Today’s 20-somethings and even those in their early 30s came of age in what was the worst national real estate market on record since their grandparents were born. Now realtors want to persuade them that it’s time to take a risk; that it’s time to walk away from paying rent and pay high prices to buy their own homes.
There’s nothing wrong with the mathematics at the heart of the analysis by Trulia.
Trulia is even urging millennials to push the envelope. Buy a house, they suggest, and eat ramen noodles to make mortgage payments for a year or so, because after a raise or promotion or two, that new house will look like a bargain and be a much easier financial burden.
But for many Americans, the tradeoff isn’t that easy. And to be blunt, it shouldn’t be. If you don’t plan carefully, your dream of home ownership can end up as a financial nightmare. Here are the points to ponder.
Trulia is arguing that millennials should stretch themselves financially, basing that argument on a hypothesis that may or may not be valid: that they can expect their incomes to rise and their personal financial outlook to improve. You’ll need to be ruthlessly honest with yourself: is that likely to be the case with you?
More than any other single factor, what anyone wrestling with the buy v rent decision needs to ponder is the extent to which they are stable. That means how stable their job is (and how likely they are to get promotions and raises over the coming years), how stable their relationship or marriage is (is there a risk that they might have to sell the house at a bad time in the market because of a divorce or split?), and how stable their career path is (might they move cities or states to work for a different company or attend graduate school?). If the answers to any of those questions signals doubt that they might not be committed to staying in that house for the next five or more years – then regardless of what the mathematics says, buying probably isn’t a good idea.
That’s because while a house purchase can make sense when you run the math, it may still not be wise when you examine life circumstances. A great many homeowners found themselves in precisely the same predicament during the housing crisis: needing to sell because they were relocating, because they were elderly or because they were military families asked to deploy overseas, but unable to find buyers because of the market conditions. So, evaluate your circumstances.
Be equally honest about your finances.
But the costs of home ownership doesn’t stop with the mortgage. Remember, you’ll also need money to pay property taxes, and the bank that gives you your mortgage will want proof that you’ve got an insurance policy on your new home. When you were renting, there’s a chance that your landlord covered some of your utility expenses: almost certainly he paid a water bill, and possibly either heating or power. Now, all that will be your responsibility. You spot an ominous drip in a ceiling? That’s now your responsibility to fix quickly, before it becomes a flood. That parade of ants through your kitchen in spring? That’s up to you to control, along with the signs of mice nibbling on the edges of your cereal box in the kitchen cupboard. The refrigerator that you bought along with the house dies, and that’s another expenditure and then there’s the time that you invest in mowing the lawn, painting the walls, and so on.
You’ll also have to keep putting money into your retirement savings plan, because your house can’t end up being 100% of your nest egg. This might not even be the right time to buy, anyway. Sure, rental prices are high, but chasing housing prices higher is rarely a wise plan. You may feel that houses are becoming less and less available, and less and less affordable, and you’d be right on both counts.
Millennials and others who are mulling the renting v buying trade-off should also ponder some of the long-term market dynamics that will affect the housing market now.