American Dream or American Scheme?

American Dream

Over 80 years ago, James Adams said “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. This is known as the American Dream. Buying a home has also long been called the American Dream, probably because it gives one a great sense of accomplishment. After a lot of hard work, and intentional saving, one is able to purchase a little slice of American soil. A slice they can call home.

My, how things have changed.

My grandparents lived in one house for 30+ years, and they worked for the same company for 30+ years, but this lifestyle is now the exception, not the norm. The average length of home ownership now is about eight years.

It’s like we’ve been brainwashed by America circa 1940. We’re told The Dream is to own a home, so we buy one. But did you know that you are nearly 10% underwater the second you buy your home? No really you are. Check out this example…

  • Todd has been saving like a mad man and pays cash for a $300,000 house. He decides three months later to take a job in a new city. He no longer wants this home, so he puts it on the market for $300,000. He gets a full-asking price offer, but after Todd pays 3% commission to the buyer’s agent, 3% commission to the sellers agent, and another 3%-ish in fees Todd only has $270,000 in his pocket. He lost 30 grand even though he sold the house for exactly what he paid for it.

Do you get it?!

The numbers don’t lie, real estate is a pretty terrible investment. It barely beats inflation. But that pesky American Dream tricks you in to thinking the house you’re looking to buy is, for some reason, a steal of a deal. You tell yourself it’s under-market value or in an up-and-coming neighborhood, but you ignore the fact that you will probably sell it long before you realize any significant return-on-investment.

Look, I’m not anti-homeownership. Girl Ninja and I are still looking to buy our first place, but I can’t let us get caught up in the American Dream hype. It’s only when one buys a home, and lives in it long enough to either A) no longer have a house payment, or B) realize a substantial appreciation in value, that I think it makes financial sense to take the risk.

Time’s have changed kiddos, whether we choose to acknowledge that or not remains to be seen.

24 thoughts on “American Dream or American Scheme?

  1. I have owned my current home for 7 years but I knew that I would not be moving when I bought it.
    I don’t think there is a rush to buy but in my small city decent rentals are hard to find. Students and people on social assistance make up the bulk of our renters and the first thing that landlords do when they buy a property is to attempt to divide it. If they can’t divide it then they rent the entire thing out to 5 or 6 students.

    We have some nice but very small single family homes for sale under 200K. Just make sure you don’t buy a house next to a student rental.

  2. For us, it made sense to buy a house. We knew we were going to be staying in the same area for at least four or five years, and we could get a mortgage/property taxes for the same monthly price as most apartments around here. So while we may not get a full 100% return on the house, we’ll still get something back when we eventually sell, which is better than the nothing we’d get back if we were renting!

  3. This is something that we struggle with a lot. My husband and I currently rent a 2 bedroom house for $675/month. It works well for us since it gives us mobility and we aren’t responsible for repairs or yard work. Part of me wants to keep renting forever, but when we someday have 2 teenagers, we will definitely want more space. At that point I think buying will become more attractive. We plan on buying a home in cash, so the only ongoing costs would be maintenance, insurance, and taxes, so if those combined wind up being less than renting a larger house I think it will make sense.

    But, we also remind ourselves that home ownership is largely an emotional decision for us. While we do think the numbers will eventually work in our favor we mostly like the idea of our kids growing up in a home that is “ours.”

  4. When my husband and I got married purchasing a home was #1 on our to do list for different reasons. For him it was important because he grew up in one house is entire life and for me it was important because I never did. I grew up in apartments and trailers, I wanted a home – I wanted that piece of the “American Dream” whether it was true or not. We paid cash for our house and got a great deal $68,000 for a 4 bedroom 1 bath home in a decent neighborhood that had been recently renovated (we live in one of the cheapest housing markets in the United States).

