Wednesday, June 25, 2014

Are you afraid to buy a house?

Recently, for the nth time, I was listening to a housing economist discuss the Millennial generation – again predicting that they will be a generation of renters.   I heard the well-worn litany of arguments: this generation witnessed their parents get burned on their homes during the recession,  Millenials don’t believe that homes are an investment, they have difficulty getting mortgages, they are forming relationships later in life, etc., etc.    I agree that in the immediate aftermath of the housing crisis, these factors were true and valid.   But these issues are temporal and rapidly fading – and certainly not a permanent condition of the Millennials.

My experience is this: young people have recovered confidence, want to own a home, can now get a mortgage and, most importantly, are smart enough to know that buying a house is a no-brainer.   I also believe they have acquired wisdom from observing their parents: they want smaller, greener, lower maintenance homes - a home that works for their lifestyles and priorities.  (see my post on rightsizing your home for a happier life

With the proliferation of rent-versus-buy calculators, I was curious to check the numbers for myself.   I took a look at buying a house in our project, Skyview, as compared to renting a similar home in the area.   In my analysis, I took the ‘no investment’ perspective of the young buyer and assumed zero appreciation over 15 years.   At first glance it appears that home ownership is more costly than renting -- by about $4k per year.  (check out the numbers below)   But when you compute the interest tax deduction and the equity from your mortgage principal, you save $22k per year versus renting!    Over 15 years, that’s $332,000.

Now, let's be a little bit optimistic on home appreciation.   Even taking the recent housing crisis into account, long term home price appreciation roughly matches the rate of inflation.   Three percent per year seems to be a generally accepted long term housing appreciation rate.   If you add this appreciation into the analysis, your home value increases from $429,000 to $668,000 in fifteen years.   The overall difference between buying versus renting with 3% appreciation exceeds $572,000!   So Millenials out there, consider this: if you  earn $90,000 a year, that equates to 6.4 years of working. If you value your time and life balance, 6+ years is a lot of time to sacrifice.  Even more striking, according to a recent Gallup Poll, the average retirement age is 62 and the life expectancy of someone born in 1985 is just under 75 years which equates to 13 years of retirement.   By this analysis, if you own a house for 15 years, you could potentially increase your retirement years by almost 50% from 13 to 19+ years.

So don’t be afraid to buy a house – be more afraid not to!      

In this analysis, I only looked at a 15 year period and did not take into account the incremental investment income that can be derived from the savings.  As you take these additional variables into account, the argument for home ownership only gets stronger.

I don’t pretend to have a crystal ball for the future.   We could have another housing crisis and homeowners may be under water again.   Or, we may high inflation due to all the government spending since 2008 and owning a house may become all the more important as a hedge.   Nobody knows and each person has to make their own decision and risk calculation.   But I know that Millennials are more intelligent than the current conventional wisdom reflects.

As always, comments and counterpoints welcome.  If you want a copy of this spreadsheet, just send me an email.   Check out Skyview