Challenging traditional measures of financial success: Homeownership
(This is Part II in a series about challenging traditional measures of financial success. Part I is The “Ivory Tower”: Reconsidering the college investment. Part III is The 9-to-5 job: Challenging how we earn a living.)
Last week, I was having dinner with my neighbor, a magnetic woman with a free spirit and a really youthful soul. She's been renting the apartment above mine for something like 30 years.
“Do you ever think about buying a home?” I asked her.
She laughed. “You know how expensive home prices are here, don't you?” she asked. Touche. In the Los Angeles metro area, the average home price is nearly half a million.
“Well, do you ever think about moving?” I asked. “Prices are a lot lower in other parts of the country.”
“No, I'm not going anywhere,” she said. “I think I'd rather be a renter here than a homeowner anywhere else. Plus, I love my apartment.”
From our conversation, I gathered that she's perfectly happy living as a renter forever. Despite the discouraging prices in my area, it's still a goal of mine to own a home someday. It's always been a goal that I've had in the back of my head. I've always assumed homeownership is a smart financial move, something we should all strive for — become debt free, save money, buy a home, retire. That's the traditional formula.
But lately, I've wondered: Why is homeownership such a measure of financial success?
The Virtue of Homeownership
Owning land has long been a sign of wealth. It's almost a virtue. In an article for the Federalist, one writer stresses why buying a home is something to strive for:
“There is also a powerful social and political aspect to home ownership, one that transcends any particular culture or legal system. There is no more potent symbol of having made it, having achieved even the modest level of economic success and stability, than owning a home — there is a reason we immediately associate it with the phrase ‘the American Dream.' The pride of a new immigrant family in being able to afford land in America is a staple of the immigrant experience.”
In theory, sure, it's better to own something than to rent it. But in practice, it's not always that simple. The pursuit of the “American Dream” led many people astray, as evidenced by the massive housing crisis. So is homeownership truly a symbol of economic success and stability? If you've done it responsibly, maybe it is.
The Cost of Renting
It's long been put to me that renting a property is, simply, throwing your money away. I guess you can see it that way. When you rent as a retiree, your monthly payment is part of your retirement expenses; it's not money you're putting toward an investment. You also have less control over your living situation.
I'm certainly not going to argue that, in theory, owning something makes more sense than renting it. Renting comes at a cost, yes. But I'd argue you're not exactly “throwing money away” by renting. You do get a place to live in exchange for your money, after all. My neighbor, for example, loves her apartment. For her monthly rent payment, she gets a great place to live in her favorite city.
The Cost of Homeownership
Beyond the down payment, there are a handful of other costs associated with buying a home. You have to consider:
Your monthly mortgage payment, which might be higher than your current rent
Home improvement costs
All kinds of insurance, including PMI, if you put down less than 20 percent
Those factors are easy enough to fit into an equation. But other factors aren't. For example, what if I want to move in a couple of years? And what if the market is down during that time? What if there are other things I want to do that cost money? It will be tough to afford those options after putting 20 percent down.
Right now I'm lucky enough to afford a pretty enjoyable life with a lot of options, thanks to all the work I've put into getting my finances in order.
But if I bought a home right now, in my city, that would all change. I might have my dream home, but it might be at the cost of my dream life. If homeownership is a symbol of economic success and stability, where does that leave someone who has their finances in order, but continues to rent?
The American Dream, Redesigned
Data from the U.S. Census Bureau has been consistently showing that homeownership in the States is gradually and steadily declining. Young people are simply putting it off. Of course, it's less of a conscious decision and more of a necessity thing (those student loans are no joke) but I think this is sparking a change, either way.
NPR talked about this a while back. They reported:
“In a nation where homeownership is part of the American dream, a generation of renters could alter communities where they live and redefine the idea of middle-class success.”
Psychologist Katherine Newman told them:
“I'm hoping that the Millennial Generation doesn't set its sights on homeownership as a benchmark of economic stability, because it's going to be out of reach for so many of them that it will just be a recipe for frustration,” she says.”
In adapting to the aftermath of the Recession, I think we've had to rethink a lot of things, including owning a home vs. renting. Ownership is a sign of financial stability and freedom, but it seems like a lot of people are questioning the rush into that. Would I feel more financially stable if I bought a home right now? I don't know. But I do wonder if homeownership is the measure of financial success it once was.
Homeownership and the Third Stage of Finance
This is something I've been wondering lately. I recently talked about how I'm in the third stage of finance. At least, it feels like I'm in that stage. I ask myself: For what am I continuing to save? I'm not sure of the answer. It may or not be “… to buy a home.” But I'm comfortable with my lifestyle, my debts are paid, and I'm just saving to save.
But if I'm renting, am I really in the third stage?
I think if we're talking about measures of financial success, we have to consider why we're building wealth in the first place. I want to build wealth so I have options. I have the option, for example, to move somewhere else and buy a home. Or, I can stay in an expensive city that I love and be a renter. If I choose the latter, I'm happier. But if I choose the former, I no longer have as many options. But, according to tradition, I'd be an “economic success.”
“The Face of Getting Rich Slowly is Changing”
It seems like we're adjusting the way we think about the process of building wealth. William Cowie talked about this when he wrote about how employment is changing:
“The face of getting rich slowly is changing right before our eyes, even as the status quo is failing.”
In short, as a society, we're adapting. People are changing how they think about not just homeownership but also employment, retirement, and higher education. I'll continue to challenge these traditional measures of financial success in my next couple posts.
But I'd still like to know your thoughts, as I think I have more questions than answers. If you're like my neighbor and homeownership is just not in the cards for you, does this mean you don't have your finances in order? Is owning land the measure of financial success it once was?