Why Buy a House?

A piece of advice that is given in almost ever financial course I have ever been a part of is that people should save up to buy a house (specifically) and that renting is "wasting" money. I don't subscribe to this philosophy for a few reasons.

Pictured: A huge investment of time and money.

First, I simply prefer living in an apartment versus dealing with a house. Houses are time consuming. Even just having to mow the lawn regularly is one of the many annoyances that go along with home ownership. Living in a smaller apartment sets a physical limit on what you need to do, freeing up time you would have spent with simple maintenance. I don't think I'd have time for my hobbies if I lived in a house. And I like it that way.

Proponents of house ownership typically cite to building equity (value of house minus what you owe on it) as a financial benefit of owning a house. First, this exact same benefit can be applied if you purchase an apartment or condo instead of a house. Secondly, because of how mortgages are structured, you will typically only pay interest for the first few years of the mortgage, so you haven't built any equity until years down the road (for those who want to learn a new vocab word, this process of paying interest vs. principal is called amortization).

But this isn't as straightforward as it is presented. One of the main differences between renting and purchasing a home is where risks fall. If you rent an apartment, you are insulated against fluctuations in the real estate market. Meanwhile, if you have purchased a home, that risk falls squarely onto your shoulders. For example, during the housing bubble of 2008, many new homeowners' equity in their homes fell to a negative amount; meaning that they owed significantly more on the property than it was worth. Even selling the house would not free the homeowner of the downside of the risk they took. Renters simply do not have this risk, it falls on the owner (typically the landlord) of the property. When you are done with your lease, you can just walk away. Owners may not have this luxury.

Pictured: The housing bubble of '08.

Next, proponents of home ownership tout that money spent on rent could just as easily be spend on a mortgage. This ignores all of the other expenses involved with home ownership. In addition to a mortgage, home owners are liable for upkeep and taxes on the property. These expenses typically mean that the real price paid for a home are more expensive than what someone is paying on rent. And any homeowner can tell you that extremely large costs can come up with no warning. For instance, if you have an older hot water system that stops working one day, you have to spend thousands of dollars in addition to your normal mortgage/taxes/other expenses. Meanwhile, renters do not have to pay this, making housing costs cheaper and more predictable.

Another benefit of renting is geographic flexibility. If you want to move and you have a house, it may take significant time and resources to be able to sell it. As any second-time homeowner can attest, there isn't even a guarantee that you will sell within a reasonable time. Meanwhile, a renter has a fixed end date that they can use. And, remember the amortization point: If you need to move within the first few years, you'll have "bought" the home for nothing and just have spent more for no real reason.

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I'm not saying homeownership never makes sense. I have friends who have purchased houses and it really works for their life. But buying a home is typically one of the largest financial transactions of one's life. Before making the plunge, take account of all the benefits and costs of the purchase.