The American Nightmare
My aunt told me that the happiest days of your life are the day you buy your house and the day you sell it. I recently sold my house, which was not the happiest day of my life, but only because it was clear to us how much money we lost on it. During the process we had several people ask us where we are going to buy next (nowhere), why we are selling, advice for buying, and I heard plenty of advice from people who never owned a house (which I considered hearsay, unless they were well read).
Briefly here are some marginal costs, advice, and other things to consider before buying a house:
- Get it in your head that you will live here FOREVER! – There is a possibility based on the market and shifting populations that no one will want your house. Even if you buy in a ‘good neighborhood’ they don’t stay that way. In ten years gas prices affect housing choices, city budgets on education affect school achievement, and shitty neighbors move in and start manufacturing meth. — So if you’re going to buy a house, buy in a city you love and be prepared to take action if it starts to change. You are buying into a community.
- Don’t think of it as an investment. I don’t care how people spin it- i.e. you’re building equity instead of paying rent, you get back what you pay when you sell it, etc. First of all, if you’re buying a house outright without a mortgage that might be true, but keep in mind that you would have to buy low and sell high like any other investment. And it’s best not to have an emotional attachment – like other investments. Second, if you do have a mortgage you wind up paying twice as much for the house over 30 years with additional interest. The way most mortgages are configured is that you have a set payment with a principle portion and an interest portion. The payment is the same for the life of the loan (if it’s a fixed loan), but the interest makes up a greater portion of the payment in the first 15 years. This is because although the payment is fixed, the bank is not going to miss out on their interest income, so they apply the interest first, and the difference between that and your payment amount is what goes to paying down your principle. If we take an example of a fixed 30 year note with a 5% interest rate that accrues daily for $120,000 (A 150k house with a 20% down payment) we’ll have a total payment of $1000.02 of which $355.83 is escrow (aka paying someone else to pay your taxes and insurance) and $644.19 is your principle and interest payment. If you never refinance and pay every payment on time you’ll pay $120,000 in principle and $111,905 in interest over 30 years. Because compounding interest is a wonderful thing you pay nearly the same amount in interest as you do the principle. Additionally, after 5 years of paying $1000.02 a month ($60001.20 in payments) you’ll have paid $9,806 off the original note leaving a principle balance of $110,194. (Incidentally, these calculations were made with the CNN Money mortgage payment calculator and the Federal Reserve Bank Mortgage Comparison tool.)
- On top of paying nearly twice as much for your house, you have the privilege of paying for everything that breaks down. This Wall Street Journal article suggests that maintenance costs are 3-4 times the purchase price over 30 years. Obviously there will be higher repair costs the older the house is, but remember it’s an investment! Even in my house where I did most of the work I can safely say that I’ve spent at least $35,000 in the 10 years we owned the house, that’s a little more than a quarter of the purchase price.
So considering that you are not very mobile (can’t take better paying jobs elsewhere as easily) and you wind up paying 4-5 times the original cost of the house in interest and maintenance, why is it that people still think that homeownership is a solid investment? If I put $500,000 ($120,000 purchase + $110,000 interest + $270,000 repairs) over 30 years in a low return mutual fund (5%) I’d have at least $800,000 at the end of 30 years (401k calculator just google one). If I spend $120,000 on a house now I could probably sell it for $400,000 in 30 years.
So why? – The housing and mortgage industries are huge sources of revenue – as seen above banks and contractors stand to make a lot of money off the American dream. There is no doubt that homeowners fuel the economy, and more than corporate executives homeowners are job creators. As such there is incentive for banks and government to encourage homeownership and make it easier for people to make that investment. (Tax breaks, flexible mortgage products).
Also, there is a sense of pride and freedom (if you like where you live) in having property that you can do what you please with (within the limits of your city ordinances and/or Homeowners Association rules). Want to take down a wall? No problem. Add solar panels (check with the city). Maybe not a problem. Raise chickens? Maybe not a problem. Be the only ethnically diverse person in your neighborhood? Depends on where you live. Start a family with your same-sex spouse? Get a little closer to downtown, but things are getting better.
If I could do it again, I wouldn’t. Although I had some great experiences in the house, as my friends moved away I felt stuck. As I looked for jobs after graduating, I felt stuck. As I tried to pay down debt, or make changes in my financial future, I felt stuck with the bill of homeownership. We were so excited to buy that house, and we had good times there, until the joy of owning a home became the burden of it. Now that the change of address forms are filled out, and our meager proceeds have been received from the sale, I feel free to make choices other than – what can we afford to fix this month? Even though we ultimately lost a lot of money on the deal, I consider it the price of learning. The day we signed the house over to someone else wasn’t the happiest day, but it was the day we got to start over.