Owning a home is the key to accumulating wealth. Buy a home, get ahead — it's the 11th Commandment of the American Dream.
But that edict deserves some scrutiny. Before signing the next 30 years of your life away, a few tough questions need to be answered, especially with young buyers with smaller savings and lives in transition.
How settled are you? If you are going to live in the house for less than five years, experts say renting probably is the way to go. It can take at least five to seven years to accumulate enough equity to make it worthwhile as an investment. (A one-bedroom condo for a couple starting a family soon? That’s risky.)
Renting comes with the advantage of being able to move without having to sell. You also can save the average $1,100 or more homeowners spend on maintenance. Put it in savings.
Another consideration: Is a down-payment the best use of your savings? As is true with most investments, it depends. Real estate is not a sure thing. There's always a risk.
The national median home price dropped more than 20 percent from a 2007 peak to when it bottomed out in 2011, according to Zillow. Many homeowners ended up "underwater," meaning they owed more than their home was worth. Stocks bounced back quicker after the Great Recession. Of course, past performance doesn't necessarily predict the future. Will the house appreciate? Location is a big factor. Make that a big, big factor. Is the local job market stable? Is it a location that attracts new buyers? Tons of factors affect appreciation.
By the way, a gauge of appreciation is accumulation of equity — the value of a house, minus how much is owed to the bank.
One study found that from 1947 to 2016, equity grew at a slightly smaller compound average annual rate (1.4 percent) than other sources of wealth, like stocks and bonds (1.5 percent). During the same period, housing equity was more volatile — had greater ups and downs — than non-housing wealth. Does this add up to not buying a house? No, not necessarily, if the house doubles as a home and your primary means of investing.
But if you want to own a place that's all yours and finances allow it, most experts say go for it. Intangible benefits like happiness matter also. If the house appreciates over time, all the better.