One of the biggest decisions any family will make in their life is buying a house. No matter the stage of life you are in, the equation behind the decision to buy a house can be very complex. Most people reading this will have their opinions and perspectives. Undoubtedly my own opinions will leak through as I write. However, the goal of this discussion is not to prescribe an answer. Instead, I hope to illustrate the most common variables that live inside this equation so that you can apply your own weighting and create your own mental toolset for this major decision.
The “Should I…” Equation for Home Buying
For ethics and philosophy majors out there, this phrase might be a little presumptive, but for all of us simple folk the “should” question can be summarized with three key variables. It is important to note that these factors do not include the idea of affordability. Yes, this is a glaring omission, but its absence can also help us get down to the basics. If you’d like more information on the idea of affordability and buying a house, then let us know in the comments as it really does deserve its own discussion.
- Your financial goals.
- Where you live.
- What your family values.
Understanding Your Financial Goals
You can find many resources that argue in favor of home ownership as a major building block of financial stability. Even for low income an minority households this can hold true, according to this Harvard paper from the Joint Center for Housing Studies. While this might be categorized as common knowledge, at least here in the United States, this doesn’t mean it is universal practice. In fact, home ownership percentages in the United States has been falling every year since 2004.
To simplify this variable, let’s consider the first time homebuyer. Unless this first time homebuyer is living with their parents still, or even if they are, they are making the fundamental decision between renting versus buying a place to live. Some of our Californian friends who have opinions (about other topics) that can be very helpful would suggest that owning a home is financial suicide and you should be a renter for life. We’ll talk about how this perspective is potentially flawed when we talk about where you live and market trends, but certain combinations of these 6 factors can definitely support the idea of renting long term. To be fair to Californians, some of them take a more quantitative approach to owning real estate and favor it as an asset class in your personal finance portfolio.
Once you get a chance to read through some of those references you’ll find that it comes down to math. It may not be fun, but its reality. You need to understand what happens to the money that you are spending on where you live over time. That “over time” part if probably the most important. In some cases – looking at what will happen in the next year with that money might suggest that you should rent, when if you look at that same spend over a few years it becomes very clear that you should buy.
Unless you are planning on dying in debt, and I understand that some people are but they should read this first to see how it might impact their family, then you are likely looking for a housing situation that will let you build your savings and pay down debt.
Where You Live
Where you live just might make your rent versus buy decision for you. Let’s take a look at a maybe not so pretty picture from our friends at HowMuch.net:
Now, there are a lot of assumptions baked into this map. For example, there are different opinions on home affordability and how much you should stretch to afford a given house. Ping us in the comments if you want more information on that topic. But for the sake of understanding your situation relative to this home buying equation you need to understand what your income is relative to the home prices in your area. If you live in San Francisco you will need a six figure plus income to even think about buying an entry level 500 square foot dwelling, while a six figure earning household might be able to “afford” (need to be careful when we use that word) a 3,000 square foot luxury home in other parts of the country. This might be another reason for the rent over buy reference I provided earlier in this post – I’d find it difficult to live in such an expensive housing market.
Now, does this mean you should move to optimize your home ownership potential? Maybe. At the very least you should do some research on market trends in your area, which might include talking to a real estate agent, so that you can confidently answer the “over time” question we raised when talking about your financial goals. Time can not only impact your personal cash position, but it can also change the value of the home you are thinking about buying.
If you were able to afford a home in San Francisco in 1995 and are still living there, then you’ve seen an above average (read as – insane and unprecedented) rate of appreciation since you’ve bought your home. However, in that same market and within that same time period – say buying in 2000 and selling in 2002 – then you saw a significant drop in your homes value. Of course, that market crash impacted a broader market, and different folks will give different opinions on how to predict these things, but the Bay Area was hit harder than other housing markets during the dot com bubble burst because it relies so heavily on technology companies.
These examples can be extreme – but you should make an effort to understand what the economy is like in the area you are considering buying real estate so you can try to answer the “over time” question with some level of confidence.
What Your Family Values
This is perhaps the most uncommonly considered variable in this process. Or rather, it is most commonly manifest as a justification for ignoring other variables in favor of fulfilling its purpose. This is, in my opinion, one of the primary sources of contention within families when making the home buying decision. Instead of letting this variable override the rest of the equation – its important to define this variable as much as possible before you look at the other facts and figures.
Here are some questions you can ask as you try to define what is really important to your family as you consider buying a home. These might be ridiculous questions, but the ideas behind the questions might tell you a little bit about what you really value.
- Would you rather eat out more or have granite countertops in your kitchen?
- Would you rather have a 10 year old car, or a 40 year old house?
- Do you enjoy listening to audio books in the car for more than 45 minutes at a time? Every day?
OK, quiz time is up! Let’s consider these questions.
If you enjoy eating out more, then you probably value having more freedom with your time and money than having an upgraded house.
If you struggled to choose between an older car and an older home then you probably value having newer, and therefore more expensive things.
If you don’t mind the idea of a long commute, then you might value the place you live over the amount of time you spend there.
So… should you?
It is a hard decision! But hopefully these three ideas can help you think about what your answer could be. The harder question comes next – if you think you should buy a house – what house should you buy?