My wife and I bought our first (and current) home nearly 8 years ago. We were in our early twenties, engaged, and only my wife had a full-time job. I guess it’s more accurate to say she bought the house and let her dead-beat fiance live with her.
It was 2010 and everyone was still reeling from the financial crisis. I had graduated two years earlier with a useless piece of paper called a Finance degree and was back in school to pursue accounting. My wife, the pragmatist, had chosen a marketable degree in her first go-round and was already 2 years deep in her career.
The housing market was still very much depressed, which is understandable considering it caused a world-wide economic collapse and all. In order to expedite the recovery the government instituted the First Time Home Buyer’s Credit, which padded our pockets’ with $8,000 when we bought our house. The move was designed to induce spending and assuage young people’s fear of the housing market and it worked.
We were heavily motivated by the First Time Home Buyer’s Credit. We were always eventually going to buy a house, but the credit definitely hurried the decision. For added motivation, we felt a lot of social and familial pressure to buy a house. Home ownership is a symbol of success, a way to demonstrate you’re maturing and your life is in order. I certainly didn’t meet that criteria, but my wife was the epitome of middle class success. Buying a home was so obviously the next conventional step that to do anything else would be ludicrous. So buy a home is what we did.
We like our house. We live in a small, new (at the time) build in the suburbs of a large city. It’s energy efficient, low-maintenance, and we don’t share walls with anyone. Our least favorite thing about home ownership turned out to be the mortgage payment. Debt is the worst! Really we didn’t have it that bad, our interest rate was a historically low 5% and because of our astute timing (luck) we bought our house near the bottom of the local market.
Still though, we didn’t like the feeling of being beholden, so in May 2017 we paid off our mortgage. The merits of paying off a mortgage early vs investing is debatable, and I discuss our reasoning in this post. One relevant factor is that we have a semi-pursued dream of being financially independent. Part of that pursuit is to minimize our fixed and automated expenses, reducing our income needs for the future.
The obvious assumption is that if you own your home outright it’s a much better financial situation than say renting an apartment. Now that we truly own our home, we’ll see if that holds up.
How much we pay to rent our own house
Despite not having a mortgage, we still have a lot of unavoidable home expenses. I think of these costs as the price of renting our own home. Let’s take a look at the numbers for 2017:
We paid $4,182 in property taxes, $993 in insurance, and $1,104 in maintenance. That’s $6,276 for the year or $523/month to live in our completely paid off house.
That’s not our total monthly living expense, it doesn’t include utilities or furniture and decor, it’s just the baseline bottom amount we have to pay to own that box.
Roughly half of the $1,104 spent on maintenance went to HOA dues and costs of maintaining our yard. If interested, you can check out this post for a detailed look at our 2017 spending. What’s frustrating about the maintenance costs is that we don’t get any value from the expenses, we don’t ever go in our yard except to mow and we’ve never used the community areas our HOA dues pay for.
Ok, but that is still way cheaper than renting
Very true. We would be hard pressed to find a decent apartment in our area for less than $523/month, but we haven’t considered the whole picture yet. We own our home. It’s an asset worth $200,000 (according to Zillow). That money is not working for us. A lot of people might guffaw and point out our home is an investment in itself, but I don’t really buy that. Unless you’re downsizing, rising home prices are not a good thing.
Home ownership does help people build wealth, but not because homes are a good investment. It works because a mortgage forces people to save. You have to pay your mortgage or you don’t have a place to live. That’s some strong motivation. Part of that mortgage payment goes toward equity, which is money you’ll “get back” some day. But the thing is you won’t get it back, not really, not as long as you live in a house for the rest of your life. Not to mention a mortgage is a terribly inefficient saving mechanism. You have to pay interest and it’s all front-loaded; your early mortgage payments are 90% interest and 10% principle.
How much could our home be making for us
The second part of calculating how much rent we pay to live in our own home is figuring the opportunity cost of the $200,000 tied up in our house. If that money wasn’t trapped in our house we could invest it. If you buy into the 4% safe withdrawal rule (which I do), then our $200k could support $8,000 a year in withdrawals. That’s $667/month! Add that to the $523/month we pay in expenses and suddenly the cost of renting our home is $1,190 a month. This is the house we OWN. We could definitely find a rental alternative for less than $1,190 a month.
An obvious counter-point to the safe-withdrawal of home value argument is that our home is also an investment. Meaning the value of our home is likely to increase and if we rent an apartment we’ll miss out on that appreciation. I’ll point you again to the post on why rising home prices are not a good thing. If your house appreciates 3%, so does every other house. You’re not gaining anything, you’re just keeping up. Meanwhile your carrying costs increase right along with home values; your maintenance and utilities likely rise and your property taxes definitely go up. Not to mention you can’t withdraw your home appreciation; when Zillow says your home value went up $3,000 you can’t go take it out of the bank. It might make you feel more wealthy, but you’re not.
Some other considerations
Your utilities are likely higher in a house vs an apartment. The $1,190/month we pay to live in our own house doesn’t include any major repairs. Our roof wasn’t replaced, our foundation wasn’t fixed, and we didn’t have to replace a failed fridge or washed out washer. $1,190 is the minimum we’ll pay to rent our own home.
We live in the smallest and cheapest maintenance-free house in our city. It is off in the suburbs, not close to our work, entertainment, or public transportation. For $1,190/month we could rent something in a more desirable area and have more flexibility to easily move in the future.
Not directly comparable
You may be wondering why don’t I just sell our house already. Well so far this analysis has treated living in a house as the equivalent to renting an apartment. It’s not. Ignoring the financials…
We don’t share walls with anyone! Our house is sooo quiet, it’s wonderful. Our cars get tucked into a nice garage, free from the elements. We paint our walls however we want and change them without asking permission! We can have friends over late at night and talk as loud as we want. I can watch movies at 11pm on top volume. When family or friends come to visit they have a place to stay. If we ever have children the schools in our area are highly rated (the merits of which are debatable, but another time). We have more space, even though our house is on the small side, it’s bigger than apartments in the same rental range.
We spend a lot more time maintaining our residence. Our lawn especially, but also more square feet means more to clean and furnish. Our location is less convenient meaning longer commutes. Picking up and moving isn’t near as easy. When things break it’s our problem.
So What’s the Point
If there is one, I think it’s that you shouldn’t use financial well-being as the primary reason for buying a house. The numbers just aren’t there. We own our home free and clear and still spend $6,300 a year to live in it. Our home equity also comes with $8,000 a year in opportunity costs. That’s over $14,000 a year going toward our completely paid off house.
All of this doesn’t mean buying a house is a poor financial decision. It just means it’s not solely a financial decision. There are many reasons you may want to buy instead of rent, but try framing that decision as a lifestyle choice and not strictly a financial one. Try to see past the societal pressures of home-ownership as an inevitable step toward adulthood and make the decision that is right for your circumstances.
Or at least think about it. Don’t just do it because it’s a thing people do.
If you do decide to buy a house, do yourself a favor and buy a small one. Oh and also drive small used cars.