What's Wrong With The American Dream?
Growing up in an immigrant family, I was raised to develop an eternal sense of optimism and believed, to my core, that with hard work, determination and initiative, I could achieve anything that I set my mind to. As I became more familiar with American customs and traditions, like Thanksgiving or 4th of July, I began to recognize my optimism and desire to achieve as the American Dream. Regardless of how crazy our government and the world around us has become, the American Dream is still an ideal that we all cling to and hold true. Sure, it has changed over the years. For one, nobody is holding out for Social Security to support them as they grow older. But, at its core, the idea that we can all achieve a life of success and prosperity remains the same.
When we picture the American Dream, the majority of us visualize owning a house with a white-picket fence, having 2.5 kids and playing catch with a Golden Retriever in the front yard. Many of us have this idea painted so vividly in our minds, that we march toward this dream without ever stopping to ask why. Over many conversations with friends and peers, purchasing a home seems to be the biggest priority and financial goal for our generation. But when asked why, most people can't respond with any more than "I've heard they're a good investment."
When done correctly and for the right reasons, purchasing a home can, absolutely, be one of the smartest choices a person makes for his or her financial well-being. However, it is not a decision that should be entered into blindly or without a full understanding as to why it makes financial sense. After all, buying a home is the most complicated and significant purchase that you will ever make!
As a result of sitting through one too many conversations with people who either looked down on renting or who wanted to buy a home, but didn't understand why, I felt compelled to share my thoughts on home ownership, as well as break down common misconceptions about purchasing a home. At the end of the day, owning vs. renting isn't black and white, or inherently good or bad. There is a tremendous amount of grey area and personal preference. I hope that by sharing my thoughts below, you can feel confident in and comfortable with your decision to rent or to buy and to respect the choices that others make too.
Purchasing a home is not equivalent to purchasing a pair of pants at J Crew. Duh, right? Yet, I have witnessed many people approach these two decisions with the same nonchalant attitude and lack of knowledge and research. Before you buy a house, you should be an expert on the tricks and common mistakes home buyers make. You should know all common real estate terms and how to push and pull to get the best deal possible. With the popularity of guilty pleasure reality TV shows, such as Fixer Upper, people seem to have irrational visions of six-figure bank accounts and associate yacht vacations with buying a home. Understand that homes are primarily for living in, not for making huge cash gains.
You should buy a house only if it makes financial sense, not just to fulfill the American dream or because you have heard it is a good investment. When I say financial sense, I mean don't buy something that you can't afford. All of us lived through the recession of 2008. Buying more than you can afford will catch up to you at some point. Can you afford at least a 10 percent down payment? If not, set a savings goal and don't even think about buying until you reach it. For my more financially literate friends, yes, there are some exceptions and some great 3-5% down payment programs, but we will get to those more uncommon circumstances in a later, more in depth post.
Once you have a 10% down payment saved, do not approach the purchase of a home thinking, "Well, my rent is $1400 a month, so I could afford a $1400 mortgage payment." Wrong. Your rent does not include home insurance, property taxes, potential HOA dues or maintenance costs. You can expect to add between 30-40% of your mortgage payment to your monthly housing costs. In this case, your $1400 mortgage payment equates to about $1900 a month in housing costs. Could you afford a $1900/month rent payment? If not, you cannot afford a $1400 monthly mortgage.
Pro Tip: I LOVE the New York Times Rent vs Buy calculator to help you determine how much you can afford and whether or not it makes more sense to keep renting or to buy.
Another common misconception with home ownership is the degree to which it is a lucrative investment. In my opinion, real estate can be one of the most overrated investments in America. Real estate should be viewed as a purchase first and an investment second. As an investment, real estate provides average returns, at best.
First, the risk factor. If your house is your biggest investment, just how diversified is your portfolio? If you are paying $1000 a month to a mortgage, are you investing $3000 elsewhere to balance your risk? Of course not. Second, the return. I read an interesting study from Yale economist, Robert Shiller. Shiller explained that, when adjusted for inflation, the average return on a home over the course of the last 100 years has been close to 0%. Crazy, but true. With how quickly housing prices are rising today, it is common to hear accounts of someone purchasing a home for $300,000 and selling it for $600,000 15 years later. At first, this sounds fabulous. You think, "Wow! They made $300,000! That's incredible!" However, when you factor in property taxes, maintenance fees and the opportunity cost of not being able to invest that money in the stock market, the earnings on that sale are closer to $0 than they are to $300,000.
My intention with this post is not to dissuade anyone from purchasing a home, but rather to educate people on common misconceptions associated with home ownership and to ensure that everyone who purchases a home understands exactly why they are doing so. Over the next few weeks, I will be sharing a series of posts related to housing, ranging from A Case For Renting, A Case For Buying, Breaking Down The Lifetime Cost of Buying and many other relevant topics. As I mentioned earlier, a home is for living in, not for making huge financial gains. It is a roof over your head, first, and an investment, second. Buying a home can be one of the smartest moves you make for your financial future, as long as you can afford it and are ready for the responsibility.
As our country, and the world around us, changes quickly, I believe the American Dream is still very much alive. However, rather than march blindly toward home ownership, we need to evolve how we view this goal and try to achieve it for the right reasons. We can all live the American Dream, but we should understand that it looks differently for everyone. And that's okay. Success and financial stability is not black and white. Today, renting a chic downtown apartment, while investing, can be just as smart and respectable as owning a big house with a white picket fence.
It is my hope that my series on Renting vs Buying will help my peers to understand real estate as an investment, feel confident in their decision to rent or to buy and to begin thinking about a topic crucial to their financial future. If there are any specific questions that you have or any topics that you would like me to address, please comment and let me know!