We came across a blog post on A Wealth of Common Sense by Ben Carlson of Ritholtz Wealth Management calling buying a starter home "one of the worst moves you can make financially as a younger person."
We had to know more.
A starter home is any home you don't plan on staying in for the long term.
Carlson, who's a married homeowner in his mid-30s, as well as a CFA Charterholder, watched many of his friends follow the traditional path: get married, buy a home for the time being, have kids, upgrade to a bigger, more permanent home. However, he saw that these starter homes were more expensive than the buyers planned, from making improvements up-front to extricating themselves from the property later.
When he ran the numbers, he realized that, generally, starter homes just don't make sense. For one thing, the bulk of your mortgage payments in those first years go directly to interest payments, meaning you haven't built much equity by the time you trade up.
The median house price is roughly $200,000, and for the sake of argument, let's say you don't put anything down. If you stayed there for five years with a 4% interest rate on a 30-year fixed mortgage, two-thirds of your payments go to interest costs alone. You don't build up a ton of equity.
The break-even point for a home tends to be between five and seven years, depending on where you live. If you're in the house for less than that time, you sink money into closing costs, property taxes, improvements, and even realtor fees when it's time to sell.
If you're going to buy a house, buy something you're going to stay in for seven to 10 years. Otherwise, those costs are going to eat up most of your equity.
Carlson isn't against buying a home overall. In fact, he's strongly in favor of it — if it's somewhere you intend to stay for at least a decade. Until then, though, don't look down on renting.
"I think for young people, renting is underrated," he said. "When you're young, renting gives you more options. People say they don't want to pay someone else's mortgage, but I think especially when you're young and not tied down, it gives you the ability to pick up and move to another city for a job — a little leeway. A house is much more expensive than people think. It's more than just a mortgage."