The American Dream (Nightmare) - Should you buy a house?

Derek Notman |

Why buying a house may be one of the worst financial decisions you will ever make turning your American Dream into a Nightmare.

Grow up, go to college, get a job, buy a house - The American Dream.  Sound familiar?

The American Dream claims its roots in our Declaration of Independence which proclaimed; “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”

The “pursuit of happiness” makes one feel, well, happy.  At its core this ideal can improve not only your life but all those around you.  But, this pursuit of happiness has changed from its non-material origins to include material things, like a house.

Our culture, like most on this planet, seems to put a lot of value on owning one’s own home.  What has always interested me however is that very rarely do you hear about the downside to owning a home.

Is owning a home really all it’s cracked up to be?

Well, it depends on which point of view you take, which I boil down to only two.

  1. Lifestyle
  2. Financial/investment

I’ll start with lifestyle since it tends to be the more enjoyable and relatable point of view.

Should I buy a house for my lifestyle?

Married with kids, a dog, and a white picket fence around your home.  Sounds American to me.

Having a place to call your own, to make your own, to make memories in, is something a lot of American’s have and will continue to strive for.  Any why not?  Raising a family, having a safe and secure place to come home to each night, celebrating birthday’s and anniversary’s, having the iconic American Bar-B-Que.  Sounds like a nice way to live one’s life.  And it is.

I think anyone would be hard pressed to argue against buying a home for reasons like these.  After all, they go back to the root of our Pursuit of Happiness, how can we argue with that?

But, can you put a price on all this?  Well, yes, we can.  Now for the not so talked about side of home ownership.

Should I buy a house as an investment?

Mortgage, property taxes, insurance, maintenance, lost time maintaining the house, realtor and closing fees, etc.

These are just some of the financial responsibilities that come with owning one’s home.  I come at this point of view with a unique background.  I have owned 3 homes, all of which I have sold.  I also have had the “should I buy a house” conversation countless times with numerous clients over the last 13+ years.

It always struck me that people didn't think much about the financial aspect of buying and owning a home until after they fell in love with it from a lifestyle perspective.  I too am guilty of this.  How can we not be?  Suddenly one day we all become “grown-ups” and think now is the time to buy a house.

We do a quick search online to see if we can “afford” a house with one of those free calculators and then we are off on the hunt!  We meet with a realtor.  The realtor shows a variety of houses until we find the one we fall in love with.  We see ourselves living there, how we would paint the rooms different colors, what flowers we would plant, where the TV and couch should go, etc.

Once we fall in love with the house we then are told we need a bank to pre-qualify us.  So off to the bank we run to continue our Pursuit of Happiness.  The bank asks for some basic info, tells us we are pre-approved, and good luck on getting the house!

Long story short, your offer is accepted, the inspection goes off without a hitch, you meet at the closing to make it official, and drive straight to your new slice of happiness!

Boom!  Now financial reality starts to rear its ugly head.

The Dream May Turn into a Nightmare

A primary house could be argued as one of the worst investments you will ever make.  You may be thinking; “this can’t be true, I know so many people who ‘made money’ on their house”.  And you probably do, plenty of people have made money on their house, but there is more than meets the eye.

The best way to explain this is through some examples.

The First Example

A client of mine who owned their home for over 30 years.  They raised a family, had pets, a garden, sleep-overs and BBQ’s, etc.  The neat thing about this client is that they kept meticulous notes on how much they spent on the house from the day it was purchased to the day it was sold.

The house was purchased for $165,000.  It sold for $400,000.  That’s a Gross profit of $235,000.  Not a bad pay day, right?

Not exactly.  When you factor in all the other costs associated with owning a home, the gross profit went negative. 

That’s right, negative.

How can this be?  Well, think about it for a minute.  The interest charges on a mortgage are only part of the equation.  Yes, you get to deduct the interest in most cases on your taxes, but it is still a net cost.  What about property taxes?  Insurance?  Maintenance?  Etc.  All these things add up, but many people fail to pay a lot of attention to them since they are spread out over months and years.

