The concept of home ownership has changed for this generation, not only in the logistics of the best way to do it, but also in the desire and demand for owning versus renting. According to the Penn Institute for Urban Research, the U.S. homeownership rate is now at 63.7%, the lowest in 48 years. “Homeownership rates have declined for all demographic age groups. Since 2006, the number of households who own their home in the United States has decreased by 674,000 while the number of renters has increased by over 8 million.”1
Jon Solitro
But isn’t owning your own home the American dream? Isn’t it a great investment? If we’re looking strictly at the monthly payment numbers, traditionally paying a mortgage is cheaper than paying rent for the same-size home. That became even more true as home prices dropped in 2007-2008 and as interest rates also dropped over the last several years. Then there’s the age-old concept of “building equity” or “throwing away money on rent.” As a financial planner, I get asked all the time about a home as an investment. It certainly can be, like any investment, if you buy and sell at the right time. But something is only an investment if it grows, and you can’t predict if you’re going to buy and sell your house at the right time. The median price of an existing home sold in March 2021 was $329,100. That’s a 17.2% increase from March 2020. Times are certainly crazy right now in the real estate market.
What many people don’t think about are the other costs, and not just financial costs. Today’s generation is more aware of the added stress and burden of maintaining a home and the money you can sink into it for maintenance, let alone remodeling. Then of course there’s the mortgage interest, property taxes, and insurance that you won’t have with a rental. Lastly, the biggest reason today’s generation is choosing to rent more and more is the flexibility. They want to be more mobile, able to get up and move without having to worry about listing, selling, and possibly owing more than the house is worth, and being stuck. We saw this with many residents that bought a home during residency and then tried to sell when they landed their first job, only to find out they owed more than it was worth because of the real estate market collapse of 2008. Approximately 50% of physicians will leave their first job within 1-3 years, so it’s a gamble that you’ll be able to sell your house when you want to for the price you need.
But what are the benefits of buying? First, there is the age-old argument of building equity. If you stay in your house long enough, and plan to sell it when you retire and downsize, it can definitely be an investment. If you keep a mortgage long enough, eventually you’ll pay it off, and have no payment. Mortgage interest is also tax-deductible. Lastly, there are the intangibles – like being able to put down roots, build a community, and have the ability to remodel and customize your home, a feature not usually available when renting.
Now that I’ve effectively talked you out and back in again, what’s the best way to go about buying a house in today’s crazy market? We’ve seen houses list and sell within a day and get multiple offers well over asking price. It’s a very difficult time to buy, but there are ways to make it easier. First, be clear on what you want in a house, especially location. There’s nothing worse than buyer’s remorse in your primary residence, and that happens more these days when people have to quickly make a decision. Find a good, fee-based financial planner to help you decide how much house fits in your budget and your long-term goals. You’d be surprised how easily we can talk ourselves into paying much more than we had originally decided. Use your financial planner to help avoid emotions getting involved and creeping up your price (especially when multiple offers are involved). A good rule of thumb is for a housing payment to be no more than 33% of your take-home income. This includes principal, interest, and taxes. Or, many planners will use the “2x income” rule of thumb. So if you make $300,000, don’t go over $600,000. Although with today’s low interest rates, there is some more wiggle room on that. Next, get a good referral from someone you trust in looking for a realtor. Real estate is a commission-based job and can have some potential conflicts of interest, so getting a recommendation can help. Or, there are realtors who will work for a flat fee, regardless of how much you pay for a house. That can help reduce the conflict.
You made the offer, you beat out the other bids, and you’re getting a house! How are you paying for it? Hopefully, you already got preapproved. This means finding a good, reputable mortgage professional. Get referrals, shop around, and take your time. Get multiple quotes before you start the underwriting process. They shouldn’t have to pull your credit to give you a fairly accurate estimate of what interest rate you’ll qualify for. Usually, they will give you fixed and variable interest quotes. I normally recommend fixed interest. Because interest rates are so low right now, they’re only going to go up in the future, and if you have a variable rate loan, your payment will go up as interest rates rise.
Is a physician loan a good idea? Depending on your circumstance, it can often be a good deal. Most new attendings don’t have cash saved up for a down payment, and these often don’t require one. And the other big benefit is that they won’t consider your student loan payments when calculating your debt-to-income ratio. Mortgage lenders will look at how much other debt you have when determining an approval. And a conventional mortgage will take your student loan payments into consideration, which means you’ll qualify for a much lower payment and purchase price. In my experience, you want a credit score of around 700 or higher to qualify for these types of loans. The only downside of a physician mortgage is the rates are slightly higher. I encourage you to start the application process early; they’re taking upward of 90 days lately.
As the mortgage is being processed, you’ll have an inspection and appraisal, and as long as those are all favorable, you’re in! Now, should you take any surplus income each month and pay extra on your mortgage to pay it down sooner, or invest it? Everyone’s situation is different, but a good rule of thumb is to look at interest rates on the debt you want to pay off versus expected rate of return on the potential investment. For example, if you have extra money, should you invest it in an SP500 index fund that historically gets 8%-12% per year, or put it on the principal of your mortgage that has an interest rate of 3%? Assuming no other factors or goals, and you just want the best bang for your buck, my money would go toward the investment getting 8%-12% over saving 3% on my mortgage.
Take your time, do your research, and find good professionals. There’s no right answer for everyone, but there are certainly some good practices when walking through the first home decision. Here at FinancialMD, we only work with physicians, and we’re happy to chat if you want some guidance on this. Send me an email and subscribe to our weekly Didactic Minute videos on YouTube for more financial tips for young physicians. Good luck!
Mr. Solitro is a financial planner and CEO of FinancialMD. He has no other conflicts of interest.
Investment advisory services offered through FinancialMD, a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. This article is provided for informational purposes only and nothing contained herein should be construed as a solicitation to buy or sell any products. Advisory services are offered only to clients and prospective clients in places where FinancialMD and its investment adviser representatives are registered or exempt from registration. Investing involves the risk of loss of principal. Past performance is no guarantee of future performance and no investment strategy can guarantee a profit or protect against loss.
This article was updated June 8, 2021.
Reference
1. Wachter S and Acolin A. Owning or Renting in the US: Shifting Dynamics of the Housing Market. Penn Institute for Urban Research. 2016 May.
