For generations we’ve pledged allegiance to home ownership. Our parents, teachers and presidents told us it would be our ticket to wealth, prosperity and happiness. It’s partly why I bought a place in Manhattan five years ago. But that sentiment is, for obvious reasons, changing. Our recent housing debacle has erupted into a debate over the actual benefits of homeownership.
Some critics argue that renting a home is far more financially attractive and less risky, with some three million homeowners expected to face foreclosure this year alone, according to RealtyTrac. That’s up from 800,000 foreclosures in 2005. And if you bought a home during the peak of 2006, chances are, no matter where you are in the country, you feel a little or a lot duped.
I Heart Ownership
Call me crazy, but I’m still rooting for home ownership. Maybe it’s old-fashioned but I still think rent is “money down the drain” in a lot of cases. Remember, one very big reason why our real estate market is in shambles today is because banks handed us these laughable mortgages and we, in turn, became over-leveraged and unprepared for home prices to slide. We were also a flip-obsessed country, believing that quick gains from buying and selling were almost guaranteed.
Home ownership, when practiced properly (i.e. paying at least 15% down, planning to live in the home for longer than five years, signing off on an affordable fixed-rate mortgage, having a savings account and no credit card debt) is not the real menace to our financial livelihoods. What is scandalous is putting zero money down on a $500,000 home, while earning, say, $50,000 a year. It’s the irresponsibility with which banks and individuals entered the housing market over the past several years that is mainly giving home ownership a bad rap. But hopefully we’re learning our lesson.
Government intervention is playing a role in the recovery and we’re seeing prices stabilize. Real estate agents, once again, are getting very busy. In California, the hardest hit state, folks bought 600,000 homes in February, up 80% from a year ago. A turnaround looks to be in the works and now is a great time, especially for newbies, to get in the market.
“People have very short memories,” says Jacky Teplitzky, executive vice president at Prudential Douglas Elliman in New York. “The [critics]…are those who bought their homes two years ago and need to sell them now. But if you look at people who bought, let’s say, in year 2000…those people still have equity and they are still ahead of the market.”
Owning is not for everyone. First it needs to make personal financial sense. Your mortgage payment (plus taxes and maintenance) will likely become your biggest monthly expense, so the best homeowners are those who’ve got all their financial bases covered as discussed up top. After running the numbers, you also want to make sure you have the stable, grounded lifestyle best suited for owning a home. Do you see yourself living in this house for at least five years? If you plan on moving around soon, rent may be a more flexible way to go.
5 Reasons Why Buying Rules
Here's my crib sheet on five way buying a home trumps renting. (Let the hate mail begin.)
1. Tax breaks. First there’s the mortgage interest tax deduction, which typically lets you deduct all of your mortgage interest from your taxable income if your mortgage is less than $1 million. Note: President Obama is proposing to lower the mortgage interest tax deduction for upper-income Americans. Property taxes are also fully deductible. Next, there is the $8,000 federal housing tax credit for first-time buyers and those who haven’t owned a home for at least three years. That expires Nov. 30. Finally, home improvement costs can often earn you a tax break, as well.
2. Your home is yours to change. Want to paint the walls, rip out the carpet or extend your deck? Go for it. When you own a home you usually don’t have to get permission to remodel your house, unless there are zoning issues or co-op boards to deal with. Remember to keep your receipts; there will be some nice tax rewards for your home improvements come April 15.
3. Better for the neighborhood. Home owners tend to take better care of their properties and surrounding land. “In general, people who own their properties will look after their yards, take more pride in homeownership and repairs,” says Ron Lypchuck, a realtor with Prince Albert Re/Max in Canada. “You can always pick out a rental property in a block…The yard isn’t looked after, the house hasn’t been maintained well... There is just more pride in ownership.”
And beyond their homes, owners tend to be more concerned with the maintenance and safety of the surrounding area. “They’re more likely to join the neighborhood watch…and also concerned with their neighbors’ homes. [Ownership] instills more of a community feeling,” says Marjorie Wallace of Prudential Ruby Hill in Pleasanton, Calif.
4. Better for your budget. Assuming you get set on a fixed, affordable mortgage you can better plan your life’s budget by owning, since your monthly housing costs will more or less be fixed. But a landlord can change the terms of a lease once it expires.
5. Kids get better grades. Knowing you’re in a home for the long run can provide comfort to everyone in the household, especially the kids. “I’m a mom myself, and a stable environment always contributes to the children’s well being…It’s not easy to move with a family every two years,” says Teplitzky, who says renters risk having to move every one to two years after their lease expires if, say, the landlord wants to rent to others or raise the rent. There have been studies over the years that actually link home ownership to children performing better in school. “It just makes sense,” says Wallace. “If kids are uprooted it’s hard to have outstanding test scores.”
Looking for reasons to keep renting? We've covered that, too.
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