Rethinking Housing: The Meaning of Homeownership has Changed

The meaning of homeownership has changed.

Here is what it means to be sensible about buying a home:

  • You should save up at least a 20 percent down payment.
  • You should get a 30-year fixed-rate mortgage.
  • You should spend no more than 30 percent of your gross income on housing.
  • If you have student loans or credit-card debt as well as a mortgage, your total debt-to-income ratio should be around 36 percent.

That means a couple making $80,000 a year should look to put down $60,000 on a house costing not much more than $300,000. To have the best chance for appreciation, you should also be planning to stay in the house for at least five years and preferably more.

Can’t Afford It? Don’t Buy It

For many people, following those rules makes the buy-or-rent decision easy. They don’t have the down payment money to afford a place in a city they want to live in and a job market that has the opportunities they need. Or they don’t plan to stay in the same city for more than a few years.

But let’s say you do have some money saved up, or parents who are willing to help you buy a home. It still may not be the best idea. In most cities, rents are still much lower than monthly mortgage costs for similar homes, so your home has to appreciate significantly in order to be a decent investment.

Over the long term, instead of putting all your eggs in one basket – a single property, in a single market – consider a buy and hold approach for stocks and bonds, focusing on low-cost exchange-traded and index funds.

For a young consumer looking out over the horizon of your life, saving and investing som money in the stock market and forgetting about it is the best thing you can do. You’re going to be much better off over the long run investing in equities than if you rush into a house that you’re going to be out of in five to seven years.

For many of us, a home purchase is far more than a financial investment. As homeowners, we’d be more committed to a community, which would be good for us now and even more important when we want to start a family. It’s an automatic savings plan. It’s a symbol of adulthood. And of course, it’s a place to live, one where you can remodel the kitchen and replant the yard (if you have a yard).

Think of homeownership as only one piece of the investment puzzle. Have a broader, more diverse, lifetime investment strategy that includes stocks, bonds, and domestic and overseas investments.

If there’s anything we can learn from the housing downturn, it’s that financial security doesn’t come automatically with four walls and a roof.

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