The American Dream, we’ve been told over and over again, particularly by mortgage brokers, is to own a home.
That’s all well and good. Home ownership can be a wonderful thing. And for centuries, across cultures, owning land is what has separated the nobles from the peasants. And who wants to be a peasant?
Still, some of us are peasants. And that’s OK. In America, the peasants get to vote! And peasants are under no obligation to fix their own plumbing when something springs a leak. There’s much to be said for this.
So how can you tell if yours should be the life of the land-owning nobleman or that of the can’t-tie-me-down free spirit? It’s not just a question of personal taste (the waltz vs. gypsy dancing, for example). But there are some concepts to bear in mind as you decide whether to join the landed gentry or the apartment-dwelling gentrifiers.
Five Year Rule
Most experts will say, without equivocation, that no sane person should buy unless they intend to stay in the same location for at least five years. Thus buying a home in the city where you land your first, post-graduation job is probably not a good idea, unless you’re quite sure that first job will last for a good number of years. By the same token, lifelong renters would be crazy to buy just as the grandkids are being born in a distant state. You’re going to want to be near those little guys.
Buy to Grow
If, say, you’re 30 years old, recently married and childless, you’re in that demographic beloved by people who want to lend you money — you’re a DINK, a double-income, no kids person. You’re likely a pretty low credit risk. And as such, you’ll likely qualify for a decent rate on a mortgage for that cute, one-bedroom apartment in that fashionable neighborhood you love. But hold on just a minute. What are you going to do just a couple of years from now when you find yourself expecting your first child? What if it’s twins? Don’t get sucked into buying a home for who you are now. If you can’t afford to buy something big enough for the family you’ll become, keep renting for awhile.
Near, Far, Wherever You Are
Here’s an exercise that every potential homebuyer should try. Pick a town where you think you’d like to buy your home. Then go stand outside the commuter train station there at around 8 pm. Hang around for a few hours and watch people. Don’t they look tired? That’s because they’ve been commuting for hours! If there’s no commuter train, leave your job after work some night and drive to the town where you’re thinking about buying. Do that many, many times. Does the commute seem bearable? Millions of Americans buy property that is very, very far away from where they work. Those homes tend to be cheaper than in the city centers where folks work. But is owning a home so important to you that you’re willing to spend four hours a day, five days a week, for the rest of your life, commuting from southern New Jersey to midtown Manhattan? Wouldn’t renting someplace closer make for a more enjoyable existence?
Reductions in Deductions
The reason that homeownership tends to make more financial sense over time than renting is simple — the government subsidizes homeownership. No one likes to call it a subsidy. But that’s what it is. If you own a home you get to deduct the costs of borrowing to pay for it. That’s a really, really great thing for the banks that lend money to homebuyers. And it’s a pretty great thing for the people who want to buy homes too. But how long can it last? You’re read the news. Times are tough in America these days. The government is short of cash. Gradually reducing the mortgage deduction could generate some $215 billion for the feds by 2021. A study by the libertarian research group Reason says that the mortgage deductions effectively exclude $1.26 trillion a year from taxes. So before you sign that 30-year mortgage, ask yourself: what are the odds that the government won’t decide it needs that money for at least the next three decades?
Buying a home never works out
On the other hand, poetry will never fail you.
Paul is the editor of MyBankTracker. His columns cover the money movement — the ongoing shift in how people, businesses and our culture look at finance.