Although the client walked away with a nice check, they had paid their mortgage off early, when you factor in all the expenses over the years they still lost money on owning that home.

To take it a step further, this same client actually compared living in their house (after the mortgage was paid off) for 10 years to just renting.  After netting everything out, including the money from the sale proceeds, it was still less expensive to rent than own.  I asked for a copy of their records to verify this.  Indeed, I was able to review 10 years of every cost.  Renting was less expensive.

The Second Example

Another client of mine owned a luxury home up to and through the Great Housing Recession of 2008.  The late 90’s and early 2000’s saw real estate values going in only one direction, up.  Anybody and their dog could make money in real estate during this bubble period.  At least that’s what everyone thought.

This client raised a family in this house but did not track any of the costs associated with owning the home.  They had the disposable income to pay for it and were of the mindset that it was an investment since real estate prices only go up, right?

In fact, at one point the client actually told me, “this house is part of my retirement plan”.

Well, fast forward to after the Great Housing Recession.  The client ended up needing to sell the house.  It was originally listed for over 1.1 million.  It sat, unsold, for over 3 years.  It ended up selling for $650,000, almost 50% less than what they had hoped for!

Not only did the client loss a bunch on the sale, they almost certainly also lost money from all the expenses that weren't being tracked.

Are there examples where people owned a home for a few years and then sold for a huge profit?  Certainly.  Are there examples where people owned homes for 50+ years, buying them originally for 10’s of thousands of dollars only to sell them for millions later?  Of course. 

But these are the exception, not the rule.

Another great example can be found in an article on Listen Money Matters which also talks about the definition of an asset from the Rich Dad Poor Dad series.

Buying a home - the worst investment ever?

So why am I saying owning a house is one of the worst investments you may ever make?

Would you put your money into something that tied it up for years, had a relatively small chance of making money that was almost entirely due to forces outside your control, had a relatively large chance of losing money, and the purchase & sale had to be timed almost perfectly?

Doesn't sound like such a great investment when put this way, does it?

My point is that most people never consider all the other financial factors in owning a home.  They are in their Pursuit of Happiness and financial matters simply don’t factor into that pursuit for most of us.

Looking at a primary house from a purely financial perspective it is hard not to acknowledge that in most cases owning a house is simply a bad financial decision, one that will arguably cost you more than any other financial decision you will ever make.

But, we don’t live in a purely financial world.

Lifestyle means a lot to people and I get the feeling it is becoming more and more important for our culture to get away from material things to focus on what really matters, like living a life of meaning & purpose, giving back to our communities, spending time with those we love, and pursuing our passions.

But, that doesn't mean we should ignore our financial responsibilities and how they will impact us in the future.

Am I saying you shouldn't buy a home?  No.  But if you are considering it, make sure to go into it with your eyes (or as my son says “eyelids”) wide open.  Dave Ramsey has a nice article about whether you should rent or buy that talks about some additional considerations you should think about before signing on the dotted line!  Another good article on reasons to buy or not can be found on The Balance, make sure to check these additional resources out.

Where to start?  Before going any further than looking at houses online or driving through some neighborhoods you would like to live in, make sure to consult with a financial professional.  (Yes, this is a small plug for me and my firm).

They will be able to help you model a variety of scenarios to see if you can actually afford a home and how things could look many years in the future.  Although this part is not as fun as looking at houses, the time spent will make you feel better.  Buying something on a financial hunch, although it may seem to be OK at the time, can create a ton of stress for you later.  Remember, part of being that “grown-up” is that we have to do things we don’t always like to do!

Thank you for taking the time to read this, I appreciate it.  I hope this article has shed some light on The American Dream of owning a home and that your Pursuit of Happiness doesn't turn into a nightmare.

Best Regards,