    When we bought our house we bought it knowing we would live here forever – it has room to grow into but not so big that we couldn’t deal with it in old age (it’s a one story with no steps). For us the so called American Dream is alive and well. We realize that if we were to sell our home we wouldn’t recoup what we paid for it and what we’ve put into it – and that’s why we won’t sell it. I think a lot of people get themselves into trouble when they buy “starter homes” – going from one home to the next after living in each one for a few years.

    Home ownership isn’t what’s wrong with the American Dream wanting to “one up” the last home you lived in is.

  5. We are closing on our dream home in 9 days!!! Yay! This home is a mile away from my childhood home, walking distance to church, school and the store and after moving 6 times in the last 6 years with our 5 year old twins, I seriously get teary eyed just knowing that they will have a ‘home’ now. Yes, they have a a home (6 of them) since their birth…but we are thrilled to settle down. The price and possibility of inflation or depreciation don’t really matter to us since we don’t plan on moving.
    I’ll throw in my $0.02 cents about renting too…I have NOTHING against renting. The problem I have with properties not occupied by owners is big businesses coming in and buying single family homes with all cash that regular families want to buy to live in. Over the last 8 months of house hunting we came across some beautiful homes that we wanted to put offers on (with 20% down and a mortgage) and we got squeezed out by companies with all cash wanting to rent them out or flip them for a profit. I don’t think that’s cool. I think people who want to buy and build a life in that home/neighborhood/community should get first dibs over people trying to make a buck.

  6. I’m confused. If housing is such a bad investment then why were you ready to buy a rental a month ago? Either rents in your area at least cover PITI+maintenance & fees or they don’t. Renter are providing a profit to the landlord (Interst+Taxes+Insurance+ maintenance <= rent ) or the house is losing money. It doesn't make sense to say housing is an awful investment as long I am living in it, then talk about committing money to the purchase of a rental.

    • I can see the reason for confusion. The reason the rental option was on the table was not the rental income potential. In the post I said we’d only be getting about $300/month each in passive income at most. Obviously that’s not a life changing sum. I was interested in that rental property because we were going to buy and hold for a long freaking time. I said in the post if we weren’t going to keep it at least 10+ years, then we wouldn’t consider the deal.

      I’m saying virtually the same thing in this post. If one is going to buy, and then sell a few years later, they are more times than not going to be better off never having had bought in the first place. The 10% fees people have to pay when they sell are too overlooked. You have to spread that loss out over a longer period of time.

  7. I think it depends on the market, and what kind of house you are planning to buy. We are planning to buy a house, but it will definitely be a starter home 1500 sq. feet. Max I’m willing to pay for a house is $150,000. Our mortgage, plus tax and insurance will be the same as our apartment’s rent. I know our expenses will increase a bit, (higher energy costs, maintenance here and there), but I am accounting for these increase by trying to figure out how we can lower our expenses now.
    If we end up moving later on, we can easily rent out the house.

  8. My girlfriend and I plan to buy a home with cash one day. I guess we see things a little differently than most in our lives, since we see purchasing a home as similar to buying a computer or new phone. It’s not a necessity, and we’re looking at the purchase with the plan to get a place we like, without worrying about whether we will get a return on our investment. If we end up moving down the line, it’ll be just like buying yet another phone, with a slight discount for turning in the old one.

  9. No offense – but you remind me of this kid who wants to buy something and keeps raving about how good it is, how amazing it will be to buy and play with it. Then for some reason ends up not buying it. Now all his energy is spent in trying to justify how buying it wouldn’t have made sense in the first place.
    Just an opinion – its your blog and i will still come by and read it, but i am sure i am not the only one who thinks that you spent a good part of a year raving about how buying a home is THE thing to do (when it was affordable in your view), and now suddenly you keep saying that it is actually the other way around.

  10. Ummm, I’ve never raved about home buying. If you click through my archives you’ll see I’ve written posts titled “Why housing isn’t a great investment, but I’ll still buy one.”
    “Why renting doesn’t suck.”
    and dozens others like it.

