How Long Do You Have to Live In A Home to Justify Buying It?

How Long Do You Have to Live In A Home to Justify Buying It?

I recently heard an interesting discussion on Dave Ramsey’s radio show about the length of time you need to live in a home in order for it to make sense going through the process and expense of purchasing it. It’s a rare occasion that I disagree with Dave Ramsey, but in this instance, I did. A caller was telling Dave that he was going to be moving to a new city and would be there four years. The question was whether or not he should buy a home knowing he would need to sell it in four years. Dave’s response surprised me.

curb appeal
Photo by MichiganMoves via Flickr

Calculating Appreciation

Dave told the caller to find a neighborhood with higher than average appreciation rates. If you can estimate 5-8% annual appreciation, then the money you would make on your house in the four years would compensate for the costs of closing upon buying the home, maintenance of the home during the four years, and the cost of selling the home.

But wait, haven’t home values been going down in recent years? Of course, and as such, Dave recommended using appreciation rates just prior to the housing crash in 2007/2008. This is what floored me.

Dave’s rational for not using 2007-2009 appreciation (actually depreciation) rates was because it was an abnormal time period for the housing market. Maybe so, but wasn’t 2003-2006 just as abnormal? Those “good” years were the biggest real estate bubble the world has ever seen. How in the world does it make sense to base estimated appreciation over the next four years on a time when people were entering raffles for the chance to buy preconstruction condominiums? Completely foolish in my opinion.

Today’s Reality

While I’m hoping for higher home values and a stabilization in housing as much as the next guy, I believe it makes zero sense for somebody to buy a home with the intention of living in it for only four years. Renting is a much better option.

I’ve already mentioned that assuming appreciation in housing close to 2003-2006 levels is ludicrous in my opinion. I’d be surprised if the next four years showed any appreciation at all, in fact. Additionally, buying, owning and selling a home is expensive. Closing costs on the front end are several thousand dollars. Selling a home usually means paying 5-6% commissions to real estate agents (especially in a tough market).

When it comes to owning the home, the first few years of paying your mortgage are made up of almost all interest. Most people call renting “throwing away money”, but say nothing about “throwing away money” in the form of interest. Furthermore, you will pay insurance, taxes, maintenance and maybe HOA fees. Lastly, all situations are unique, so be sure to calculate the mortgage payments and run the numbers including all estimated fees.

So, if owning a house is expensive, does it ever make sense to own? Sure, if you know you’re going to be in your home for a long period of time. I would suggest the minimum should be five years, but maybe even be closer to ten years. I believe the real estate game is still changing even several years in to this downturn. Renting is definitely the best option financially for any short term periods of time (less than five years). I’m sorry Dave Ramsey, but I strongly disagree with you in this area!

7 thoughts on “How Long Do You Have to Live In A Home to Justify Buying It?”

  1. Dave’s eternal optimism about real estate is directly contradicted by the “bubble” shape of the Case-Shiller index.

  2. The trouble with any home valuation equation is always the innocuous little variable you put in it to represent appreciating value. You can get almost any result you want out of it, compared to the other more stable variables like rent and costs.

    It’s dangerous to deny that housing has gone up way ahead of inflation for the past 50 years though. Maybe split the difference between the two rates?

  3. Of any of the investing advice Dave Ramsey will give, I will listen to what he says about real estate more than the others. Dave has made and lost a lot of money in RE. Experience like that is always worth given strong consideration.

  4. All real estate is local, and returns vary drastically from house to house. If your in an area with a strong job market that historically is strong regardless of general market conditions, then the housing market will generally follow that.

    Also if you plan to buy something and fix it up while living in it, or if you just want the nicest house you can afford will factor into whether or not you should own or rent.

    I had a house built and lived in it for three years and sold it for a good profit after all the costs. It was a lot of work though, so if you don’t want to put a lot of work in it rent.

  5. There is something to be said for pride of ownership, being able to actually remodel your own home, and the freedoms that come with owning the home. I also don’t see anyone mentioning the mortgage interest and property taxes being deductible, whereas most of rent is not (above the renter’s credit), which can enable some families to live in a nicer home if they buy than if they rent.

  6. owning a house is so fantastic but too hard to imagine. so my advise is, as long as one’s income is at low rate he/she has to rent.

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