Tuesday, January 19, 2010

Realigning your financial dreams


Owning a home is the quintessential example of having made it today. Or it was before the recent housing bust. Once you have a job with a steady income everyone I know purchased a house almost as if by clockwork. So did a friend of mine. An engineer by trade with a wife working in IT, he had bought a house in a quiet subdivision in an up and coming neighborhood in Michigan (not Detroit). The only way he could see himself going was up.

Fast forward almost 5 years and he's laid off with 3 kids and a mortgage to support. Fortunately for him, his wife makes a decent salary and he also dabbled in some side businesses which were seeing some profits. But his house on the other hand was losing its value. Apparently what he had bought for $220000 had depreciated to $140000.

I talked to my friend over the weekend. He happens to be a tad bit older than me, and he said that if he could offer any advice he'd tell me not to buy a house. Don't buy a house? That was contradictory to everything I had  heard before. Wasn't it the first milestone on your path to financial success? Wasn't it supposed to be the 'smart thing to do'? Others my age were buying fixer uppers with the intention of making a profit down the line. But now this guy was telling me to hold on to my savings and invest it somewhere else. What ever happened to the American dream?

This conversation made me re-evaluate my goals. For a while now, I had felt queasy about buying a house, seeing the 'foreclosure' signs mushrooming everywhere. The only thing stopping us from buying was our lack of a decent downpayment. And now I was getting advice not to "waste my money on a house.

What do you think? Is it still financially sensible to buy a house as an investment? Would the housing market rebound any time soon?

As for my friend, he's realigned his goals alright. He's fed up with everything - the house, the rat race, the scarcity of jobs, etc. So he's packing up his wife and kids and moving to Canada to focus on his businesses!
Posted by thriftygal at 4:52 AM
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7 comments:

  1. Hey Thrifty,

    I think your friend is really smart to realize that housing investments aren't for everyone. There's a common myth that real estate was the best investment because (1) you could live in it so you save money in rent and (2) real estate values will always go up.

    I think most of us now realize that real estate values will not always go up.

    That being said, real estate prices are way off their peak. Whether or not, they've hit the bottom or not - no one knows.

    From an investment standpoint, just like any other investment, it's a question whether or not you feel the value will rise over your investment horizon.

    If you're going to live in your house today, it matters less whether or not the housing market will rebound anytime soon. It matters what the value of your house is at the time you want to sell it. Just keep in mind, transaction costs are high.

    From a tax perspective, housing does have its benefits because you don't have to pay taxes of $250k ($500k if married) of the gain if you meet certain other criteria (whether or not it's your primary residence; if you sold another primary residence in the last two years, etc). It's something to look into.

    Good luck!
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  2. I'm very happy with my investment in our house. But I really don't view it as an investment...

    My wife and kids are much more attached to our house than I am. Perhaps it's because as a kid I was shuffled around quite a bit, the longest I've ever been at one place before now was 8 years...

    I find that I try to maximize maximize the experiences my kids have growing up. Having stablity in housing I think is an important part of that experience.

    Pre-kids, anything goes ;)
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  3. This is a great post! Here's my two cents for what it's worth! :)

    I'm not against home ownership by any means but I am beginning to really question this idea of it being the American Dream. Not that a home is not a great goal to aspire to, but there are other dreams that are just as valid.

    We are renters because we live in Southern CA and the housing market here is ridiculous. Even if I had the money for a 500,000 2 bedroom condo, I would not consider it a good use of our money. We can rent something (and we do) that is gorgeous and not have to worry about the upkeep, taxes, insurance, etc...If I'm going to get myself into serious debt for 1/2 million dollars plus, I sure as you know what better love the place. So far all the places, I love here are way more than 500,000, so renters we will be for the time being. We have made a choice to live in a very expensive area and the trade-off of being renters is fine with me. Also, everyone I know who has bought complains about the upkeep.

    I'm sure we will buy one day but not now. I think you should buy if you want to and if it's the right time for you and your family's finances. As far as housing values in the future, I think we are entering into unprecedented territory in all areas of our economy so I cannot even begin to predict that one! But returns on investments can often come in non-monetary ways that are just as rewarding.
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  4. I'm gonna go the Rich Dad poor Dad route here and say that a house is not an investment. Investments are things that provide an income on your dollar. A house on the other hand is something that you need to feed.

    My personal take would be if you're going to stay in an area for at least 5 years, buy the smallest house you're comfortable with, or better yet consider purchasing a 4 family since those are still valid for residential loans. Often the 3 other units will support the majority of the loan, thus, it's an actual investment. If you lose your job, the property would still support itself.

    Kudos to your friend! The recession is a good thing because it's made us evaluate why we do the things we do. Sitting in a cubicle for 30 years to pay for a big McMansion is not what we were born to do.
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  5. This is such a pertinent topic for me. My husband and I have a goal of purchasing a house within the next year. However, we too don't have our down payment saved yet.

    The whole reason I want to purchase a house isn't so much as an investment opportunity, it has more to do with the fact that our rent is about the same as a mortgage payment (if the mortgage was around $250,000). Also, eventually as we enter our retirement years, the goal would be to have the mortgage paid off. I guess the idea of owning a home really boils down to whether it will be a savings in the long run. I think I now need to make a pros and cons list!
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  6. Thanks for all the feedback guys. I was very curious to find out how this post was going to be received because I feel like I myself have realigned my dreams of owning a house. Before, it was something I was looking forward to checking off a list. But now, I'm not so sure I want to own a house. Like Don said, I want experiences for my daughter, but I feel like owning a house might have a huge opportunity cost.

    And we were also thinking of buying a multi-family house, because a former colleague of my husband's is apparently having his renters support the majority of his mortgage. But this is a big if for us as of now.

    And Piage, $500k for a 2 bedroom condo??? How shocking! And I thought Boston was bad...
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  7. Having my own house one day is a dream of mine. That being said, it's a huge risk and not one to be taken lightly, especially when we don't have 30year mortgages (the longest a rate can be fixed for is about 5 years).
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Have something to say? Disagree with me? Please leave a comment as I'm always looking to expand my horizons.

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