Why We Don’t Own a House (Yet)

Why we don’t own a house (yet)

Photo courtesy of Diana Parkhouse

Neither my wife nor I have ever owned a house. Since finishing college in 2007, I have rented 5 different apartments.

Just under two years ago, when my wife and I found out we were pregnant with our first child, we were living in a tiny studio apartment across the street from Fenway Park. We needed more space. But rather than rush out and find a “starter house” to buy, we found a little three-bedroom apartment for rent in a different neighborhood.

I have nothing against home ownership. In fact, we’d like to buy a house in the next few years and we’re putting a significant chunk of savings every month towards a down payment. But there are several reasons why we haven’t made the leap yet and why we certainly don’t feel pressure to rush into a purchase.

We don’t feel settled

I grew up outside of Boston, and aside from my four college years I have lived here my entire life. It’s my home.

My wife grew up between Florida and Alabama. When we met, she was finishing up her masters in Florida. That’s her home.

This is not something we’ve resolved yet. She moved up here just about four years ago, but there’s always been the possibility that we’ll move down to Florida. I enjoy my current job, but there isn’t enough stability to feel comfortable counting on it for the long term.

For those two reasons, we don’t feel “settled” in our current situation. That makes committing a big chunk of money to a house feel like a poor decision.

The basic financial math is against us

No matter how settled we eventually feel, it’s a reality that circumstances can change very quickly. Jobs can be lost, opportunities can arise, and feelings can change. Besides, other people choose to buy houses with a short-term outlook. So if we know that long-term stability doesn’t truly exist, if we know that many other people buy houses with less stability than us, and if we know that we want to buy a house eventually, what’s holding us back?

For me, it’s some basic financial math.

When you buy a house, in addition to the purchase price, there are closing costs and a potential broker commission. The same thing applies when you sell. So if you simply want to avoid losing money on the eventual sale of your house, you have to rely on price appreciation.

Here’s an equation you can use to determine the sale price needed to break even:

s – c*s = p + a*p

Where the variables are:

  • s = sales price
  • c = total cost of sale, including closing costs and commission, as a percent of the sales price
  • p = purchase price
  • a = total cost of purchase, including closing costs and commission, as a percent of the purchase price

So let’s say you buy a $200,000 house and we use some common numbers (taken from the NY Times Buy vs. Rent Calculator) to say that the purchase costs (a) are 4% and the selling costs (c) are 6%. If you plug those numbers into the equation above you come up with:

s – 0.06*s = 200,000 + 0.04*200,000

s = 221,277

So just to avoid losing money, we’d have to sell the house for $221,277.

That kind of appreciation is certainly in the realm of possibility, but I don’t like counting on it when we don’t have a long-term outlook.

And that formula doesn’t even include…

Monthly cost over rent – When you own a house, your monthly bill includes not only the mortgage payment but insurance and property taxes. Hopefully you have tenant’s insurance even if you’re renting, but it will likely be cheaper than homeowner’s insurance. And renters don’t pay property taxes. It’s not guaranteed that this monthly cost will be higher if you own, but it’s certainly possible.

Maintenance costs – When you rent, it’s the landlord’s responsibility to fix things. When you own, it’s all on you. That can really add up.

Opportunity costs – When you buy, you typically have a sizable down payment. Having that tied up in your house means you don’t have it available for other purposes, such as putting towards retirement.

Inflation – The number above only actually gets you to even in real dollars if there is no inflation. But the reality is that inflation exists, so even if you sold for that $221,277 you would have lost money in terms of real value.

If you want to factor in inflation, the equation would look like:

s – c*s = (p + a*p) * (1 + i)n

Where i = the annual rate of inflation and n = the number of years between purchase and sale. If you assume 2% inflation (based on current estimates for the next 10 years), and assume a 3 year period between purchase and sale, then the required sale price becomes $234,820.

Again, not something I want to count on.

We rent a place that fits our needs, not our wants

When we eventually buy a house, it will certainly be nicer than our current apartment. Our current place fits our needs, but there are things we don’t like but choose to tolerate because we know it’s a short-term solution, not a long-term commitment.

Because we’re okay renting a place that isn’t as nice as what we would buy, we’re saving even more money. Our monthly cost if we bought would definitely be higher, and in the meantime we’re able to use that extra cash flow for other purposes. With a short-term mindset, this is preferable to us than having a nicer place for the next couple of years.

