Ask Money

A home and a margin of safety

Chris Farrell Apr 16, 2012

Question: My boyfriend and I both currently work full-time and are in school. He’s working toward an associate degree and I’m working on a master’s. When we both finish, in the spring of 2014, we’ll be qualified for much better-paying jobs. We’re also planning on getting married between now and then and starting a family once one or both of us has found new employment.

We weren’t planning to buy a home any time soon, but I recently inherited $40,000. We plan to spend around $15,000 on our wedding and the rest on a house down payment. We both love the city that we live in and could buy the home of our dreams here for $150,000 max. The problem is, although the area is perfect for the two of us and young children, the public school system is terrible. I’ve heard that houses in neighborhoods with poor school systems are difficult to sell. Plus, I’m worried that we’d want to move but wouldn’t be able to sell our house if the market hasn’t rebounded significantly in the intervening 5 years. On the other hand, we love the area and the historic housing stock and are both getting pretty sick of renting! 

My question is, how do you know that you’re ready to take the plunge? Do we go for it now before we have kids or a job hunt to worry about? Do we wait 2 years until we both have better-paying jobs and can better afford unexpected expenses on the house (or, if we’re paid very well, private school for our kids)? Should we wait all the way until our kids are school-aged, in case we want to move to a location that we don’t like as much but has a better school system? I’d rather purchase a home sooner rather than later because the prices are low, but don’t want to get stuck! Help! Leah, Ypsilanti, MI 

Answer: You’re asking all the right questions. My reaction is that you’ve answered your own question about when to take the plunge: It’s too early. It seems to me you face too much uncertainty at the moment to lock your savings into a home. I’d keep renting, at least for now. I would use this time to think through and research your options. 

By the way, one of the biggest myths in real estate is that renting is throwing your money away. It isn’t. The real question is which offers you a better margin of safety when you’re in the market for shelter: owning or renting? At this stage of your life — finishing up school, getting married, looking for better-paying jobs — renting offers you more financial flexibility and financial safety. You can still build up equity while renting by putting some money automatically every month into a safe savings account, adding to your $40,000 inheritance. The savings can be tapped to buy a home when you decide it’s a good move.

My recommendation is to wait until you’ve both graduated from school, have gotten those better-paying jobs and can make some reasonable guesstimates about the earnings trajectory of your careers. It’s a conservative approach.

You’ve also raised a number of critical issues — especially the potential trade-offs between living in an historic house and your (future) child(ren)’s education. If you buy an historic home but really won’t want to send your children to the local public schools, is a private school or charter school a realistic alternative? Would you be happy in a community with better schools but a very different ambience from the historic homes you like? There is no right or wrong answer. It’s what trade-offs work for you and your fiancé.

I would use the time between now and your new jobs for you and your fiancé to talk though these issues, visit open houses and do your own research on homes, finances and neighborhoods.  

No one can pierce the fog of the future. My best guess is that home prices are nearing bottom. (Full disclosure: I thought that last year and prices continued to come down.) Most economists have a hard time coming up with scenarios where prices rise much over the next several years. The damage to the market has been too great. That said, local conditions matter. Home prices in some neighborhoods will jump more than the national average, and vice versa. It’s a risk.  

When it comes to owning, I strongly believe in keeping household finances conservative. Here are some key guidelines for weighing the costs and benefits of homeownership: 

  • Compare the cost of owning vs. renting.
  • Buy only if the deal is financially conservative.
  • Keep the financing simple.
  • Smaller is smart.
  • Be sure you can stay in the home for at least 5 years.

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