The best single step anyone can take to indicated they are on the right path towards wealth building is to purchase a home. According to Statistics from The U. S. Census Bureau homeowners have 17 times more wealth than non-homeowners. Home ownership is the most significant predictor of wealth for middle income Americans.
That said, homeownership is not for everyone and the timing of a home purchase is a major consideration. I am a major advocate of homeownership and yet there are four circumstances when it is clearly not the best choice. If you are considering purchasing a home I would consider the following reasons for not buying a home before you make a commitment that may not be in your best interests. I offer the following considerations not with the objective of talking you out of pursuit of your dreams, but in the hope of making you aware of the conditions that may make homeownership something that you should postpone.
Reason 1
You Job or Income Source Is Not Stable
When most people buy their home they get a mortgage loan for the purchase. The lender will require employment and income history for two years to qualify you for a mortgage loan. Even if you qualify for such a loan you may know of pending layoffs or other potential interruptions in your income. The last thing you would want to do is to purchase a home only to have to sale it or lose it for non-payment. If your job or self employment income is about to take a hit wait to buy until your income stabilizes before you make a commitment of this magnitude.
Reason 2
There Is A Good Chance You Will Move or Be Transferred In The Next Three Years
Some careers are more stable than others and career moves are frequent. If you are in such a career homeownership may be best postponed until you will be at one location for at least three years.
The cost of acquiring a home and re-selling it can be substantial. Your acquisition cost and reselling costs will likely exceed 10% of the purchase price. Since homes typically appreciate at about 3% a year you would not be able to cover the cost of reselling your home if you are in the home for less than three years.
Reason 3
You Live In An Un-affordable Area
Some areas are notoriously high priced and the price to rent ratio may tip the advantages of homeownership towards renting. What is the price to rent ratio? It is a mathematical calculation that compares the cost to rent to the cost of home ownership.
Here is how it works. Take the annual cost of renting (which is monthly rent times by 12) and divide the annual rent into the cost to purchase the same home. By way of example:
Monthly rent:$1000, Times 12 months = $12,000 Annual Rental Cost
Purchase Price: $240,000
Now Divide the Purchase Price or $240,000 by the Annual Rental Cost $12,000.
You get 20 for your answer. So it costs twenty times annual rent to purchase. That is the upper end of affordability. I strongly recommending purchasing a home if you can when the price to rent ratio is 10 or less. In the range from 10 to 20 it is likely to be a decision based upon other factors. If you plan on living in the are you may want to reach up to the higher end of the scale, if not wait until your situation stabilizes.
Reason 4
You Live In An Area Of Falling Population and Prices
Certain areas have a dynamic of falling home prices and it is likely that they will continue to fall. Examples of this are areas of closing factories and jobs moving elsewhere. As there is an outward flow of population demand for housing is bound to drop as will prices. You can purchase a home for non-economic reasons but it may not be in your best economic interest to do so.
Everyone’s situation is unique and I encourage homeownership for most people; but the four reasons above clearly tip the scale towards renting unless your desire to own is not based upon economic factors,