6 Simple Reasons Why You Shouldn't Buy a Home
byMay 29th 2012 3:16PM
Houses are cheap. Interest rates are low. And the economy is improving. Even Warren Buffett says that housing might be the best investment today.
So should you run out and buy a home?
Although owning your own home is often associated with achieving "the American Dream," it's arguable that could also be your worst nightmare -- an investment that costs you more money, time, and happiness than you realize.
Here are six reasons not to buy a home.
1. You'll Develop an Emotional Attachment.
Realtors know how powerful this can be.
Walking you through a home, they'll have you envision yourself bathing in the Jacuzzi tub, preparing Thanksgiving dinner for your family in the kitchen, and snuggling up to your spouse in front of a roaring fire in the living room.
You're hooked before you even put the keys on your keyring. In your mind, you already live there.
Imagine the same with a stock. Would you envision it going up ten times in value? Do you think about how happy it'll make you, and how you'll spend the profits?
Secretly, maybe. But it's not -- or at least it shouldn't be -- the main reason for investing in a company.
When you're in love with an investment -- any "investment" -- emotions get in the way of your rational thought process, which often leads to stupid decisions. That's why plenty of investors end up selling their winners way too soon and hold on to their losers in the hopes they'll come back around someday.
2. You'll Be Buying Something with a Horrible Track Record.
Home prices always go up in value, right? After the recent real estate bubble burst, we all now know this isn't true.
But what you may not know is this was true even before home prices began falling.
Homes appreciated at an inflation-adjusted 0.4% annually from 1890 to 2004, according to Robert Shiller in his book Irrational Exuberance. Consider this: A $100,000 home is historically worth only $112,723 after a 30-year mortgage is finally paid off. Whereas $100,000 invested in large-cap stocks -- assuming that market segment's historical rate of return -- would be worth $719,677 if they earned their long-term average return, even after adjusting for inflation.
Bottom line: Homes are historically not a profitable "investment."
3. You'll Take on a Huge Amount of Leverage.
Knowing that homes appreciate slowly, does it make sense to devote 28% of your income for 30 years to pay down a loan you took out to buy your dream home?
For those still wed to the "a home is an investment" argument, let's tweak this scenario a bit. Would you take out a loan to buy stocks that will probably end up being worth little more than the initial amount you invested, and then slave away at a job you hate for three decades just so you could shell out one third of your income to pay for them? No.
Sure, there are tax benefits attached to the interest you pay on a mortgage, but as James Altucher pointed out in a recent column, it's "a microscopic dot on your tax return." The debt enslaves you to that home -- and your job.
4. You'll Toss Liquidity Out the Window.
Need cash in a pinch? Good luck getting it from the home you're heavily in debt with.
True, you could try a home equity loan or line of credit, but that'll only enslave you even more to the home and boost your mortgage payment. Plus, if your area sees a decline in home prices, it could ultimately send you underwater on your home.
5. Your Portfolio Will Become More Concentrated Than You Realize.
For most Americans, a home becomes the largest investment in their portfolio. Ridiculously large. After all, how many people with a $100,000 home also own $900,000 worth of stocks (meaning the home is a reasonable 10% of their entire portfolio)?
And it's an investment that, again, you're emotionally attached to, appreciating slowly, don't own outright, and wholly dependent upon the local economy of the specific geographic location your home is in.
6. You'll Have to Give it Constant Attention and Invest More Money in It.
Whereas some stocks pay dividends, homes work in reverse. They require a growing percentage of money to be spent on them to keep them in working order.
The walls will need repainting. Your dishwasher will break. You'll need to replace the roof. And this adds up -- meaning saying goodbye to even more money than you already thought you were spending, and spending even less time enjoying your life.
Add it all up and you can see why buying a home just to cross it off your bucket list, as an investment, or to fulfill your idea of the American dream can be a costly mistake.
If you can convince yourself to get over this mental hurdle and instead rent a home, then invest extra money in the market's best stocks. You'll be wealthier, freer, and happier in 30 years.
This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on how to ensure a wealthy retirement.