I have a friend who is contemplating buying a first house with his girlfriend. Having owned two houses, and having purchased both while involved with girlfriends, I thought I could share some thoughts. Names changed to protect the innocent.
If you guys want to buy a house, by all means, go buy a house. I merely want to share the wisdom I’ve accumulated from my own misadventures in home ownership and the mistakes I’ve made.
So a few random thoughts, in no particular order.
Why do you want to buy a house? Is it because you want to live in a house? Is it because you want to be able to paint the walls? Is it because all your friends have a house? Is it because you think it’s a good investment? Nail down the answer, and it will help you think creatively about whether buying a house really is the best way to achieve those goals.
Houses are Great
It’s fun to own a house. I personally have gotten great fulfillment out of having some extra space to spread my stuff out, learning how to fix things, taking creative control over things like paint color and light fixtures, etc. I have loved every Saturday spent learning how to wire up a new outlet in a room. [My wife] has loved choosing paint colors and picking out furniture for all the extra rooms. It’s a tremendous luxury to go to the taxidermy store on Mississippi and decide not to buy the lion head because I don’t want to spend the money, not because I don’t have the space for it. It’s fun to be able to throw parties and invite 40 people. I’ve really enjoyed the experience of owning a house, on balance.
You want to live in a house together. That’s all fine and good. But the devil is in the details. Both times that I bought a house, I was in a relationship. Neither time did I attempt to “co-buy” a house with the other person. If, heaven forbid, you two were to break up at some point, it is much easier if one person owns the house and the other is a tenant. You can always change that later and add someone to the title. We know a couple who own a house together, got divorced, and now live in it together while their separate girlfriends and boyfriends come and go, because they are so underwater on the house that they cannot sell it. At the very least, make a plan if you co-buy about how you extricate yourself from this huge, illiquid liability should your lives take different paths.
A House Will Close Doors and Kill Your Life as You Know It
A house is a huge and illiquid asset, and a huge liability. If you own a house, you don’t really open many doors, but you close many doors. Doors like moving to a different city to find a better job. Or even taking the opportunity to find a different job locally — imagine a case where you find your dream job but it pays $30k less than your current one. The decision of whether to take it is a very different one with a $700 rent payment versus an $1800 mortgage payment. So, owning a house not only commits you to Portland, but it also commits you to a certain income. Which means that you have many fewer options professionally.
In many ways, life offers you a tradeoff between an optimal dwelling and an optimal work life — because one is a significant drain on your cash flow, and the other produces all your cash flow. Since a house is optional but a job is not, I’d recommend levering up to buy a house only if you are completely satisfied with your job. If you are not, then get a job that completely satisfies you, then affix yourself to the permanent negative cash flow associated with a house.
A house is like reverse golden handcuffs, and owning one actually benefits your employer more than it benefits you. Imagine that if you ever wanted to leave your job for one in a different city, you had to write a check for $40,000 to a bank. Lots of people are in that boat right now because their houses are worth less than their mortgages. And employers know it! The rational response for a certain type of employer under this scenario would be to not give you the raise you otherwise deserved, because they know you can’t go anywhere else.
On a smaller scale, think about what owning a house will do to your lifestyle. When I owned my last house [when I was aged 23-26 or so], I remember many Saturdays when I wanted to join you and [our good friend] for Saturday day-drinking on bikes, but I couldn’t, because I had to mow the lawn. I had to do it because if I waited another week to do it, the grass might be wet, or too long to mow. I remember when I was selling the house I had to be home every night to water the plants, because if I didn’t, they would die, and the several hundred dollars I spent on them would have been wasted. That meant no happy hours, shopping, etc. Heck, just yesterday I spent all morning and part of the afternoon up on a ladder fixing leaky gutters. Why did I have to do this? Because the weather was nice. Yes — the weather was so nice that I had to fix gutters, while they were temporarily dry. A house affords me plenty of storage space for my stuff. Plenty of space for my bike to sit on nice days.
Consider also your commute. Odds are, it will increase if you buy a house. Think about what this means for spontaneous fun things like meeting friends for a beer after work. I could never do that with my last house, because it was a one-hour round-trip if I needed to go home first, between work and socializing.
Houses Are Incredibly Expensive
It is incredibly expensive to buy, own, and sell a house. I did not fully appreciate this until I went through the first round-trip on the last house.
Buying a house means filling it with furniture, taking time off work to meet with all sorts of service providers, spending all your free time fixing things up. It’s all exciting and women like it because they get to shop for everything. But it is expensive.
Owning a house means you get to deal with property taxes (mine are $3,500 a year), homeowners insurance, various repairs, etc. When I moved into my current house, one part of the roof was leaking. I got to spend $1,250 to fix that. Wasn’t expecting that expense upon moving in.
And now we come to the very most expensive part of home ownership, the selling of the house. Realtors will take 6% of the value. If you sell a house for $300k, that’s $18,000. Then, on top of that, budget at least $10k+ to get the house in shape to sell. When I sold the last house, as a condition of sale I had to agree to repair the chimney ($12k) and replace the sewer line ($8k). In a strong housing market, these things don’t matter. In a weaker market, the buyers have all the power and in order to sell, you have to pay all these bills.
I owned my last house from 2005 to 2007, during the greatest bull market for houses that has ever existed. After accounting for opportunity costs, I did not make a dime. The math went roughly like this:
- Bought house for $225k (purchase price — with 20% down this would be $45k actual cash outlay); sold it for $325k. Gross profit = $100k.
