The last post looked at some common beliefs about mortgages. This week I read a great article by Brett Arends’ in the Wall Street Journal, 10 Reasons to Buy a Home, that fits nicely into our series on home ownership and mortgages. Do you want to know how his top-ten is related to mortgages? Let’s find out.
Arends’ Point: It’s a buyer’s market
Counterpoint: The state of any market for a commodity, in this case shelter, is irrelevant unless you need to buy or sell. If your current shelter is adequate for your station in life there’s no reason to buy a new home just because it’s cheap. You will probably need to take on more debt to buy the new home unless you are downsizing. More debt means less free cash flow for other purposes, which usually means less freedom.
Arends’ Point: There’s cheap debt:
Counterpoint: The cost of debt should never be a primary factor in the decision to buy or invest. Every investment and major purchase should be evaluated on an unleveraged (i.e. without debt) basis first. Ask yourself if you need this thing or if it will add value to your portfolio or life. Then layer in the cost of the debt. The financial rabbit trails post covers this topic in detail.
Arends’ Point: Uncle Sugar wants to give you a present, really!
Counterpoint: An investment or purchase should not be made primarily on tax consequences anymore than it should be made on financing factors. See #2 above.
Arends’ Point: You can decorate!
Counterpoint: This is one that I can agree with and it has nothing to do with debt other than you are paying interest to satisfy your decorating impulses, which increases the cost.
Arends’ Point: You can have a nicer home
Counterpoint: I can’t really argue with this one either. But I do believe that whatever shelter you consume it should fit your lifestyle and station in life. Usually nicer means more expensive which means more debt. To repeat #1, more debt means less free cash flow for other purposes, which usually means less freedom.
Arends’ Point: Your home is an investment
Counterpoint: Negative! In my post of September 12, 2010 I debunked the idea that your primary residence is an investment in real estate. We clearly demonstrated that it is consumption of shelter.
Arends’ Point: Your home is an investment part 2
Counterpoint: Negative! See above
Arends’ Point: Your paying the bank to pay yourself back
Counterpoint: Why would you pay someone else to force you to save? A mortgage builds equity for you by requiring monthly principal payments at the cost of bank interest. If you are that undisciplined that you spend everything you earn it’s unlikely that you should be making major life purchases such as buying a home or a car. Wait a minute, pay me and I’ll put my experience as a professional borrower to work on your behalf, telling you when to borrow, spend, give and save.
Arends’ Point: A big selection to choose from
Counterpoint: Again, the market for new homes is irrelevant unless you need to change your shelter consumption pattern; see #1 above.
Arends’ Point: The demand and supply curve imbalance looks tempting
Counterpoint: There are really smart people in the world who make their living studying and predicting economic cycles. You can’t compete with their knowledge and are likely to make an uninformed decision. Buy what you need when you need it with what you have. Don’t try to time economic cycles.
We learned in this post to buy what you need, don’t consider the financing options first in your decision making process and don’t consider your home an investment. If you ignore that advice, now might be a great time to buy a new home if you like to decorate.
- Housing Views Dim, But Underwater Borrowers Say Owning Beats Renting (blogs.wsj.com)
- Are These Investment Myths or Contrarian Opportunities? (fool.com)
- Why a 0% Loan Isn’t Always the Best Choice (thesimpledollar.com)
- 10 Reasons To Buy a Home (online.wsj.com)
- Buying a Home, Good Idea? (blogs.wsj.com)