Over the past thirty years, homeownership has represented a sure path to personal wealth. Homeowners watched the value of their properties rise seemingly with no end in sight. Thus, owning a house was considered one of the best investments a person could make.

The last few years have taught us a slightly different lesson: bubbles always burst. Prices have fallen and homeowners have watched their property values deteriorate, giving up much of the gains they enjoyed over the last decade. Given this, it’s worth revisiting the most common fallacies about owning a home. If you keep the following in mind, you’ll have far more reasonable expectations when looking at homes for sale.

It’s One Of The Best Investment Vehicles

When housing prices were enjoying strong momentum, it was easy to think of your home as part of your investment portfolio. In fact, many people lacked stocks or mutual funds in their long-term investment mix, but considered themselves fully invested by virtue of owning their house. The problem is, the recent real estate meltdown has revealed that this notion is deeply flawed. Homeownership delivers a rate of return that has historically underperformed the stock market.

Bottom line: buying a house should be considered an investment in your lifestyle, not your future net worth.

Tapping Into The Equity Is Like Having An ATM

A confluence of factors made it possible, even irresistible, for homeowners to tap into their house’s equity. Due to rapidly rising valuations, low interest rates, and lenders who were only too willing to meet the demand, there was a surge in refinancings. Homeowners borrowed against their equity to pay for vacations, private school tuition, and even to maintain their lifestyle when it outstripped their income.

In retrospect, this was done during the boom, and thus was unsustainable. As home valuations have plummeted, millions of homeowners have found themselves saddled with a debt load that exceeds the value of their property.

Bottom line: after you purchase your house, avoid tapping into the equity unless doing so is necessary.

You’ll Get More Mileage For Your Dollar In The Suburbs

During the housing bubble, one of the biggest trends in homeownership was a mass migration to the outskirts of major counties. Many people moved several miles away from their friends, family, and jobs for the sole purpose of buying “more home for their money.” Unfortunately, living far away carries hidden costs. For example, most people saw a significant rise in their fuel costs as their commutes to and from their jobs became longer.

Bottom line: price alone is an insufficient measure of the ongoing cost of homeownership. Just because house prices in the suburbs are low does not mean they represent a bargain.

Small Down Payments Are Usually A Bad Idea

To be sure, the “nothing down” mortgage loans that were extended to anyone who wanted to purchase a home were a mistake. There was no shortage of risk involved, which has led to a number of problems. That said, making a small down payment is not necessarily a bad decision. In fact, there are a several benefits to doing so.

First, if you put down less than 20 percent, you’ll be required to carry mortgage insurance. The upside is that such insurance can result in a lower interest rate since there is less risk involved for the lender.

Second, putting a smaller down payment allows you to keep a portion of your money liquid. You can tap into it easily for any reason.

Third, you’ll be able to put part of your money into investment vehicles that have historically yielded a higher annual rate of return than homeownership. Essentially, you’ll be able to diversify your investment portfolio.

The recent downturn in housing valuations has created a buyer’s market. There are many homes for sale that are currently listed at bargain prices. But keep the four fallacies described above in mind. Buying properties with reasonable expectations will provide peace of mind regardless of the direction prices travel in the future.

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Category: Real Estate
Keywords: looking for homes, house shopping, homes for sale, common falacies about buying a home