The American Dream?
Home ownership can be a great investment over time, but not necessarily for the reasons you think. Let’s take a standard mortgage, you will be making monthly payments for 30 years. If you make payments once a month for 360 months you will build up some reserves, no question. This type of behavior is much easier when set on autopilot and the autopilot nature of paying a little bit of principal with every mortgage payment could be one of the biggest benefits of homeownership.
Home ownership has been a cornerstone of the American dream for decades, but it remains to be seen if that will continue to be the case in a post COVID world. I guess the big question that I have is will generational wealth and stability continue to come from being tied to one physical location the way it did from WWII up until COVID?
This is not an argument against homeownership. I just think that there's this conception that homeownership always builds wealth, or that it’s required to be financially secure, and it’s just not that simple. Even if houses always go up in value on a long enough time scale (which is not guaranteed) they are not always good investments, there are hidden costs of ownership and pricing volatility.
Being forced to sell a house, or any asset that makes up a significant chunk of your net worth at an inopportune time could be catastrophic. Not to mention that a primary residence usually is located near your job which means that your income and housing are subject concentrated localized risks. The chance that you could lose your job when the housing market is doing poor in your area is real, and it’s one of the ways homeowners end up selling into bad markets.
I would argue that the evolution of how we work and the increase in the number of catastrophic weather events transfer more risk to homeowners today than in past generations.
If you want to raise a family and have A career at A company there are some huge benefits to home ownership. However, if you want to be nimble while advancing your career there's a clear benefit to renting. Flexibility is arguably more important than ever, and while some types of flexibility are afforded to homeowners[i] (the ability to do what you want with the space) I believe that the ease of moving to a different place has exploded as a benefit to renters that leave homeowners in the dust.
Not to mention some of the tax benefits of homeownership were kneecapped by the 2017 Tax Cuts and Jobs Act[ii] and major insurers are leaving states entirely due to climate risk[iii]. It is also very common to underestimate how much it will cost in repairs as a homeowner, the rule of thumb I like to use is to assume that in any given year you will have to spend about 1-2% of fair market value for repairs[iv]. For a median value home that could mean around $650 a month more than what most first-time homeowners assume, in the 6 most expensive states and D.C. that number jumps to over $1,000 per month.
You also will likely need a mortgage which means a lot of debt, which isn’t a bad thing necessarily but is something that you need to navigate carefully.
As is always the case, diversification can help you spread out risk and if your entire net worth is tied up in your house and your downpayment depleted your emergency fund you’re assuming a tremendous amount of risk.
Is homeownership part of YOUR DREAM?
Or is it just part of "THE AMERICAN DREAM?
The only goals that matter are YOURS.
Homeownership gives you shelter and forces some savings; you probably need shelter and you probably need to save but do you need to own a house?