the dead end of home ownership

the American dream

I’ve known more than one guy with the following life story: working at a corporate job as a middle manager, married with young-ish kids and settled in normal sized house in an acceptable neighborhood. Maybe the kids are really young, even though he’s in his forties; like me, a lot of men (and women) are waiting until later in life to have kids. The house is comfortable but small. The job is OK but if the guy’s honest with himself he knows he’s not likely to soar to the CEO floor in the 15 or so years of working life he has left to him.

So here’s the question: if you make X dollars at age 40, say, and 40% of your income goes to your mortgage that you took out at age 38 – a 30 year fixed mortgage – and you’re expecting a 5% raise every year (if you’re lucky) – when will you reach the finish line?

I know the common perception is that if you own instead of renting there will come a blissful moment when you burn the mortgage documents and skip off into sunset worry-free. In my mind, two things will be happening in 30 years when my mortgage is paid off that will throw a big monkey wrench in those plans.

Property taxes

Perhaps you live in Cheyenne, Wyoming. If so, your property taxes are the lowest (on average) in America, probably around $1000 per year. That’s $83 per month, a doable figure. However, if you live in places like Garden City, New York, your taxes run closer to $9000 per year, or $750 per month. One thing I can guarantee about both Cheyenne and Garden City that holds equally true for both is that 30 years from now, those taxes will be higher. Will they have grown at a rate faster or slower than your annual raises at work? With the strains looming on the US economy – an enormous national debt, rapidly ageing population, and so on, I’d be willing to bet those taxes will eat up a big chunk of your post-retirement income after you’ve paid off the mortgage.

Shoddy construction

On this point I only have my own limited experience to go on, but I remember laughing out loud every time someone asked me in New Jersey if I expected to pay off my mortgage on my townhouse in 30 years. I laughed because I really didn’t expect my townhouse to last 30 years. We moved in while construction was going on in the community, and I saw how these homes were built: pressboard and 2 by 4s. Not stone, not metal. K. Hovnanian put them up fast, using what (ahem) APPEARED to be workers who might not have been entirely legal citizens. These were not structures built to last. These were not cheap places, either; it was a very expensive gated neighborhood with fancy homes (think elevators installed in the homes, riverfront views, etc.) Most American homes will need substantial and continuous maintenance and repair work in 30 years. So think about that mid-70s guy dealing with a crumbling home. Again, no mortgage, maybe, but those bills can mount up quickly.

…the dead end

I still think you ought to own if you want to own, and you ought to work for a corporation if that’s what twirls your pigtails, but this scenario just looks like a dead end to me. This house I’m in now needs to be my last one, or else I’m going to need to move into a place where I can pay off the mortgage substantially sooner than 30 years or I’ll be working to pay the mortgage (and other costs) into my 80s. If you don’t think that’s a dead end, I don’t know what is. I for one don’t want to be struggling away at age 75 to finally pay off my mortgage just to get stuck in a crumbling house paying exorbitant property taxes. Figuring out how to stay out of this dead end ought to be a high priority for anyone who looks to buy a home in their late 30s or later.

13 comments

  • How is that any different than renting? The same problems exist if you had someone else buy the place and you rented it, but you would also be paying someone else to gain profit, plus your rent will increase in absolute value far more than just the property tax. Try doing the math starting out with housing costing 40% of your income, with just a 3% raise every year using a 30 year mortgage starting at 35 (so that your paid off when you retire) with expenses increasing at 2% per year.

    I should say that when people ask if they should buy a house as an investment I always answer in line with your closing paragraph. You should buy a house if you want to own a house. Finding a place to live and finding investments should be two separate things in my book. I just think a comfortable retirement is far easier with a paid off residence.

    I did make you a little spreadsheet that makes lots of assumptions (like you have to do in every case, which is why this should be a personal decision) that compares rent vs buying the same home assuming someone else buys the same home and rents it to you starting at a 2% return on their costs. The rent, property tax, and maintenance go up all at a nice even 2% per year, the salary goes up at 3% per year and then the person retires and buys a fixed income annuity that pays 70% of his last years salary (assuming in both cases they saved and invested elsewhere).

    http://spreadsheets.google.com/ccc?key=0Anp45XU

    Who do you think has a more comfortable retirement?

