Should I buy a home?

When a coworker asked my thoughts on home ownership my mind immediately jumped to a law school lecture offered by an opinionated and confident New Yorker professor. That particular morning he showed up about ten minutes late; class was cancelled if the professor arrived more than 15 minutes late. He began by acknowledging that he did not understand the need of every single person he met out West to own a home. Even though he was late because the he just closed on his own home, he didn't think it was a good idea.

We discussed three primary reasons that people use to explain their decision to purchase a home:

• They don't want to throw good money away on rent when they could buy. 
• With interest rates low, it is cheaper to buy a home than pay rent. 
• Home ownership provides a great investment. 

My professor then went on to explain how these claims frequently turn out to be more dream than reality. Rent just seems like throwing money away. What do you have to show for it once it's gone? To some degree they have a point, but often that point takes many, many years to become a reality. In a 30 year amortization schedule, a homeowner will pay substantially more in interest than they will  in principal. After 18 years in a home I still throw more interest away to the bank than I accumulate in equity.

But at least some money is going to principal and that has to be a better bargain than rent, right? Not always. Home owners spend a whole lot more money on their house and property than the mortgage. Some years the costs of repairs, upgrades and general maintenance amount to even more money than the cost of the mortgage, taxes and insurance. When you are the home owner you become responsible for everything from fencing, landscaping, roofs, appliances and so much more. Buying a home is never as cheap as you might think it is. In comparison renting often proves a bargain.

Almost every investment advisor will agree on the benefits of diversification. Home ownership comes with tremendous risk. The concentration of assets in one investment seldom results in reasonably expected growth. Markets can rise but they also can come down. Additionally, you can really only take advantage of any market increase by selling your home; but unless you buy a smaller home or leave the area, you will be paying more for your new home because the same market growth that increased the value of your investment increased the cost of your new home.

There are good reasons to buy a home and not rent but these three reasons aren't foolproof. I told my friend of one great reason to buy a home; buy a home that you love and a home where you would happily live for the rest of your life. If you haven't found that home, you should keep on renting. It really doesn't cost that much.