1. As investments go, it’s not always a great deal.
While it’s true that some homes do appreciate, so do many other assets. If you bought a house for, say, $200,000 thirty years ago, it would be worth $468,375.09 today. While that gain feels impressive, that appreciation is based solely on inflation – which means that, in theory, the same appreciation would have happened with any asset. While we did “make” money on the sale of our house, I suspect we would have had a similar increase had we invested that money in the market or in our business.
2. The mortgage interest deduction doesn’t make up for the fact that you’re still paying a lot of interest.
While I understand that it’s possible to buy a house without a mortgage, the large percentage of homeowners (more than 70%) take out a loan. With average mortgage rates at 4.3% (as of this morning), you’ll actually pay $356,307.44 for a $200,000 home: $156,307.44 in interest alone. Averaged over 30 years, that works out to a little over $5,000 per year (even though in practice you pay the most interest at the beginning). Assuming you’re in a 25% bracket – and you itemize – that works out to a tax savings of just over $1,300 per year. But the word “savings” is somewhat of a misnomer because you’re still out of pocket more than you get back in tax savings: in our example, you would “save” less than $40,000 while paying out more than $150,000 in interest.
3. Homes often tempt people borrow more than they can afford.
As Congress tosses around the idea of taking away the home mortgage interest deduction, homeowners are screaming that they won’t be able to afford their homes without it. In fact, when you’re looking to buy, most lenders and realtors will use the deduction as a selling point to boost prices. But is that a great strategy? When buying a new dress or a new car, consumers tend to focus on the cost of the item alone when determining how much to spend. But when it comes to mortgages, that number edges up because of the potential for tax savings (again, see #2). With that temptation, combined with a sluggish economy, it’s no wonder that more than 10 million homeowners are currently underwater on mortgages worth more than actual house values. We were fortunately not one of them but not for lack of the banks trying. When we bought our home, we were actually approved for a mortgage which was hundreds of thousands of dollars more than the home we ultimately bought. We opted for a less expensive home – and thankfully so.
4. Owning a house subject to a mortgage drives up debt to income ratios.
Assuming that you borrow to buy your home – again, a pretty reasonable assumption – that debt load can be a drag on your credit and ability to borrow for other things (like a new car). I’ve made no secret about the fact that I owe a significant amount in student loans. That already affects my perceived ability to pay when figuring my credit. A mortgage dramatically increases that ratio. Interestingly, our monthly rental payment is actually more than our monthly mortgage payment – but on paper, our rent is not a debt, it’s an expense. The two may be treated very differently, depending on the circumstances.
5. A mortgage is typically 20 or 30 years while, at any given time, the current administration has only four (or possibly eight). I can’t stress this enough.
The home mortgage interest deduction has been around for what seems like forever. Does that mean it that you can count on it to be around in 10, 20 or 30 years? Don’t be so sure. The deduction has become increasingly vulnerable: it has been a talking point in practically every administration from Bush to Obama, despite Reagan’s famous promise to the National Association of Realtors in a 1984 speech that he would “preserve the part of the American dream which the home mortgage interest deduction symbolizes.” Just this year, Eric J. Toder, the co-director of the Urban-Brookings Tax Policy Center, advised Congress that “[a]chieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the mortgage interest deduction or some other equally popular and widely used provisions.”
6. A mortgage is typically 20 or 30 years.
So yeah, I said that already. But I have another point: home ownership can limit your mobility. We were fortunate that we were able to write checks for our rent and our mortgage. While we could afford to make both payments, chances are that we would not have been able to obtain a mortgage for a second house while continuing to carry the first. Often, in order to move, you have to sell – or rent – your first home. I’ve been a landlord before and I’m not inclined to do it again. And selling our house in this economy was no small feat. That’s part of the reason that we stayed so long in one place: it was hard to move. In addition to our own missed opportunities, that may not be good for the country’s economy: economists Andrew Oswald and David Blanchflower found that rates of high homeownership lead to higher rates of unemployment in both the U.S. and Europe because, among other issues, owning a home may keep people from moving to areas with good jobs and creates “negative externalities.”
7. Houses take a lot of your money.
There’s a reason that many folks refer to their homes as money pits: you often put a lot of money that you’ll never see again into a home. Not all improvements are deductible. Deductible expenses are generally limited to casualty loss deductions. In most cases, significant repairs to your home merely increase your basis for purposes of calculating a gain at sale. As most taxpayers aren’t likely to experience the kind of gain that would subject them to capital gains, basis isn’t always an issue which means that those expenditures get lost. Thousands of dollars to replace the air conditioning unit? The new garbage disposal? Replacing the flooring in the kitchen? The new washer/dryer? Landscaping additions? You can’t write them off and while you may recover some dollars at sale, rarely do you recover the entire amount. If you add all of those expenditures up over a 30 year period, you might see an explanation for some of that “gain” at sale. Often homeowners get fixated on two numbers: the purchase price of the house and the selling price of the house – but don’t forget to account for all of the money you spent in between.
