Is buying a home a bad investment? Is renting a home a waste of money?
The deeper questions are: Why exactly are you considering buying over renting? And when is the right time for you, taking into consideration all of your financial goals?
In today’s housing market, home prices in many areas have been rising due to growing demand fueled by an improving economy and an extended low interest rate environment. Prospective home buyers are being confronted by a dilemma: to rent or to buy. Many homeowners find themselves “house-poor” after purchasing expensive homes using large sums of savings and borrowed money — something they might reconsider if they had a better sense of the dynamics at hand.
The key to smart decision-making when it comes to housing is to decouple “investment” from “consumption.” While some personal finance experts might suggest that rent is money thrown down the drain since it could have gone toward a down payment on a home, the reality is that paying rent for a period of time can often be a smart economic decision — especially if we continue to see the risks of deflation. When renting you’re buying flexibility (to invest, save or consume elsewhere) and you’re paying for a place to live, which provides you high consumption value by satisfying a practical need.
A prospective home buyer needs to remember that buying a home is not only an investment but a highly concentrated, illiquid, leveraged investment.
When you buy a home you are also linking yourself to the economy of the area in which you buy.
You need to remember, though, that if you buy a home at the top of your price range with a big down payment and mortgage, you significantly lose investment flexibility by tying up all of your potential investment capital in home ownership costs. While ultimately you might turn a profit when you sell the home, the potential lost income from diversified investments over time is something critically important to consider.
Bottom line: Buying a home is a huge accomplishment, and Americans derive a great deal of satisfaction from owning their homes. A home is typically the biggest single purchase most people are likely to make in their lifetimes — and it’s also potentially the riskiest. Many prospective buyers are giddy during their home search and can quickly let emotions overrun fiscal sensibility.
The water can be great in the housing pool, but there are no lifeguards on duty, so get informed and educated before jumping in.