    I don’t think I’ve ever written a post where I’ve been like “Buying a home is the smartest thing ever.” If you’ve seen a post like that here, please point me in that direction. I don’t think buying a home is stupid, and like I said in this post, Girl Ninja and I will probably buy one soon. But it would be silly of us to not tread very carefully as we considering taking on a couple hundred thousand dollar debt.

    I’m trying to not get sucked in the emotion of buying a house, but really considering statistics and how the numbers play out.

  11. When i re-read my comment above – it throws a completely different tone 🙂 Sorry about that.
    All the factors remain the same in the last 18 months or so – the only difference is that the seattle real estate market is really hot now. If you had purchased a home then, you would be sitting on a good chunk of profit (all other things still remaining the same).
    So it is surely a timing, local market thing – and if the economy does not tank, buying a home will end up being a good investment in the long run (even the average 8 year holding period)

  12. No, real estate is a long term investment! That means more than 5 years. You should not invest in real estate unless you know for sure that you will own it for at least 5 years. In your example, he could have kept it and rented it out. It is not the best choice, but he would not lose $30k,

  13. Damn you are so right on this one. My wife and I are looking for our next home, but we never realized the “potential” of our current home. While we plan on moving to a home that we would love to stay in for many more years, how I can tell that we won’t move somewhere else. I don’t consider my home an investment anymore. They don’t realize returns, but I need a place to stay and there is no potential for recouping investment in a rental, so home ownership is the next best thing.

  14. I don’t think of my home as an investment either. If you are not planning to stay in a place for more than 5 years, I don’t see any advantage of home buying. If you are and the home is paid off, you have the advantage of removing your largest expense. All this is just restatement of what others have said above. However, one way to benefit from real estate is to own shares in a Real Estate Investment Trust. I have about 5% of my IRA in the Vanguard REIT index fund, and it’s done very well, as well as having an historically low correlation with other asset classes.

  15. I agree with you on this. My husband and I bought a house last year, but only because we wanted/needed more space and we’d be paying as much for a rental as we would for all the housing costs combined. Plus we wanted something that we could call our own, decorate as we wanted and such. We both knew going into it that it wasn’t for the investment side of things. The house will be paid off when we both retire and it’s the knowledge of knowing we won’t have to pay rent in our golden years that is worth more to me than any potential investment.

  16. It’s definitely not an investment. I like to think I’ll be grateful to have it when I’m retired on a limited income and have no mortgage to pay. I just hope I’ll have enough retirement funds to pay for the upkeep and to rent from the city (i.e. property tax).

  17. You buy in the hopes of increasing your equity, but also to have control and independence over the property to do with as you see fit.

  18. I wish I could convince my wife not to buy a new home and “suffer” in our paid off starter home. I’m not looking forward to purchasing a new home in this bubble we are having here in Las Vegas. Granted there are cheaper homes in the city, but there is a reason they are cheap. Location, location, location! Hopefully that reason will be my savior on this huge purchase.

  19. Home ownership sucks, don’t buy into the bull crap about the American Dream, it’s more like the american nightmare. A house is just one big money pit that nickels and dimes you to the point you want to move after eight years because you tell your self the next house will be better, but it’s not. I’ve lived in my house 16 years, and now it needs a new roof, new carpet, should replace the hot water heater, just replaced the furnace two days after Christmas, just replaced both garage door openers. Home ownership is not for everyone, I’ve hated it ever since my wife said lets buy a house, and she said that because it was the American Dream. One other note, I’ve also worked for the same company for 30 years and I’m only 47

  20. I don’t think many people buy, expecting to move in less than 5 years. But it happens a lot, due to job changes, family changes, etc. That’s why I think it’s worth buying a house that you can most likely live in for 5+ years…for example, room for children (bedrooms and bathrooms) and the sort.

    Realtor fees can suck so hard. Some people have success with FSBO but I doubt I could swing that.

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