    • @traciatim: Your analysis is fine, and I don't disagree with it. But as you said, it makes some assumptions that weren't exactly what I was talking about: not starting at age 35, for example, but maybe age 42; you're making the assumption that maintenance goes up at a nice even clip, but as the cheaply built house in my example gets older I'd anticipate it rising much faster; and I'd make the assumption that property taxes aren't going to rise at a nice steady pace, either.

      But it depends on assumptions based on future unpredictable events, so various scenarios could play out. And one final thought – if you own a big 5-bedroom house, and your 3 kids move out when they go to college and you're a couple – say, 65 and 60 – you're either going to downsize or be living in a lot more house than you need. Assuming it's steadily increased in value may not be true – just ask anyone selling in California, Florida or Arizona in the last 3 years. The renting couple just ends the lease on their 5-bedroom and gets a 2-bedroom.

      But hey, lots of assumptions and your basic point is dead on: the place you live is not an investment, it's the place you spend most of your non-working life. Everyone needs to figure it out for themselves! Thanks for the good analysis.

  • Guinness416

    In Ireland you pay your property tax up front, as “stamp duty”, when you buy the house. It costs a HELL of a lot of money to pay that up front, but you save for it in the knowledge the cost is there, and people like my parents and grandparents have almost zero outlay (beyond basic maintenance and optional stuff like prettifying the garden) every year for their housing.

    • @Guinness416: I'm sure it costs a lot to pay it up front, but sheesh – not having to worry about the superintendent of schools whining about needing more money for schools (from property taxes) after he returns from his school-system-paid fact-finding trip to London would be worth it (true story, by the way – love ya, Jersey).

      Someday the US is going to have to take a serious look at taxes. Not overall burden, which is fine, but simply how it's paid. I am sure Ireland has infuriating tax code, too – or maybe not, I don't know – but in this case it seems like a much fairer system. Sigh.

  • This culture is so mobile now that no one pays off their mortgage. They bounce around for something newer and better. Same as looking for a job no one is content with one job anymore.

    • @moneymonk: You're right, but I still hope I won't be paying off a mortgage when I'm 75…

  • This is why renting works for me – yes, I have a smaller place than I would if I had a home, but my rent (just under $1k/month) is about half or a third of what a house would cost me here in the Bay Area. I figure I can keep saving double digits for retirement, and get some money for an eventual down payment in the bank – IF I decide that owning makes sense for me, I could wait until I'm 50 and buy with a 15-year mortgage. I'll have saved a ton more for retirement than if I had a house now, and I'll still be paid off when I retire. I'm not remotely convinced I want the onus of home ownership though.

    People who point out that renters pay the owner's costs neglect to factor in the year of purchase: while I started renting within the last four years, the owners of my apartment building bought it 20 years ago when costs were a LOT lower.

  • Personal finance

    Property taxes are on the rise everywhere in the world. Living in a comfortable house according to the number of members in the family is every one's dream. But owning a house is not very easy in today's economic condition.

  • Home ownership works for some people and doesn't work so well for others…I guess each person needs to figure out if home ownership will be a net gain or net loss for themselves. Whatever you do, if you buy a house you need to get a 15 year, low fixed interest rate deal with a payment that is at most 25% of your income.

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  • My only concern about renting when we are elderly is— the moving factor. If the landlord should sell, we may have to move. I moved yearly in my twenties and thirties. It wasn't easy, but it was doable. In my 80's? No thank you.
    We have five years left here then we are off to something SMALL with lots of land—maybe a tiny house. We paid cash for this (16 years of renting accumulated the savings) and will pay cash for the next one. I Will look at taxes before we settle the next time. The Midwest is not as cheap as others tout!

  • I agree in principal will alot of what you've said. Appart from shoddy construction. I live in a 60 year old fibro, sheet iron roof and wood frame house. It's lasted better and is cheaper to repair than most. What happens when you have a brick work that needs repair? It'll cost you a fortune and you can't diy. Timber frame, fibro means i can diy all i want

  • Great article … and I agree with you; but, you're missing the other half of the article. That would be How to Avoid and How To Get Out of the dead end. I'll be looking forward to it!