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.
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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.
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!