Five Fallacies When Buying a Home

My wife and I were recently having a discussion with our daughter, and she made a statement that had a profound affect on me. Her statement was, “We need to buy a house. Every one of my friends that are my age with kids have already purchased a home, and I feel like we’re behind everyone.” Now, once you get past the “keeping up with your friends” conversation, the larger question remains something that is relevant to the market, and one that I’m asked regularly. The question takes on numerous forms, some you may recognize, such as:

• “Is now a good time to buy a home?”
• “When should I buy my first home?”
• “Is this a good market to buy a home?”
• “Should I make an offer now or wait until the rates come back down before buying a home?”

Perhaps you’ve asked one of these questions or some other variation to a trusted advisor or friend. What struck me during the conversation was not what was asked, but why would we ask these questions? After all, we don’t follow this line of questions when purchasing a vehicle. We don’t ask if we should rent a home or an apartment based on the market. We don’t apply that same thought process to the decision to buy groceries or not this week or the fact of if we eat out or not. We may change what or where we purchase from, but not the purchase decision itself.

That brings me to the meat of the conversation. There are some major assumptions we make when making a home-buying decision. Those assumptions reveal five fallacies in our collective thought process that we need to address to put us on the right path toward making a good decision. Once we address the thought process, then we can talk about the “hows” and “whys” of the conversation that so many people want to jump to, but that’s another conversation for another day. I’ve often found that asking the correct question is much more valuable than getting the correct answer. If you have the correct answer to the wrong question, you may find yourself acting in a way that may not be the most beneficial for you.

Fallacy #1 – Your home is your largest and most important investment

Hold on there…I know I moved your cheese here! Hear me out before you discard the rest of this article! We commonly call a house an investment, but is it truly? What other investment in your life costs money on a monthly basis? You don’t borrow money to invest into your 401k. You borrow money to leverage your earning potential toward the purchase of an asset. You don’t leverage your earning potential for an investment (unless you own a business, but that’s a different conversation entirely). It’s true that your home is likely your largest asset. If your engagement ring or vehicle is worth more than your first home, then the conversation shifts to priorities, but the principle stands. Homes cost money on a monthly basis. They also have functional utility (you can live in them). They need repairs, updates, and regular maintenance. That’s not a description of an investment.

Fallacy #2 – There is a “right time” to buy a home (or do anything for that matter)

I remember asking my mentor years ago when the “right time” to have children was. I was astonished to hear my mentor, who had an answer for everything, tell me “when you do.” We always want to grade our decision making instantly as though there’s some scale by which we get immediate feedback. The only place where I’ve ever experienced that as a regular course of action is in gambling and sports. Home buying is not a sport, and is certainly not something you want to gamble with. There are better times than others, but never a “right time.” As with most decisions in life, we make the best decision we can with the information we have available at the time of the decision. Provided we ask the right questions, we will have sufficient answers to help us make good decisions! The results are subjective and must be graded out over time.

Fallacy #3 – If I do not have this now, I will fall behind

Our economy is one of exchanges and the first rule of Economics is the concept of scarcity. “There is never enough of anything to fully satisfy all those who want it,” according to Thomas Sowell. The fallacy comes in when we introduce the concept of loss into the equation, turning a financial decision into an emotional decision. Any good salesperson will tell you that creating that emotional connection is the first step toward making the sale. That is making a sale, though... not necessarily making a good financial decision. Leave the emotional connection and “selling” to advertisers. That’s their job. Yours is to make the right financial decision!

Fallacy #4 – This is the most important decision of my life

Financially speaking, this is a large purchase and likely the largest asset purchase of your life, but that’s always a relative statement. The average 30-year mortgage lasts about 7 years (meaning most people don’t stay in their home for the full mortgage term). People move, life happens, and things change. Don’t let the number scare you. The size of the purchase is just that… the size. If you use the right financial fundamentals to make the decision, then you are well on your way toward making the right choice. Plus, you can always change your mind. Don’t put yourself under that level of stress!

Fallacy #5 – There are good and bad markets to buy a home

We have established that homes are assets, and just like any other asset, they are susceptible to the pressures of supply and demand. High supply depresses values while low supply supports values. Conversely, low demand depresses values while high demand supports values. Those two factors are always interacting with each other, and have a significant effect on prices in the market. We’re coming out of an economic environment where demand was extremely high and supply extremely strained, so prices were increasing very rapidly. In the current market, the Federal Reserve is attempting to decrease demand by raising interest rates, but they can do little to increase the strained supply. There are always economic tradeoffs that we evaluate when purchasing or selling an asset. A firm understanding of the forces at play helps us make better decisions.

The first step toward asking the right questions starts with challenging our current assumptions. Even the best answers can’t make up for bad questions and assumptions. The goal here is to help us all take a breath. Life is challenging enough without introducing assumptions that increase our stress levels.