The Opportunity Cost of Home Ownership

Posted by Daniel in Advice, Debt, Finance, House, Life, Uncategorized

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I was recently called and asked to participate in a Gallup survey, and for some reason I agreed. Eventually, after wading through questions about political beliefs and the economy, the question about my personal happiness came around. I thought about it for a second, and didn’t have anything to complain about. I felt content with life so I answered “Yes, I am happy” and I finished the survey.

After I hung up the phone I kept asking myself, “Am I truly happy?” and “What could I do to make myself happier?”

…and thus a personal journey of self discovery began.

I could bore you with an endless array of what I found about myself, or I could answer it for you in a simple sentence that might contradict the American dream: the opportunity cost of owning a house at 23 sucks.

No, we aren’t hurting financially like many Americans. We bought a house that we could afford, we got a low interest, fixed rate loan, and we put down a good sized down payment (10%). We have an almost fully funded emergency fund, we are both employed, and we live a frugal lifestyle. The issue comes when I look at the opportunity cost of home ownership, or what we could be doing if we didn’t own a house.

The thing about owning a house is that no matter how much financial knowledge you have you can never really account for the opportunity costs of this often emotional purchase that is deemed a “necessity.”

I think about how much money we spend each month on our mortgage, taxes, insurance, utilities, and HOA dues and I cringe when I think about what else we could be doing with half of that money if we had bought a less expensive house, or even if we were renting. One of us could work while the other focused on entrepreneurial ventures or attended grad school. We could work for a year, save up, then quit our jobs and travel the world for a year. Even if we waited another year we could have saved up enough money to put an even larger down payment on a house, thus lowering the future monthly burden.

I look at our house as the reason why we have to work. I feel like I work a job not because I want to (even though I do), but because I have to, and this feeling of burden makes work seem like a chore instead of a learning experience.

So I challenge you, as you are tempted by a free $8,000 first time home buyer credit, to truly think about how much money you want to spend on a house, and the opportunities that you will give up as a result.

For the record, my wife disagrees with me. Her rational (and mine at the time of purchase) was that we bought a house in which we could grow into and start a family, while this is true, I believe that the only thing that would make me a happier person right now would be owning a less expensive house that wouldn’t feel like a burden.

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18 comments

  1. tom

    Wow thank you for sharing this experience here.
    I am 24 myself and I am years away from owning a home because I just don’t see myself tying myself up to a mortgage for years.

    You are right, the tax credit is appealing but people need to look at the big picture before jumping in.

    And I am glad you brought up that you have to work to pay the bills instead of investing time on something you really want to do.

    I don’t mean this the wrong way, but your wife may look at this house as security and doesn’t see the financial aspect of it in terms of what is being given up.

  2. Asher

    Well put. I think a lot more thought needs to put into home ownership. It’s more than just a ‘good’ investment or ‘American Dream’, it’s also more than just a roof over your head. I’d love to get into a home eventually, but in some ways not until it really really makes sense.

  3. Rufus

    Not to mention the hours you spend mowing the lawn, weeding the gardens, painting this and that, fixing the plumbing, etc, etc, etc. What else could you be doing with that time?

    Home ownership is a way to “anchor” members of a community. A house makes it harder for people to risk their life and liberty protecting that which makes them most free. Housing is a way for a government to control a community.

    Resist home ownership as long as possible. It never gives you are much autonomy as it promises. In short, it is a big lie. (home owner for 32 years. Only the first 4-5 were fun, until the truth started settling in…)

  4. ontrider

    I’m going to have to disagree with some of the comments. Once your house is paid off you generally have a solid asset that is increasing in value along with much more disposable income. You can say that “If I didn’t have to pay bills and spend time fixing my gutters, I could be out being entrepreneurial and creating the next big company, but that rarely happens” Most of my friends in their mid-late 20′s that don’t own a home are not doing anything that I would consider productive with their extra income. It goes to things like booze, car payments, trips, expensive gadgets etc… Fun now, but in the long run they really have nothing and when they do decide it’s time to buy, they have trouble finding something affordable that they want without large payments. So I say good work Daniel buying early… stick it out – and the most important lesson from this… listen to your wife :)

  5. Deamiter

    I too find myself disagreeing with most of the negativity toward home ownership. Quite simply, when renting, you are paying extra for the luxury of avoiding lawn mowing and maintenance. You’re still paying the mortgage and all the bills, they just get rolled up into one monthly payment.

