Buying your first house: Are the trade-offs acceptable?
Buying your first house is a big deal, there’s no question about it. But does the purchase of a first home mean your lifestyle will change forever? That the things you love to do will be lost in a flood of ownership tasks and big expenses?
First-timers feeling the squeeze
Part of the reason the lifestyle question comes up is that first-time buyers have less marketplace presence than in the past. The National Association of Realtors says first-timers historically made up about 40 percent of all existing home purchases. For 2018, that figure dipped to 33 percent.
Because there are relatively fewer first-time buyers, we sometimes forget that homeownership represents more than just shelter. Buy a home with a fixed-rate mortgage and you effectively have a hedge against rising real estate costs. As an owner, you have more freedom to have a pet, paint the walls any color you like, and plant whatever you want in your garden.
Equally important, real estate is the vehicle used by millions of families to create household wealth. While no one can promise that real estate values will always rise — that’s certainly not the case – the general trend suggests that for most people, homeownership has been a good way to grow net worth.
“There is a reason so many Americans choose to develop their net worth through homeownership,” said The New York Times in 2017. “It is a proven wealth builder and savings compeller. The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter ($5,400).”
The buying-your-first-house quiz
Okay, let’s get to the main issue. Will buying your first house ruin your lifestyle?
Everyone will have a different set of answers depending on finances and particular interests, but here’s a good way to look at how ownership might change your life.
Will your monthly housing costs go up?
This is a tricky question. A recent study by ATTOM Data Solutions found that “renting a three-bedroom property is more affordable than buying a median-priced home in 442 of 755 U.S. counties analyzed for the report — 59 percent.”
If you have a rental unit with a $1,500 monthly lease and a home with a $1,500 monthly mortgage cost, it might seem as though the expenses are equal — but actually that’s not the case. With the rental unit, the $1,500 goes to the landlord, while with a home monthly mortgage, cost includes interest as well as a principal reduction. In other words, part of the cost of ownership is actually a form of forced savings because the size of the mortgage debt is reduced every month.
If you combine generally rising prices with mortgage amortization – the gradual reduction of the amount owed each month – you can see how a lot of owners come out ahead. “Home sellers in 2018,” says ATTOM, “realized an average home price gain since purchase of $61,000, up from $50,000 last year and up from $39,500 two years ago in 2016 to the highest level since 2006 — a 12-year high.”
And what about renters? When they move out, they have no claim to any equity in the property. They get zero.
Will owning real estate cramp your style?
A big issue for first-time buyers concerns the type of property they buy. If you stretch and purchase a home that represents too much of your monthly income you can wind up being house poor. “House poor” is an expression which means you have enough money to pay the mortgage but not much else.
A good way to avoid being house poor is to check your debt-to-income ratio (DTI). The DTI is a measure that lenders use when reviewing mortgage applications. Generally what they like to see is a DTI of less than 43 percent. As an example, imagine that you have a gross household income – the income before taxes — of $8,000 per month. In this case, $3,440 ($8,000 x 43 percent) will be allowed for housing costs like mortgage principal, mortgage interest, property taxes and property insurance (PITI) plus required recurring monthly costs like student loans, auto financing and credit cards.
Will the DTI protect me from being house poor?
While the DTI is a useful measure, it does not take into consideration all monthly costs. For example, daycare is not included, nor does the lender look at such things as commuting costs, home repairs, or what you spend for hobbies and restaurants.
A good way to figure if you are living within your means is to have a monthly budget, stick to it, and save money every month. With cash on hand, you’ll be able to pay your bills on time and in full and thus avoid late fees and nasty credit dings which will make mortgage borrowing more expensive.
Doesn’t buying your first house make it harder to move?
Maybe yes, maybe no. As a tenant, you have an obligation to complete the lease term. If you have to move to get a new job 100 miles away, but the lease has six months to go, that will be something which needs to be worked out with the landlord.
If you own a home and you need to move to get that special job, you can either sell the property or rent it out. How well either choice works will depend on your local market.
The bottom line is that both renting and buying your own house have their pros and cons. What works best for Smith might not be so good for Jones, and vice versa. To get a better understanding of your situation and how it might be affected by purchasing your first home, it’s useful to qualify for financing with a lender and speak with real estate brokers who are active in the areas where you might like to purchase or rent.