whereas the additional sitting areas, dining areas, porches, extra bedrooms and bathrooms are largely ignored.  That’s significant money wasted going towards property tax, cleaning, furnishing and energy, every year.

4.  The typical American only lives about 18 miles away from their parents.  Now, I’m not knocking the importance of family or the role “the village” plays in everyday life.  However, if living near Momma is a must-have, then know that you’re boxing yourself into the economic limitations that come with that.  Over time, that can have a real impact on your ability to build wealth, get out of debt quickly or take full advantage of job opportunities that lie outside of your comfort zone.

Soooo in a nutshell, we’re buying larger houses even though we have smaller families, paying at least 67% more than the loan amount over time, only using 40% of the damn thing and not opening ourselves up to options outside of an 18 mile radius to be near Mom because “renting is throwing away money”.

In what world is over-building, over-paying, under-utilizing and limiting your options a recipe for success?  

To be clear, we’re not knocking homeownership as a whole.  Obviously, we’re homeowners as well. The difference is we live small, have no debt on it and can turn it into a cash-producing machine (aka asset) if we want to.  When we do move up, we have the flexibility to go anywhere we want (including international destinations) without the pressure of finding a buyer and the benefit of a fantastic debt to income ratio.  Also, we can afford to wait for the market to soften and have our pick of homes when [not if] they go on sale.

Bottom Line

You have permission to question your beliefs about home ownership.  If you must buy, consider buying small.  If you must borrow, consider a 15 year mortgage. Most importantly, think about the TOTAL cost of homeownership, not just the “affordability” of the payment. Borrowing the maximum allowable amount of money for a home benefits banks, not you.  And oh please, please, PLEASE don’t let anyone tell you that “renting is throwing away money“.  That’s just another stupid tagline.