When You Should Buy a House—or Not

The new rules of home ownership take into account much more than real estate values.

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The following post has been adapted with permission from Kimberly Palmer’s new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back (Ten Speed Press).

Traditionally, the decision to buy a home was a relatively straightforward one: You made the purchase as soon as you could afford it. Buyers expected to spend about one-third of their pre-tax income on housing costs.

[In Pictures: 8 Painless Ways to Save Money]

But that easy formula no longer applies. It doesn’t leave any room for the unexpected, from maternity leaves to job losses to a roof that needs replacing. There’s no single percentage that makes sense for everyone, since each household has different priorities and savings goals. If you’re already spending one-third of your income on student loans, or day care, then you can probably hardly afford to spend even 20 percent of your pay on your home.

Another factor to consider is how long you plan to stay in the home, because selling after less than four or five years means you’re also paying for significant transaction expenses (such as closing and moving costs). A more realistic goal for a home-ownership budget depends on a person’s overall spending plan. For some people, one-quarter of their income might make sense; others might feel perfectly comfortable with the traditional 33 percent—or more.

But before getting knee deep in those details, you might want to think about whether or not you really want to buy a house. Sure, there’s something nice about the idea of going home every night to a three-bedroom ranch home with window treatments you picked out yourself. But consider this: Home owners tend to be heavier and more miserable than renters.

Researchers at the Wharton School of Business found, after they controlled for household income, housing quality, and health, that home owners aren’t any happier than renters, and, in fact, “they report to derive more pain from their house and home.” And perhaps because they are so busy updating those window treatments or mowing the lawn, home owners spend less time on leisure activities and with friends.

If that’s not enough to turn you off home ownership, how about the fact that housing is no longer guaranteed to appreciate over time. Since the fall of 2007, housing appreciation has been largely negative, according to the Federal Housing Finance Agency. While plenty of baby boomers used their homes like ATM machines, taking out home equity loans and downgrading when they needed cash for retirement, there’s a good chance that younger generations will have to find an alternate funding source.

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

Meanwhile, renting is no longer necessarily the same as “throwing money away,” as home owners were so fond of saying even just five years ago. If a house loses value, or the buyer loses his job and can no longer afford the monthly payments, then a house quickly turns into an income incinerator.

Owning a house also comes with a lot of extra costs that add to the overall bill: repairs and upkeep; transportation, if the house is farther from your job than your rental was; and utilities.

And then there’s the time factor: home owners spend their Saturdays raking leaves and doing other household chores, they tend to have more rooms to clean than renters do, and they have to stay home from work to wait for the plumber instead of just leaving a note for the landlord about the drippy faucet.

That could help explain why homeowners aren’t always happy, even if they come home to a beautiful house every night. They know what it costs to keep it that way.

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.