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house frontRecently a co-worker asked me about buying a house if they didn’t plan to stay there but three years or so. I do have an opinion about buying a house if you’re not going to be living there a long time – don’t do it.

The math may seem to work but there are unknowns you can’t control, like the market.  If the market has dived when you want to sell the house, you’ll surely lose money. Yet get this: you may lose money even if the market remains steady because there are many costs in buying, owning, and selling that rob you of potential profit.

  1. There are buyer-pay closing costs. My wife and I just bought a house and forked over thousands in loan and other service fees.
  2. While you own your house there are insurance, taxes and maintenance costs.
  3. There is interest shoveled to the bank if you have a mortgage.
  4. The seller (which would be you in a few years) typically has to pay closing costs and realtor commissions. On the house my wife and I just bought, of the money we handed over, the seller paid $10,000 of it to the realtors.  Ouch.

So the problem is, when you add up all the above costs, your house would have to rise in value up to 7% or more per year just to break even (and that assumes today’s low interest rates). Yet historically, home values appreciate by about the same amount as the inflation rate (which has been 3%-4% annually on average).  How could you possibly come out ahead given this situation? This is exactly why buying a house short term is a good recipe for losing money.

But you say, “The market is hot in my area right now!” Beware. The market was hot when we bought our last house too. But when that housing bubble burst, home values dropped like a rock in a lot of places.  In our Pacific Northwest small town, home values held steady.  Our house value never dropped.  But because it was overvalued when we bought it, it has not increased in value much since the bubble burst. In fact, after owning it for ten years, even though we’ve done some great upgrades and have maintained it in perfect condition, it is now only worth about 10% more than what we paid for it. That is a very crappy growth rate (about 1% per year). As far as investments go, we’ve lost our shirts! If we would have had to sell our house within the past ten years, or even now, we would lose money.

The main reason to buy a home is for long term, non-tangible reasons. Like to raise a family. We love our house and have no regrets. And we plan to continue living there for many more years. We’ll probably come out okay financially in the long haul.

In my opinion, buying a house short term is not worth the gamble.  I would rent. All that said, as long as you know the risks going in and are willing to take them…go ahead, lose your shirt!

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