8. If you do hit the home appreciation jackpot, there can be significant taxes.
Not all houses bleed money. Not all appreciation can be attributed to inflation and/or a combination of home improvements – sometimes, it turns out to be a good investment. But there is a price: if the gain on the sale of your home exceeds the $250,000 exclusion (or $500,000 for married taxpayers), the proceeds over that exclusion are subject to capital gains. Additionally, under the new health care law, a Medicare tax of 3.8% will be imposed on investment/unearned income, which includes gain from the sale of your home, for high income taxpayers. High income taxpayers means those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000.
9. I like for things to be predictable and real estate taxes can vary.
While mortgage payments can remain fairly flat, assuming you have a fixed mortgage rate, you more or less know what you’re paying each year. You don’t always have the same result with real estate taxes. Your tax bill can change based on property assessments and reassessments (just ask Philadelphia) or a change in tax rates – especially in today’s climate as townships and counties search for revenue. Unlike most commercial leases, residential leases don’t tend to be “triple net” meaning that the expenses are not directly passed through but tend to be figured as part of the total rental payments. Real estate taxes are generally accounted for in the cost of the rental; when they are not, they may be limited by statute or otherwise capped.
10. You can’t deduct a loss on the sale of your home.
If I lose money on stocks, I can net those losses against other gains. If I lose money in my business, I can deduct those losses or use them to offset other gains (even in other years). But it doesn’t work that way when it comes to housing. You can never claim a capital loss on the sale of a personal residence – no matter how much it hurts. In this market, many taxpayers are finding this to be the case. That makes putting all of your investment eggs in the housing basket a risky proposition.
11. It’s getting more difficult to claim the itemized deduction.
Home mortgage interest is only deductible if you itemize on your Schedule A, meaning that only about 1/3 of taxpayers even have the option of taking the deduction. You itemize if your deductions exceed the standard deduction: for 2013, the applicable standard deduction rates are $12,200 for married taxpayers filing jointly; $8,950 for head of household; $6,100 for individual taxpayers and $6,100 for married taxpayers filing separate. Those numbers are getting harder to get to for many taxpayers, including me. Mathematically, the longer you own your house, the less you owe in interest and the smaller the deduction. Add that to the bump in the threshold for the medical expense deduction (which means that I’m not going to be able to claim those expenses in 2013), restrictions due to the Pease limitations and the bar for miscellaneous deductions, and taxpayers are increasingly finding that the deduction is actually quite elusive.
I’m not saying that owning a home is a bad thing. I liked being a homeowner. I just happen to like renting more. I liked that when our oven died, it was replaced – at no additional cost to me – that same day. And I liked that as I wandered through Home Depot, I happily gazed at cabinet pulls and meandered through the garden center rather than making a beeline for caulk, wood putty or other maintenance items. Maintenance is no longer my problem.
I’m also not advising folks to eschew real estate: it can be a good investment for some taxpayers. In addition to owner occupied properties, rentals can be a good financial move. While I have no desire to be a landlord again, it has been a good bet for many taxpayers. My father-in-law has rented properties for years. He realized, like many other taxpayers, that rental real estate is not only a good income stream but a forced retirement plan. But he, like other savvy real estate owners, also understands the rules and the economics, and makes decisions accordingly.
What I am saying is that we shouldn’t buy into the idea that owning a home is for everyone. And it’s not just me: at the end of August, the U.S. Census Bureau reported that the home ownership rate was 65.5%, the lowest rate in the past 50 years (downloads as a pdf); adding borrowers in risk of default, the number is closer to 62%. In contrast, ownership in 2010 was nearly 69%: for purposes of context, a one-percent change in the ownership represents well over a million homeowners. That dip doesn’t spell disaster for our country. It would be a mistake to assume that countries with high incidents of home ownership are synonymous with a strong economy: Russia, Italy, Greece and Spain – countries with struggling economies – have significantly higher home ownership rates than the U.S. Conversely, some countries with traditionally strong economies like Germany, Switzerland and Japan, have lower home ownership rates than in the U.S.
There are so many considerations when deciding whether to buy a home. It’s not the ‘ideal’ scenario for all families. Don’t be fooled by promises of tax savings and tax-free appreciation: that’s not always the case. A home is a huge investment so be sure to research what it might mean for you before taking the leap – and don’t be afraid to say no. I did. And tonight, as I sit on my rented porch, staring out at my rented view while my kids happily play inside a house that they’ve already made their home, I don’t regret my decision one bit.
