Over the last couple months two long-held truths of the financial world have been turned on their heads. One, money market mutual funds can’t lose money, and two, the value of real estate always goes up. Unfortunately, many have discovered neither of these “truths” have ever been 100% true, just assumed. And you know what assuming does.
Has the American Dream Been Oversold?
For years the “American Dream” has been to own your own home. The notion itself is a little absurd. After all, you never really own your home outright. Don’t believe me? Try not paying your mortgage for a couple months. But you own your home free and clear you say? Well, try skipping out on property taxes this year. No, we never really own our homes completely free of any obligation. However, to a lot of people “owning” a home represents the pinnacle American financial experience.
Realtors and Brokers and Politicians, Oh My!
So who has been perpetuating this idea that owning your own home would somehow complete you, financially? Realtors have certainly played their part. Let me make clear first, I am a fan of realtors. I think there are some truly great real estate agents out there who have their buyer’s (or seller’s) interest at heart. But I think there is an even larger number out there who signed up clients for mortgages they knew they couldn’t afford, and did so by conspiring with banks and mortgage brokers to work “creative financing” for their clients. In other words, since the buyers couldn’t qualify using standard mortgage practices they had to “get creative,” which led to a variety of bad loan options such as adjustable rates and interest-only loans.
So realtors and banks played their part, but the government isn’t off the hook. For the last two decades administrations have pointed to increases in home ownership as evidence of a strong economy, and a happy citizenry. The Clinton administration called for increased loan options for lower-income families, particularly those who did not have funds available for down payments. Bush furthered the problem by calling for an “ownership society” early in his first term. It seems both administrations were caught up in the idea that home ownership was a proper measure for our fiscal health.
We’ve now discovered many homeowners would have been better off continuing to be renters. Despite what others tell you (particularly those associated with the real estate industry), renting is not the equivalent of “throwing money away.” Renting a house is a viable option for providing safe shelter for you and your family. There should be no shame associated with it, and in fact, in many cases it is much smarter to continue renting than opting to buy real estate. After all, a house is just sticks and bricks, but a home is where you make it. And it doesn’t matter who holds the mortgage on that “home,” you or a landlord.
Often times mortgage brokers run numbers and say things like, “Well, for the same amount you are throwing away in rent each month, you could be making a mortgage payment!” Unfortunately, the real world tells us that rent and mortgages are not equal, in terms of the financial risk associated with each. If you buy a house with no emergency fund and the hot water heater bursts sending gallons of water over your flooring, guess who gets to pay for the cleanup and repairs? If that same scenario happens in a rental home, your landlord is on the hook for necessary repairs.
Owning a home is still a worthwhile goal as real estate prices do typically increase over the long term. However, it’s best not to jump into home ownership solely for the investment potential. Leveraging too much of your life by over-buying a house can wreak havoc on your family’s finances for years to come. Renting has its downsides as well, but they are typically more inconveniences (fluctuating payment amount year to year, having to move if owner wants to sell or reoccupy, etc.) as opposed to the uglier potential negatives associated with mortgages. Can you say “foreclosure?” So, if you are in position to buy a home, make a frugal purchase and enjoy your new humble abode. If you are not in position (no down payment, no emergency fund, etc.) then simply rent a space and keep plugging away at building savings–no shame in that game.