Here’s the main reason why I don’t think young professionals should buy a home:
If I get fired or quit my job tomorrow, it won’t be a big deal. I’m confident that of the seven billion people on this planet, there is a person or group somewhere who will find my skills valuable enough to pay me enough to support my family. It may take me some days, months or years, and take me to Kentucky, Seattle, Shanghai, or Kathmandu, but I have no loans, debts, or any other ongoing financial commitments, so my savings will last long enough until I find the best opportunity for me.
Knowing this is very powerful: it means I can take risks and opportunities that others can’t. I can propose a risky new project to my boss, even if there is a big risk that it will blow up in my face and I’ll be laughed out in disgrace. I can propose a big new role for me, even if I’m not sure whether I’ll be able to do it. I can browse open jobs on LinkedIn and seriously consider taking them even if it means dropping everything and flying across the world. I can really negotiate my rates knowing that there are plenty of other options for me.
Now consider Kathy: a 30 something with a mortgage and auto loan. In between her mortgage, insurance, taxes, HOA fees, cable contract, etc, most of Kathy’s after-tax income goes to pay for fixed costs. She can’t get out of these commitments without months of effort and a big loss.
Will Kathy make that risky proposal to her boss? Will she surf around for better jobs in Seattle? Will she be able to tell her boss that his idea stinks or drive a hard bargain when negotiating a raise? How can she, when losing her job risks not being able to pay off her house and car? She would have to scramble to find a new job before her savings run out — and she will be limited to an area within commuting distance of her house. Besides, she has her children to think about — she has to be a responsible caregiver.
Besides mortgage worries, there is the constant risk of repairs — if her roof leaks or her fridge breaks — can she pay for unexpected emergencies? Can she take time off work for the plumber or kitchen remodel during a critical project launch at the office?
A mortgage can be paralyzing for anyone who still has their prime career years ahead of them. You may as well admit “this is as far as I will go up in the world.”
Even if you have the cash to purchase a home outright, there are still many costs to consider. First, there are the ongoing costs: property taxes, HOA fees, lawn maintenance contracts, repairs and more to worry about. More importantly, paying a large fraction of your net worth to purchase a home outright is a poor financial decision: it invests a huge portion of your net work in an illiquid and risky asset. Historically, a diversified stock portfolio is both safer and gives a higher return than a home. Even if you have cash to spare, it’s still wiser to pay the minimum downpayment and invest the rest.
When we rent, it is clear that the money is a cost spent on a service. What’s not clear is that paying a mortgage is also a form of paying rent on a service — with the addition of a high-risk, highly-leveraged real estate investment, huge transaction costs, and major restrictions on your lifestyle and career options.
And if you do lose your employment, are able to find a job elsewhere, and forced to sell your current house, you have no guarantee that it will cover your original investment. Additionally, you have the time it takes until closing before you will get any money out of your investment. And you may be forced to come up with cash at closing just to sell it!
If you were renting, that’s all on the landlord, not you. The only thing extra that might be demanded by the property owner would be a payment to break the lease. But you will still be way ahead.
Renting is not all roses, either. If your landlord decides to sell, you need to scramble to find a new place. When his property taxes go up, so does your rent. You’re also paying your landlord’s insurance and HOA fees while you’re there. And if you do any damage during occupancy, you get to pay for it, but if you make improvements, they stay with the house.
As far as advantages to home ownership, there are many, especially if you’re handy. You can buy the least expensive/least desirable house in a great neighborhood, make it better while you live there, and potentially make a handsome profit when you decide to move.
That’s what we did over our 30 year (so far) marriage. Bought the first house for $70K, did some stuff, sold it a few years later for $103K. Built the next one for $120K, sold it for $170K. Bought the next one for $172K, sold it for $305K. Built the next one for $320K, sold it for $583K. Now we have two cheap houses, and rent one out. While we fix up the one we live in to ultimately sell again in a few years.