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The Absolute Insanity of Not Buying a Home When You’re Young
(www.riskology.co)
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this post was submitted on 31 Aug 2023
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In the U.S., buying is a mistake if you don't think you're going to stay for more than 5 years. The up-front transaction costs of a purchase, and then a sale when you move, needs to be amortized over a long enough time period to be worth it.
A typical $500,000 home is going to see something like $520,000 paid by the buyer for $480,000 in the seller's pocket. That $40,000 is an expense that can only be justified if you're staying there for more than 5 years ($8,000 per year). Maintenance, taxes, and insurance on that $500k home will also be continuous, and will vary heavily based on age/condition of the property and the jurisdiction/location. On the upside, maybe the property will appreciate, but historically that has basically only happened about as fast as inflation for specific properties.
Renting is generally better if you want the flexibility. If you're single and childless, but anticipate maybe getting married and having children later, do you buy the place that works for a single person today, or do you buy the place that might work for raising kids 10 years in the future? Contrary to this piece's argument, it's precisely the young people who are least equipped to predict the medium term future, and renting can buy time so that when they do buy, they buy the right place for them at that future stage of life, with full knowledge of their household income, expenses, and household size. Plus city, neighborhood, etc. Nobody wants to commute an hour per day because of a decision they made 10 years ago.
Renting is almost always better for people under the age of 30, and the financial calculators basically prove it.
Rather than selling the house, you can consider renting it out if you move. Depending on the terms of your mortgage, you may be only roughly breaking even when you first start renting it out, but after a couple years rent will likely increase so that you're cash flow positive and you're also building up equity in the house.
If you've bought a small starter house 10 years ago then you have lots of options when you want to upgrade. Your starter house should have appreciated and a good chunk of your mortgage payments have gone to increasing your own equity.
So you could sell the starter house and reinvest the profits into a larger house. If you do a 1031 exchange then you avoid paying capital gains taxes, so the starter house essentially functions as an appreciating savings account.
Or you could do a cash out refinance and keep the starter house as a rental property and use the excess equity to invest in the new house.
These are all good options to have. It's going to be rare where you're upset that you bought a starter house 10 years ago and are now looking to upgrade. That's pretty much an ideal position to be in.
Do the math. The S&P 500 would've outperformed the equity in the starter house over most 10-year periods of time. The renter is in a superior position when bidding on homes, compared to the owner who wants to put in a contingency on the sale of their current home.
Plus look at what people are actually experiencing today: they're ready to upgrade in their home, but are finding that the equity they've built (from high housing prices) isn't actually enough to significantly upgrade (because of high housing prices). So they feel stuck in their old house that no longer suits their needs.
After all, if the starter home appreciates from $250k to $500k, that means other $500k homes out on the market are generally similar, and your equity can't actually buy as much as you imagined 10 years earlier.
And more to my point, is living in the same house for 10 years a mistake? For most 20 somethings, yes. That "starter home" is a compromise in lifestyle: extra bedrooms they don't need yet, commuting distance to work or to family, shitty neighborhood for dating, school district they don't need, etc. Actively planning to live somewhere for less than 5 years makes buying a mistake, but actively planning to live somewhere for more than 10 years requires a lot of contingency planning and anticipating changing needs (and sometimes living with those incorrect choices).