Ways to Buy and Own Your Home
How much to save towards the purchase of a new house depends on the approach taken to home ownership. It's not just about the mortgage, because that will be greatly affected by the path a homeowner chooses to pursue.
The nice house and 30-year mortgage
Part of the proverbial American dream is to buy a nice house adequate to last a lifetime through all stages of starting and raising a family and to pay off the 30-year mortgage before retirement. Some people are able to do this, particularly in more rural areas or where close ties among extended family influence everyone to live near each other. Factors that have made this increasingly difficult to achieve are:
* Housing statistics are from the 2010 National Association of REALTORS® Profile of Home Buyers and Sellers.
- The breakdown of the traditional nuclear family (only 58% of buyers are married couples*)
- The growing number of career changes a person makes throughout his or her working life
- The “shrinking” globe, in terms of the relative ease and low cost of travel and communications
- The steady rise in expectations of standards of living in relation to housing--the average down-payment for first-time home owners is a mere 4%
- Urban sprawl, with more jobs in the cities and 52% of houses in the distant suburbs (bedroom communities)
Despite these trends, 85% percent of home buyers in 2009-2010 saw their home purchase as a good investment, and nearly half think that investment is better than stocks. Indeed, the typical seller in 2010 who purchased the home eight years prior experienced a median equity gain of $33,000, a 24% increase.
View the video at right. Buy outright or use these plans to build your own. Size ranges from 65 to 837 square feet.
Start small and trade up a few times
Another way Americans approach housing is to start with something small and affordable, and then work their way up gradually as they become more affluent and their needs grow. This may mean starting out in a mobile home or something of similar value, but it typically permits home ownership at a younger age. (The median age of first-time home buyers is 30.) Some people consider mobile homes to be sub-standard housing, but they are inexpensive, especially used ones. When the mobile home is paid off and the family has a bit saved up, they can sell it and trade up.
Pre-fabricated housing offers more room and flexibility with a somewhat higher standard of living, yet still relatively inexpensive because of assembly-line techniques that limit what actually has to be done on-site by the builder. Here again, there can be relatively modest borrowing, which can be paid off relatively quickly with most of the payments going to principal and very little to loan interest itself. When it is paid off, though, it can be sold, and the proceeds along with other savings put toward the next nicer house.
This trade-up pattern can have any number of steps and a variety of housing types besides those mentioned. It lends itself well to the tendency in recent decades for people to move frequently (average home is sold after eight years) for job or other reasons. It usually costs less in the long run, but the trade-off is not getting to live in that dream house from “Day 1.”
Urban living with mass transit and no car
A third option that is not nearly as common in the USA as in many other countries, but growing in certain congested metropolitan areas, is buying a condo downtown—close to mass transit—and eliminating a personal vehicle. For this radical approach to work, there has to be a reliable and extensive mass-transit system of monorails, commuter trains or the like. Buses alone are not normally sufficient; though need to be part of the network in order for the rest to work effectively.
Seventy-seven percent of all buyers purchase a detached single-family home, 9% a condo and 8% a townhouse or row house. Eighteen percent of homes purchased are in an urban area. Just don’t try this one with kids! It’s basically for singles and couples.
Commuting costs factor strongly in buyer decisions; three-quarters of buyers say transportation costs are important. They are usually thinking only of operating expenses, not depreciation and other fixed expenses. However, when a home buyer locates close enough to reliable mass transit with broad enough coverage, it is possible in some areas, e.g. New York, Miami or Chicago, to eliminate owning a personal automobile. Taxicabs have to be available for emergencies and those occasions that mass transit won’t work, for one reason or another.
Urban housing is, of course, more expensive than suburban. The gain is in the trade-off with transportation. Financial planners traditionally advise spending no more than 30–35% of your income on housing and 15–19% on automobile expenses, but they also say to spend no more than 50% on a total of housing and transportation. So you can spend more on housing if you’re using mass-transit for transportation. Note, also, that automobiles are depreciating assets, while a home (over any mid- to long-term period) is an appreciating asset.