Purchase a Home?

IF YOU ASK FOLKS whether a home is a good investment, you’ll get all kinds of answers—both enthusiastic and downbeat—because you’re now firmly in the land of anecdotal evidence. The fact is, most people own perhaps three or four homes during their lifetime, sometimes with great financial success and sometimes not, and even those who claim their home has been a big moneymaker often don’t have a firm grip on how much they truly made.

Our advice: Don’t buy a house because you think you’ll make a heap of money from home-price appreciation, and don’t buy a house because you’ve been told it’ll save you a bunch in taxes. Maybe those things will happen, but we shouldn’t count on them.

Instead, consider buying a house for three reasons. First, while home price appreciation is an iffy proposition and often offset by the hefty costs of homeownership, there’s one sure benefit: We get to live in the place. Indeed, this so-called imputed rent is typically more valuable than the gain from price appreciation.

Second, buying a home locks in our housing costs. While renters face never-ending increases in their monthly payments, homeowners with fixed-rate mortgages will enjoy the same monthly principal-and-interest payment for years to come. Those with adjustable-rate mortgages suffer more uncertainty, because their monthly payments could rise. But there’s a limit to those increases—and, of course, their payments could fall if short-term interest rates decline.

But the big payoff comes 15 or 30 years later, when the mortgage is finally paid off. At that point, homeowners still have to pay maintenance, property taxes and homeowner’s insurance. But the big monthly payment is gone. For many folks, sending off that final mortgage check is the signal that retirement is finally affordable.

What’s the third big benefit of homeownership? It compels us to save. With every monthly payment, we chip away at the mortgage balance, slowly at first and then ever faster. We might even accelerate this process—by making extra principal payments.

But these three benefits hinge on a key factor: staying put. Because of the hefty costs involved in purchasing and especially selling a house, few experts would advise buying a home if you have less than a five-year time horizon—and even that’s arguably too short. Think about it this way: The roundtrip cost to first buy and later sell a home might be 10% or more of a home’s value. To make money on a house, you need enough price appreciation to offset that cost. That’s tough to do over a short holding period, unless you get lucky.

Next: Borrow How Much?

Previous: Roth or Traditional?

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