We’re willing to wait

All of the above shows that buying a house would likely to be a pretty bad financial decision for us. But we all know that buying a house is more than just a financial decision. It’s a place to call your own, to raise a family, to be your home. And if you stay there for a while, it can end up being a good financial decision, even without much price appreciation.

We want all of those things, but the simple fact is that we’re willing to wait for them. For us, the short-term sacrifices are worth the increased long-term financial security.

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15 Comments... Read them below or add one of your own
  • Holly Johnson April 22, 2013

    I can see why you’ve waited. Gone are the days when you can count on quick home appreciation so you have to take that into account. I personally wouldn’t buy unless I knew that I wanted to live somewhere at least 5-10 years.

  • Matt Becker April 22, 2013

    I probably lean more towards the 10 year end of things, but I’m naturally pretty financially conservative.

  • The Frugal Path April 23, 2013

    I wish that we had waited. There were so many mistakes, but you’ve got what you’ve got.
    I think it’s smart to wait. Prices are relative and if they go up, then most houses go up If they go down, all houses go down. You don’t “really” win.

  • Cash Cow Couple May 2, 2013

    Matt, really relevant post for my wife and I. We move in 3 weeks to a new state and were considering purchasing for a while. It just doesn’t make sense right now. We’ll probably only be there 4 years for sure, after that is a mystery. We’re learning that there are many hidden costs in home ownership.

  • Matt Becker May 2, 2013

    Many hidden costs, exactly right. I think it’s a great move if you plan on being somewhere for a while, but like you said, probably not a great financial decision for the short term.

  • Laurie @thefrugalfarmer May 4, 2013

    Matt, sounds to me like you guys have made a very wise decision for yourselves. People often don’t ever take into consideration the true costs of home ownership.

  • Matt Becker May 4, 2013

    Thanks. I definitely think it’s right decision for now, although it can be frustrating for sure when those pesky numbers get in the way of things you want.

  • Matt from Saverocity September 4, 2013

    Sounds like you are trying to convince yourself this is the right idea, all of the reasons that you stated against buying a house are still going to be there when you DO buy a house.

    For me, I’m happy to have saved 4 years of rent. Buy buying rather than renting my annual housing expense has dropped from $24K to $8.5K, the balance of which could be added onto the P/L tally at the end.

    Did you have to pay a broker fee for moving to 5 apartments?

    • Matt @ momanddadmoney September 4, 2013

      Thanks for your input Matt. Couple of responses. First, I have to disagree with your statement that “all of the reasons that you stated against buying a house are still going to be there when you DO buy a house”. For our specific situation, the biggest reason not to buy now is the short-term uncertainty with regards to where we want to live and the costs that would be involved with having to sell soon. In a couple of years we hope to have chosen a permanent location. While things can certainly change and nothing is ever truly forever, that variable will largely be eliminated which would allow us to purchase without the current high probability of moving soon. So for us the variables will have changed to make purchasing more favorable.

      I have to say that I’m pretty confused by the numbers you quote for your own situation. So you went from paying $2,000 per month in rent to paying $700 per month with a mortgage, insurance, taxes and maintenance? Am I understanding that correctly? If so, you must have either downgraded significantly or moved to an area with a much lower cost of living, either of which could also have been accomplished by renting. Please correct me if I’m misunderstanding.

      For my 5 apartments, I paid the equivalent of 2.5 months of broker fees. Good point that this amount needs to be included in the evaluation. For me, it was much less than what would be paid by buying and selling in a short time period. But moving 5 times is far from efficient. I wish I could have done it differently for sure but life post-college can change pretty frequently. If I had bought something immediately after college I can pretty much guarantee you it wouldn’t fit my needs for a home today.

      In the end, the main point here is that if you think you might want to change locations or change family size in the near future, the costs of buying and selling, including taxes and maintenance, can easily make it a losing financial proposition vs. renting. It’s certainly not true 100% of the time but I think it’s true much more often than many people think.

      • Matt from Saverocity September 4, 2013

        Let’s also remember that when it comes to selling you get the biggest tax break you could hope for, in the form of the 250/500K allowance on capital gains on your primary residence. Also on tax, your mortgage interest is deductible.

        My costs dropped because I bought for cash, closing costs due to that were 0.5%, sale costs FSBO with Buyers Agents fee 2.5%.

