Should I Buy a House?

If you don’t follow Zillow Gone Wild on social media, I highly recommend it. People make some… interesting choices with their homes.

If you’re just joining us, check out Part 1: The Costs. A short summary: owning a house costs a lot of money. Please make sure you understand all the potential costs before deciding if it’s right for you!

I have a bit of an unpopular opinion, but I don’t think your primary residence should be considered an investment. It is a necessary liability. Robert Kiyosaki, author of Rich Dad Poor Dad, states it simply: an asset puts money in your pocket every month and a liability takes money out of your pocket. The costs with your home are only going to go up. Your monthly escrow payment, maintenance, and utilities are all going to go up.

But, Wilson, the value always goes up! I will sell it for more money! Not entirely true… If you bought your first home in 2019, then yes, you have seen a massive increase in value. Please don’t let the past four years affect your judgment. Like always, let’s look back at history!

*A quick note: using historic home prices for the entire United States to make a decision for your town is a bit like using a satellite photo of the entire United States to find the prettiest town to live in. It doesn’t make sense. If you want more specific data, look up historic home prices for the town you live in.

Here’s a graph of the inflation adjusted home price from 1987 - 2023:

The big mountain is the 2008 housing bubble. If you bought a house in March 2006, your home value didn’t come back until March of 2021, 15 years later. If you are looking at that mountain we are on right now, you might be thinking “there’s another bubble!” Although I don’t have a magic ball, now is not 2008. The recent spike in home prices is primarily caused by supply and demand problems and low interest rates from 2008-2022. The 2008 bubble was caused by extremely relaxed mortgage standards and variable rate mortgages. When higher rates kicked in, people defaulted and the bubble burst. All that to say, I think we will see home prices decrease as they adjust for higher (not high though!) interest rates and then hold steady. However, only fools try to make predictions, so I am very prepared for six months from now when someone will send me a screenshot and laugh at how wrong I was. Let’s look farther back in history.

Here is the 1953-1983 inflation adjusted home prices:

Over this 30-year period, home prices decreased when adjusted for inflation.

Okay okay, enough of the graphs. The average home price, since 1991, has increased by 4.3% annually. With current interest rates around 7%, it is costing you more money to buy the home then it can reasonably be expected to increase in value. As I said before, each city varies greatly. If you bought a home in Austin, TX ten years ago, you are laughing at me. But let’s compare it to the alternative, renting.

Scenario, you buy a house, live in it for ten years and the price increases by 3% per year. Your friend, Mike, rents for ten years. His rent increases by about 5% per year (greedy landlords). Let’s see who makes or loses money.

I am going to steal all my numbers from the last letter:

Home Price: $436,800

Loan: $349,440

Cash to Close: $104,832 (20% down payment and closing costs)

Total Monthly Payment: $2,902*

*As a reminder: this includes estimated maintenance costs and saving for large expenses but no costs also associated with renting (utilities).

In ten years, you’ve paid $348,240 in monthly payments and $54,616 of that went towards your loan principal bringing your loan balance to $294,824. Now let’s sell:

Offer: $560,000 (exact 3% increase per year would be $569,924.926696613)

Loan Balance: $294,824

6% Agent Commission (3% for each Real Estate Agent): $33,600

Closing costs: paid by the buyer

Cash to You Today: $231,576

Cash you paid ten years ago: $104,832

Ten Years of Payments: $348,240

Total Cost of Homeownership: $221,496

Mike, your friend, rented a similarly sized house for $2,000 a month during year 1 (just using my local area for comps). By year 10, his rent is $3,100, and he has spent $301,560.

You’ve spent $80,064 less than Mike. You didn’t actually make money, but you did save money when compared to renting. Money that you can use to invest, pay off debt, or buy Yankee Candles.

Of course, the terms of your loan, home appreciation, and varying rent increases can all affect how much you save/earn by buying instead of renting. If you pay a small down-payment (say 0% with a VA loan or 3.5% with an FHA loan) and see significant home appreciation (like the last 3 years), you may turn a profit by buying. But I don’t have a crystal ball, and you probably don’t either (but if you do, tell me if crypto is going to skyrocket or self-destruct in 10 years).

But, you have to live somewhere! Housing costs are a necessity. I personally like buying because of the chance of making money. Jim Carrey and I are similar in that way. We get excited at the chance, no matter how small.

People who are anti-home buying love to say “your mortgage is the least you will pay, your rent is the most you will pay,” since you are on the hook for all repairs. The flip side of that statement is a renter gets no money back if home doubles in value.

People who are serial buyers love to say “if you rent, you’re paying someone else's mortgage.” The flip side of that statement is, if you rent out your house, you have to pay whenever an appliance you literally never use breaks.

Neither statement is entirely accurate. There is obviously the chance your home could increase in value, but there is stress and risk associated with that. The home could also decrease in value, and you’re still on the hook for the entire mortgage. Renting does not come with any of that baggage.

The truth is, you should live in a place that fits your budget and makes you happy. Whether that is renting an apartment walking distance to your favorite yoga studio or buying a farm house with random deer in the backyard, you should make the decision that’s best for you. Keep your monthly costs below 30% of your income, and I bet you will be happy with your decision.

In Part 3, I will go over some other things associated with home buying: refinancing, renting out, 1031 exchanges, etc.

Call to Action

Research home values in your town or desired town. Get a better idea on trends and appreciation rates specific to your situation.

What We’re Reading/Listening To:

The Weekly Juice Podcast. These guys live, breathe, and earn their living off of real estate. If you’re interested in taking the plunge into real estate investing and hearing from other people in the space, check it out.

Debrief on Deck

Next week, Mike is going to talk about emergency funds. The only ‘fun’ in an emergency FUNd is using it to buy 10 Yankee Candles because running out is truly an emergency.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (Twitter and Instagram).

Until then, stay the course.

Disclaimer