Many young workers today are mired in a kind of adulting limbo, yearning for a mortgage that they simply cannot afford. Homeownership among people aged 35 and younger has fallen by 18% since 2006 thanks to the Great Recession's aftershocks and the strain of historic levels of student loan debt.
Even so, three-quarters of young adults believe owning a home makes more financial sense than renting, and eventually want one for themselves. But should you inflict such self-torment? Is it really that much smarter to buy than to rent? That all depends on what a home means to you -- because ultimately, buying a home might not even be a financial decision.
Risks of Buying
Homeownership comes with a host of risks. You're sinking a large portion of your savings into an asset that's expensive to maintain, and may be extremely difficult to sell. People move, jobs change, markets tank, life happens. There's no guarantee that you'll want to live in the same area in two years, much less that your family situation will remain constant.
Rent prices have moved higher since the financial crisis -- but not being the master of your domain comes with certain advantages. You can move more easily, since you don't have to worry about finding a buyer, and won't end up spending the $1,100 or more that the average homeowner shells out each year on maintenance costs.
Meanwhile, you could very well earn a better return on your down payment by investing it in a diversified portfolio of low-cost index funds instead of a half-acre plot. Stocks rebounded much more quickly than home prices after the Great Recession, and over the long haul there isn't that much evidence that homes provide a decent return for your money. From 1900 to 2011, housing gained 1.3% annually after inflation -- compared to 5.4% for stocks.
Your home can also change abruptly from an asset to a liability. The national median home price dropped 23% from just before the housing crash to the bottom in December 2011. Home prices, excluding inflation, have only just now returned to pre-crisis levels. Nearly a third of homeowners were under water five years ago -- owing more on their mortgage than their home was worth.
The truth is that, for most people, buying a home is as much about sentiment as it is about dollars and cents.
Beyond the financials people often want a place that is their own. Owning a home feels terrifying -- yet liberating.
Indeed, young renters who aspire to homeownership do so to control their living space, have a sense of privacy and security, and establish a place to raise a family. They want a home for the freedom it confers. Don't like those cabinets? Hate the carpet? You can generally do what you please if you're the owner.
You have to pay for that freedom, and it doesn't come cheap. But it's worth remembering that whether to rent or buy isn't a clear-cut decision. And it's certainly not only about finances.
Rather it's a reflection of your particular desires -- which means you should think deeply about what it is you're after. If you're looking to leverage your savings to build more money for the future, you could easily end up disappointed.
Time – Money