    Of course, most people tend to rent a smaller home than they buy, and to that extent you can save money, but you could just as easily purchase a smaller house!

    There are pretty easy ways to avoid the work of home ownership. You can buy a home warranty to cover the cost of repairs to major appliances. You can hire a lawncare service. Heck, you could even hire a maid (although most apartments don’t come with maid services…)

    Plus, you’re not paying down the mortgage on somebody else’s house!

  6. Baron

    I appreciate your candor in sharing some of the downsides of owning a house at so young an age. There are obviously other 20somethings out there who feel the same way, and those are the ones partying it up and drinking with their disposable income. I feel that overall you are making a wise decision; I think you’re just experiencing a bit of a rough patch, as it is easy to see the opportunity cost of “settling down with a mortgage” at so young an age. Give it a solid 5 years and you’ll see what you’ll be light years ahead of most of us in your personal finances.

  7. Daniel

    Yeah, I guess I sort of have a love/hate relationship with it. I know I will be better off the the future because of it, but sometimes it’s hard to see past now.

    I appreciate you all setting me in my place.

  8. Lj

    Like everything else in life & nature, there is an equilibrium here – a balance between cost and reward.
    And, unfortunately, in an inflating economy, timing has alot to do with whether you percieve a good deal or a bad deal. I purchased a 3 bedroom attached home 14 years ago – I never intended to buy an attached home! – and even including HOA, insurance, and taxes, I’m paying less than an apartment. And with my own 2 car garage and only 4 immediate neighbors, I have far more privacy & security than my friend’s girlfriend, who just bought a three bedroom townhouse, with no garage, and dozens of neighbors, for more than I pay monthly.
    My next-door neighbors bought at close to the peak of the boom (5+ years ago), and they could well be “upside down” on their mortgage & costs.
    So, as in all things in business, whether you are happy or unhappy, making a profit or losing, is – “on the margins” – as in “profit margin.” And dozens of factors go into this balance – local tax-rates, insurance rates, quality of living of your neighborhood, proximity to work, etc.

    In your case, if you don’t mind living frugally, you can accelerate your mortgage payments, by paying down (significant amounts of) your principle, you can greatly reduce your interest payments down the road.

  9. joej

    it’s “rationale” not “rational”

  10. Matt B.

    Hey Daniel, great site!
    I couldn’t agree more with this post. I just purchased my first home in March (on my own since I do not have a wife yet) and it has turned out to be quite overwhelming. When I first decided to buy I had myself convinced that it was an “investment.” I purchased a foreclosure that needed some work and after endless spreadsheets and analysis I found that it was well below my determination of market value. That being said, I had no concept of the opportunity cost associated with buying a home. If someone had told me I would still be coming home from work every day and working on my house until 11pm or so every night I may well have reconsidered my decision.
    When all is said and done I have a love/hate relationship with my house much the same as you. From an egoistical/irrational perspective, I love having a place to call my own and I love the idea of it appreciating in value over the years, but from a rational perspective I wish I had given more consideration to the lessons of “Rich Dad, Poor Dad” and seen it for the liability it is. If only I had been a bit smarter and given more consideration to a multi-unit property instead………

  11. Daniel

    Thanks all!

    For reference, Matt B. is a college friend and we are the same age.

  12. PB

    I appreciate your candor in sharing some of the downsides of owning a house at so young an age. There are obviously other 20somethings out there who feel the same way, and those are the ones partying it up and drinking with their disposable income. I feel that overall you are making a wise decision; I think you’re just experiencing a bit of a rough patch, as it is easy to see the opportunity cost of “settling down with a mortgage” at so young an age. Give it a solid 5 years and you’ll see what you’ll be light years ahead of most of us in your personal finances.

  13. von sledge

    Good post. Too many people are like Pavlov’s dog when it comes to home ownership. Like everything else, home ownership has advantages and disadvantages. The factor that determines whether the advantages outweigh the disadvantages, or vice versa, is the price (cost). I believe housing prices will be under pressure for several more years. It will be interesting to see how the culture of home ownership holds up under relentless price compression.

  14. suki

    I am curious to know if your opinion on this has changed over time or if you still feel the same way. For me, owning a home requires sacrifices that are well worth it. You are not just giving your $ away to someone for rent. You’re building equity. When/if you sell your house for something else, you’ll have put your $ into the house, and there is a return.

    My mortgage+property tax sucks each month, and I live in one of the most expensive cities in the country. But I make it work. :)

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