This is my sixth article on personal finances, and the fourth one that deals directly with purchasing a home. It is only natural that I should spend a fair amount of time discussing home ownership since a home loan represents the largest amount of debt that most people will get into during their entire lives. In my previous articles I mentioned that wise young Christians will take the necessary time to calculate and consider the consequences of personal debt before they ever take out their first loan. Today I am continuing that theme by warning of the risks that come with buying a “starter home.” Many people buy starter homes thinking that they are a good investment that will make them automatically accrue equity and therefore have a larger down payment on the next home they buy, not realizing that they sometimes have the opposite effect. Purchasing a starter home can often result in the loss, not gain, of purchasing power.
First of all, I want to say that I am not opposed to buying a starter home in every situation. In some cases it is recommended. If you anticipate, for instance, that your career will require you to frequently move your family long distances, then you would be foolish to buy a house that is too much larger than what you currently need. Also, some people are more able than others to face the risks associated with buying a starter home. Small families, for instance, will not be inconvenienced as much as a larger family if their starter home becomes their permanent home. Likewise rich people may be more able to risk a loss of capital on their first home.
The primary target audience of this article is Christian young couples with modest incomes who want to have large families. These are the people that could be hurt the most by purchasing a starter home in the wrong place at the wrong time. Families with one parent at home may find it difficult to realize their dreams of having lots of children if their starter home backfires on them. These are the people whose long term needs cannot often be met by the first home they buy, so it is imperative that they are able to sell it later for a good price and buy another one. Unfortunately, since most of their savings are tied up in their first house, they will be unable to afford a second house if market conditions make it impossible for them to sell high.
Many people think that they can make a lot of money by buying a starter home and then “flipping it.” In some cases they can. However, in some cases they can’t. Home ownership is an expensive business. It often ends up costing more money to own a home than the buyer anticipates. In an earlier article I explained that young couples who buy houses early are usually throwing away more money on non-principal housing related costs than young couples who rent. That means that when you buy your starter house you might be paying off your loan slower than you could have grown your savings if you still lived in your previous apartment. In addition, you will presumably have to spend %6 of the starter house’s value on a realtor when you finally sell it, and then you will have to pay closing costs all over again when you buy your second house.
Therefore, in order for a starter house to “pay for itself” it will have to inflate in value by quite a bit between the time you buy it and the time you sell. This is obviously a gamble. While it is true that house prices generally do rise over time, their rate of increase is not usually predictable. At times they may even go significantly backwards (as they have done dramatically in the past few years). And even if house prices are going up in general that does not necessarily mean that your house specifically will increase in value. In the end it will depend upon finding the right buyer, which is something that cannot be taken for granted. Your house may be worth a lot on paper, but until someone decides to give you a good offer, the supposed value of your house will do you no good.
Even if you are finally successful in selling your house for a good price you still may face other hurdles that will make it difficult to buy the house you really want. The main one is that the sale of your first house will greatly affect the timing of purchasing the second one. The person you want to buy a house from may not be interested in waiting for you to get rid of the house that you currently own. They may decide to sell their house to someone else for less money who is able to close before you are. Or if they do accept your offer, failure to sell your house on schedule might make you unable to get funding from the bank, terminating your deal with them, which may result in the house being sold to the next person in line behind you. This happens all the time. It is common knowledge that it is a serious disadvantage for a home-buyer to be a home-owner.
The simple fact of the matter is that some young couples simply can’t afford to take the risk of buying a starter home. Why jeopardize your dreams by buying a starter home, if you know you can afford the house you really want by just living in your current apartment for a few more years and saving up a larger down-payment? Yes, you may be less comfortable in the short term, but you will be better off in the long term. Simply put, starter homes are a luxury that not everyone can afford to have.