Are You (Really) Ready to Buy a Home? If Not, It's OK...and Here's Why

Written with Nate Watson, Summer 2024 Financial Planning Intern

Navigating the decision between renting and homeownership can feel like a daunting task, especially when being nudged by societal pressures. Yet, the truth is, buying a home isn't always the optimal choice, both financially and personally. At Narwhal, we understand that the path to homeownership should be paved with careful consideration, ensuring it aligns with your unique circumstances and aspirations. The purpose of this deliverable is not to discourage homeownership. In fact, we think homeownership is a wonderful thing and are willing to help everyone who aspires to own a home. Still, it’s important to explore why readiness matters and why it's perfectly acceptable if homeownership isn't the right fit for you at this moment.

Biases and Assumptions: Homeownership is often surrounded by various biases and invisible scripts, which can shape our perceptions and decisions. Oftentimes, these biases make renters feel as if they’re not living up to their potential. It’s crucial to recognize that depending on your financial circumstances, it’s perfectly OK to go either route.

The "American Dream" Bias: Homeownership is often seen as a key milestone in achieving the American Dream, symbolizing success.

• Without knowing the numbers, this unspoken belief might make renters feel unaccomplished when in fact 35% of the US population is renting. That is approximately 44 million housing units!
  
• The important message to remember is that if you're renting and feel as if you're not living up to everyone else’s standards, rest assured, you're not alone.

Renting is "Throwing Money Away"

• While buying a home can be a great equity investment, renting doesn’t mean you’re gaining nothing.
• The biggest upside is that you have flexibility and freedom from property maintenance responsibilities, offering a valuable alternative to tying up funds in a mortgage.

Homes are Always a Good Investment: The belief that property values consistently appreciate.

• Much like the stock market, the housing market can experience volatility. In other words, nothing is guaranteed.
• House Price Index YoY in the United States averaged 4.62% from 1992 until 2024, reaching an all time high of 19.10 percent in July of 2021 and a record low of -10.50 percent in November of 2008.

Stability and Security

• Homeownership can provide a wonderful feeling of safety and comfort that many don’t associate with renting. However, it is often overlooked that the flexibility to adapt to changing circumstances within our internal and external environments can provide renters with their own unique feeling of security.

Social Status: Owning a home is often associated with elevated social status and prestige.

• It's important to acknowledge that we may not always be aware of everyone's unique circumstances; thus, it's crucial to recognize that owning a home doesn't inherently make someone "better" or more esteemed in society than those who rent.

Before you go through with purchasing a home, it’s essential to ask yourself some critical questions and ensure that you truly are ready.

Here are some guidelines and things to think about:

What will your cashflow look like:

• Will the yearly mortgage expense surpass 28% of your income?
  • The 28% guideline stems from the traditional "28/36 rule" in personal finance, advising that your housing expenses (including mortgage payments, property taxes, insurance, and HOA fees) should not exceed 28% of your gross monthly income.

• Will you have cash savings post purchase to cover possible emergencies and repairs?
  • What about furnishing?
    • The average cost for a 3-bedroom house is $10,000 to $40,000 with moderately priced furniture.

Have you done research into the comparative costs of your current living situation (renting)?

• Some helpful links/resources:
  • https://www.zillow.com/rent-vs....
  • https://www.nytimes.com/2024/0...

Have you made a personalized list of pros and cons?

• What are your fears and hopes of owning a home?

Do you have enough money saved up for a 20% down payment?

• Granted, FHA loans and VA loans might not require this number, but it is still recommended for a few reasons:
  • Avoiding PMI (Private Mortgage Insurance) as most lenders typically require this when putting less than 20% down. This will tack on extra costs for monthly mortgage payments that could potentially be avoided.
  • Better loan terms: Though not guaranteed, a higher down payment can typically lower interest rates and reduce fees through many lenders.
  • A higher down payment means more equity in the home from the start.

Will this be my home for the long haul or is it simply an investment?

• Consider your long-term plans carefully, especially when purchasing your first house.
• Envision how it aligns with your future lifestyle, financial goals, and emotional attachment to ensure it meets your needs beyond mere investment potential.

Finally ask yourself: Am I excited about buying a home?

If you think you’re fully prepared after answering all these questions, then go for it! If not, then it’s OK to continue renting and working towards that next step. The best things in life, such as owning a home, don’t always happen instantaneously. Try your best to find peace in your current situation as you pursue your ultimate goal. Keep in mind all these considerations are on a case-by-case basis and we are happy to help and offer guidance when purchasing a home based on your needs.

“How Much Does It Cost to Furnish a House? (2024).” HomeGuide, homeguide.com/costs/cost-to-furnish-a-house.

“Rent Statistics U.S. - Reports and Trends: Self Inc.” Reports and Trends | Self Inc, Self Financial, 8 Mar. 2024, www.self.inc/info/rent-statistics/#:~:text=Key%20statistics,-Renters%20account%20for&text=In%20the%20U.S.%2017.2%20million,people%20aged%2085%20and%20older.

Ross, Sean. “Has Real Estate or the Stock Market Performed Better Historically?” Investopedia, Investopedia, www.investopedia.com/ask/answers/052015/which-has-performed-better-historically-stock-market-or-real-estate.asp.

“S&P 500: $100 in 1992 → $2,257.50 in 2024.” S&P 500 Returns since 1992, www.officialdata.org/us/stocks/s-p-500/1992#:~:text=Stock%20market%20returns%20since%201992,%2C%20or%2010.12%25%20per%20year.

United States House Price Index Yoy, tradingeconomics.com/united-states/house-price-index-yoy#:~:text=House%20Price%20Index%20YoY%20in,FHFA%20House%20Price%20Index%20YoY.