        Home was not a downgrade, it is an upgrade, I put 20K into it and the current comparable apartment in my building (without the improvements I made) is selling today at 40% more than I paid for mine, including costs 3-4 years ago. I anticipate being able to pull out a 40% net profit after any closing costs.

        Add onto that profit the saving of $1300 per month x 48 months on cash flow is another $64,000 by the end of this year.

        The combination of saving money on rent, tax breaks, and appreciation are the leading drivers in wealth generation through real estate options.

        I do agree that buying when you are hesitant is not always the best idea, but then again I could suggest you should look at your ability to commit and make a plan. 5 moves is a lot. There are many uncertainties in the world, but sometimes it just takes the decision to go for it that makes everything fall into place, and too much hesitancy can cost you in the long run.

        • Matt @ momanddadmoney September 4, 2013

          Mortgage interest is deductible to the extent it exceeds the standard deduction. Depending on the amount of interest you pay and other deductions you have, the deductible amount may be $0 or may only be a fraction of your total interest payments. It’s not an automatic benefit.

          The capital gains allowance you mention is definitely a nice feature of home ownership, and from what you say it sounds like you’ll be able to benefit from that nicely. But in such a short time period that’s far from a given. We’ve seen housing prices fluctuate widely in short periods of time and the long-term returns on housing are pretty poor. While you certainly seem to have benefitted from good appreciation over a short period, that’s really not something to count on.

          If you bought for cash then you have to factor in opportunity costs. All of that cash that is now in your home could have been invested. It’s not a straight savings. You still may come out ahead, but you need to do the full calculation. I’m not sure when you bought, but since the start of 2010 the stock market is up over 60%. Since the start of 2009 it’s up almost 110%. Both of those are more than 40%. Granted those gains don’t have the capital gains exclusion, and that may not be the right comparison for your situation, but we need to put that 40% gain in context.

          I certainly think that buying can be the right decision in certain circumstances, just not all. And it becomes less favorable as the time period shrinks. You may luck into some nice short-term appreciation like you did, but that should not be the expectation. The expectation should be appreciation that keeps up with inflation, in which case the costs will likely be greater than the gains over a short time period. And there’s significant downside risk as well.

          As for your comments about my personal willingness to commit, I’m just going to leave those alone. If you want to hear the details of my personal life before making a judgment I’d be happy to give them, but they’re not really relevant to this discussion.

          I do agree that in general there are times you just have to be willing to take the plunge on something, but I think doing so without really understanding the potential consequences or having realistic expectations is problematic. I also think it’s problematic to generalize a single example to an entire population. I’m glad that your purchase has worked out for you but I would prefer to look at a broader data set when I’m making decisions for myself.

          • Matt from Saverocity September 4, 2013

            Now were talking! Good points. I agree, but also think there is nothing better than home ownership in the long run. Renting has convenience value, but that rapidly erodes over time.

            Maybe you could work out a spreadsheet using same data for own vs rent for yourself to see the difference? Like you say it is case by case, I did this and determined profit would be achieved just on rental savings month-month even if I sold at the same price I bought for (which I also got an 8K first time homeowners credit on).

            I agree that a buyer should read all your points, but they should temper them with mine for both sides of the equation.

          • Matt @ momanddadmoney September 4, 2013

            I agree that home ownership is beneficial over the long-term. That is, if you stay in one place for the long-term. Not being able to commit to a location for more than a couple of years is the main reason here for why we haven’t bought.

            I actually have built a spreadsheet, modified from the one provided here at Khan Academy: https://www.khanacademy.org/economics-finance-domain/core-finance/housing/renting-v-buying/v/renting-vs–buying-a-home

            I think that running the numbers is definitely helpful, but it’s important to understand the downside risk as well. You may very reasonably decide that the risk is acceptable, and that’s fine. But to not be aware of it is a mistake. Sounds like you ran the numbers ahead of time and were confident that you would come out ahead buying. If I were in the same situation, I would buy as well. But we can rent for much cheaper over the short-term, so that’s the decision for us.

            Thanks for the discussion Matt. Always fun to hash things out like this.

  • Emily November 21, 2013

    So much of this resonated with me. Great post!

    • Matt @ momanddadmoney November 22, 2013

      Thank you Emily! There’s a lot of emotion that’s tied to buying a home and I think a lot of people feel like failures for not having done so. I just hope people understand that it’s not automatically a good idea.

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