Should Families Buy a House or Rent an Apartment: If You Aren’t Thinking Lifetime Housing, You Aren’t Thinking Far Enough

Housing

Housing (Photo credit: james.thompson)

If I had to identify the one major consideration that finance professionals consistently give bad advice, it would be that most people fail to realize that housing is not a 5-year, 10-year or even 30-year decision. It’s a lifelong decision and many financial tools neglect to take this into account. When you fail to look at housing as a lifelong perspective, you are guaranteed to miss some important benefits of home ownership.

Housing is a Lifelong Decision

Do you stop needing a house or apartment in 30 years when you retire? No, you need one or the other until you die or have to go into some sort of assisted living. If you were to start planning for retirement, you’d start looking decades into the future. You’d start with questions like “how long do I think I’ll live,” “how will inflation impact spending over time” and “what kind of lifestyle do I want 30 years from now until I die.” For some reason, the buy versus rent decision is compacted into a much smaller time window; why? We need housing until we die and the decisions we make now about housing have a direct impact on potential housing benefits 50 years from now.

Buying a Home Now Decreases Housing Costs Over Time; Renting Increases Costs

What will rent prices be 40 years from now when you are in the middle of retirement? Perhaps they will double, triple or even quadruple compared to rent costs today. It is nearly certain that they will be much higher.

Now, let’s say you buy a house today with a 30 year mortgage, what’s housing cost in 40 years? It’s much, much less since you’ll only need to pay for maintenance and property taxes.

Your first mortgage payment is the highest cost you are ever likely to pay so long as you stay in the same home. However, assuming you don’t trade down, the highest cost for housing when renting is the last payment you make and I’m willing to bet it will be much higher than your first mortgage payment.

This is one of the largest benefits to home ownership and it’s one you are likely to miss if you are simply comparing rent costs to a mortgage. Home ownership let’s you fix your housing costs at today’s prices.

The Cycle of Life and Housing

If you can afford to own, you should and here is why.

Assuming you want to retire, you are going to need to make a switch from a somewhat dynamic income (one that can cover the costs of inflation) to a more fixed income. This creates problems for retirees because many costs are variable. Grocery bills, gas prices, health care costs are all increasing overtime, but your income may not move much to compensate for those fluctuations.

The largest bill in the US budget is the housing bill. By buying a home and paying off the mortgage before you retire, you’ve not only fixed the costs of your biggest budget item, you will decrease the costs just as you are coming into retirement. That is very favorable timing for prospective retirees.

Even better, in holding equity instead of paying the landlord’s profit margin, you could opt to tap your equity and increase your income in retirement. For example, a reverse mortgage allows you to hold housing costs, retain ownership, but increase your income for a period of time.

Think about it carefully. Would you prefer to pay more for housing now with your entire career ahead of you or when you decide to leave the workforce?

Housing isn’t just something you want to think and plan about until you get a family or hit retirement. Home ownership has a very powerful benefit in fixing, then reducing housing costs. If you can, you want to lock in as soon as it makes financial sense to do so.

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