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Wednesday, August 25, 2010 11:15 PM

Reader Mailbag: I Want a House, Should I Buy One?

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Here is an email from "Living With Parents" who wants to buy a house and move out. Should she? LWP writes ...

Hello Mish

I am young, well liked at my job, and have solid qualifications (a bachelors and masters in accounting and a CPA license). I've paid off all debt and have been saving money.

There is a new home neighborhood that I have been watching for a couple of years. I can purchase a house with PITI (Principal, Interest, Taxes, Insurance) that's less than what I could rent the house out for in that area.

The house is being offered at $150k and I think that by waiting another month or two and offering towards the end of the month I could get about $10k knocked off the price. The house is near all of the major job centers and is in the best high school district in town. The high school is very well ranked nationally, not just locally. It is the smallest and least expensive house in the neighborhood but is still three bedrooms, two baths and two car garage. The other homes to be built or for sale in the neighborhood have been going for $175 - $200k for larger plans of course.

My plan would be to get an FHA loan because it's assumable. Also FHA requires less of my cash up front. I would put all savings towards investments or cash accounts instead of house debt. Eventually I'd like to be in the position to start buying and managing single family rental properties.

Does this sound like a good investment right now to you? I currently pay my parents a small sum to cover utilities etc while living in their basement. The apartments I have been looking at would cost maybe $100 less than the PITI on the house. I am ready to be in my own place, but also want to keep my long term financial outlook in good shape.

I figured you might have an interesting and different take than me on what I should do in my position. I know there are other young professionals in my situation because I'm friends with them, so maybe other people who read your blog might benefit from reading a post with your response?

Thank you,

Living With Parents
Hello LWP

If your job is stable, you want a house, and you can afford a house, why not buy a house? I have a house. There is nothing inherently wrong with houses per se.

However, please don't think of your house as an investment, at least in the classic sense. Robert Kiyosaki author of the bestselling book Rich Dad Poor Dad maintains houses (except rental houses) are a liability not an asset.

I do not go quite that far, especially if a house that has equity.

Regardless, too many people bought houses as a "can't lose investment" then subsequently lost their ass because that paid too much, used too much leverage, or just plain played the "greater fool's game" and got burnt.

Even from where we are now, prices could easily drop 20% or more and take a decade to recover.

The key in your situation is the home you are looking at sells for less than rent would cost. That means (if you are correct), you have at least a reasonable starting valuation. One sign of bubble pricing is if home prices are way out of line with rental prices or wages.

Moreover, as I see it, there are considerable advantages to moving out. I would want to move out. There is a lot to be said for personal freedom!

However, financially speaking, you have a sweet deal living at home.

Those are the points and counterpoints that only you can decide. Please consider your priorities, and as long as they are reasonable, then do what is likely to make you happy. If you are prepared for home ownership, and that's where your priorities are, by all means go ahead.

Mike "Mish" Shedlock
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