- Had to dig a new sewer line. Subtract $8k.
- Had to repair chimney. Subtract $12k.
- Had to pay buyer’s & seller’s realtors. Subtract $20k.
- Lived in it for about 4 years, at a total monthly cost, including mortgage, taxes, and net of mortgage interest tax deduction, of about $1600. Prior to buying the house, I was renting an apartment for $600. Had I stayed in the apartment, I could have saved $48,000 over that time period.
- The heating bill for the house was about $200 a month more than it was for my apartment, averaged over an entire year (total $10,000 over four years).
- My net profit is now down to $10,000. I’m certain that I spent at least $2,500 a year on the incidentals associated with owning a house. Things like gas & a higher car insurance bill for my longer commute, lawnmowers, plants, various repair items, etc.
So, to recap, I owned a house during the greatest housing bull market in history. My “headline” investment return on the down payment was more than 220%! But after considering all the real costs, I made no money. I would have been at least neutral, from an investment perspective, staying in the apartment and saving the rest of the cash flow I wasn’t spending. Do you see housing prices appreciating by 50% in the next four years? That’s what it takes to break even, based on my experience.
What really killed me was moving out four years after moving in. If you buy a house and live in it forever, it might make financial sense. If you move to a different house every 3-5 years, the transaction costs will wipe you out. I spent about $30k just to sell that last house, including realtor fees, the chimney, and to disband the party in my sewer (see below). If you buy and sell two houses within ten years, that’s $60k down the drain. Buy and sell a house every three years, and in a decade you’ve thrown away a Ferrari.
House Prices Aren’t Low Enough
Now is certainly a better time than 2007 to buy a house, but houses are by no means “cheap.” Owning a house exposes you to all manner of financial risks. I mentioned my sewer, which I had to replace before selling my last house. The City, in its infinite wisdom, declared while I owned a house that houses could no longer be sold with a certain type of sewer connection (a “party sewer”). So had to pay $8k to replace it. This is not something that I could have uncovered with an inspection. There was nothing wrong with the sewer; it didn’t break (though that too was a risk). What happened was that a completely political decision, out of my hands and completely unforeseen and unforeseeable, ended up costing me $8k.
Lest you think this was a one-time thing, yet again a regulatory decision is costing me money because I am a homeowner, this time in the form of a zoning judgment that happened in 2006 and was renewed without public comment in 2009, which permitted my neighbor to tear down four historic buildings to build a glass-walled monstrosity right next door to my current house, with the trash receptacle for 72 apartment units right outside my living room. This probably will turn my $400k house into a $300k house. I have no recourse for it. I had no way to anticipate it. It doesn’t make sense except through the lens of politics. It’s a huge risk — a huge risk that I’m not being paid to take, because house prices just aren’t that low.
What happens if Congress decides that a good way to close the national budget gap is to eliminate the mortgage interest deduction? House prices probably drop 20%. Another risk — purely political. You can’t plan for these risks– and I’d argue that since you don’t get paid to take them, they aren’t worth taking.
Investment Return = Risk Compensation
My point is that the investment return that people cite when they talk about homeownership is nothing more than compensation for taking risk. The question is whether you and [your girlfriend] are equipped to take that risk. Think hard about this question — in investment terms, this is the critical question. One way to think about it might be to have a conversation together and make sure you have good, comfortable answers to these questions:
- What happens if we own a house together and break up?
- What happens if we buy a house and its value immediately declines by 20%?
- How long are we realistically going to live in this house?
- Why do we want to own a house, and could those goals be met by other means (ie, by renting a house)?
- If one of us really wants to buy a house, would it make more sense for that person to buy the house and have the other pay rent to the other person? (this is exactly, by the way, the arrangement that [my wife] and I have).
- Is now the right time? What’s the rush? Would it make more sense to save money for a year so you have a financial cushion to better enable us to bear these risks? (If you each save $1k a month — which is reasonable given the cost of a house you wouldn’t be paying, you’d save $24k in a year.)
Consider also that the maxim that “houses are a good investment” came about in post-WWII America, a period when:
- The economy was good, generally speaking, for 50+ years
- People tended to make a career at one company, in one city
- People went to church and got married and stayed married more often than they do now.
None of these things is true of modern America. I submit that if they aren’t true, then history provides no guide to the question of whether houses make good investments.
In summary, I love owning a house. But I love it because my eyes are wide open to the risks I am taking in service of that goal. I have come to terms, for example, with the fact that if my job ever got bad, I couldn’t just quit it and take some time to find a new one — because I’ve got a huge bill that comes every month to pay for this enormous liability. Neither could I move to a different city, to find a job that I’d potentially like more than my current one, without writing a check to my mortgage banker. That feeling of “stuck” is a potentially devastating one. I think it’s important to all of us that we enjoy our jobs. Lots of people have had to compromise on that principle to own a house.
Still, there are lots of (good) reasons to want to buy a house. If you do decide to get one, consider me your strongest backer and I’ll help in whatever way I can. I do strongly suggest that if you are going to do all the house shopping yourself, that you not pay for a full-service Realtor. Get a discount one like you can find at redfin.com. Don’t believe the lie that “realtors are free to the buyer”; it’s just not true. This decision can literally save you $10k.
I hope that’s all helpful. Good luck with whatever you decide.