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Don’t Buy A Home Within 5 Years of Graduation

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Farm House with Rising SunWhenever I or my wife tells people what I do (personal finance blogger), invariably one of the next few questions they ask is if I have any stocks picks for them. After I’ve explained that I don’t do that sort of thing, the next topic usually has to do with buying a house. After graduating college, the next “big thing” on peoples’ minds is usually buying a home.

My belief is that you shouldn’t buy a home within five years of graduating college or high school. First, a little about my home buying background. I bought a house four years after I graduated, after living in a few apartments, about six months before the height of the housing boom. I’m one of the fortunate few homeowners who have seen their home prices remain the same (no increase, no decrease – chalk it up as a win in my book!) but the reason I argue you shouldn’t buy a house within five years has to do with the non-financial reasons.

Don’t get me wrong, I love owning a home. I love owning our home. But don’t do it within five years.

Loss of Flexibility

When you buy a home, you lose flexibility. When you buy a house, you are putting down roots in the community and you lose flexibility in many aspects of your life. For the first five years of your professional career, your flexibility will be one of your greatest assets. As you learn what you are good at doing and figure out what you really enjoy doing, you may want to change jobs or even careers. When you buy a house, you’re restricted geographically. That could mean that a great opportunity on the other side of the country is something you can’t pursue (easily).

Homes Require Maintenance

And maintenance, regardless of how handy you are, is both a headache and time sink. There’s a reason my friend Fred at One Project Closer never runs out of topics to write about. Things in a house break and you’ll have to fix it. When you rent, the landlord is responsible if the roof leaks. When you own it, you are responsible if the roof leaks and roof repairs are not cheap. In fact, we replaced our 18-year old roof and it cost several thousand dollars.

Learn What You Like

In the five years, take the time to look around and see what it is you like about the places you live in. What do you dislike? Until you’ve lived in a few different layouts and setups, you won’t really know what to look for. Do you really like a big kitchen or just like how it looks in photos? Will you really want a hot tub or do you just like the idea of a hot tub? Is a garage something you really love and can’t live without? Unless you’ve lived in places with these amenities, you won’t know how important they really are to you.

Burden of Debt

A mortgage is a huge weight. As I said earlier, your first few years of graduation should be spent enjoying and exploring your freedom, not saddling yourself with tens to hundreds of thousands of dollars of debt. Believe me when I say that you can be even financially irresponsible for the first few years of your life, buckle down, and still retire a very happy and fulfilled person. As long as your financially irresponsibility doesn’t rack up a debt itself, you’ll be fine.

Waiting Doesn’t Hurt

Home ownership is wonderful, but it’s not the golden path to wealth. Before the housing bubble and subsequent burst, the general consensus was that the path to wealth was through home ownership. You heard stories of people selling their houses after 20 years and making half a million dollars in profit. It was wonderful! Then people did some math and saw that homes appreciated in line with inflation. While you did generate some wealth in owning a home, since you were paying down the principal of a mortgage rather than into the abyss of rent, it wasn’t what many made it out to be.

While it may be hard to hold back given the first time homebuyer credit, which is pretty substantial, consider your options before jumping head first into homeownership. Owning a home is very nice, but renting is nice too.

(Photo: orvaratli)

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46 Responses to “Don’t Buy A Home Within 5 Years of Graduation”

  1. aua868s says:

    agree…also during the first 5 years after graduation we tend to buy a home for “us” rather than for the future (read as, in case I got to sell would I have more takers for a tiny townhouse or a single family house”)

  2. Clayton says:

    I agree it’s good to wait a little bit, but in college I bought a house and had friends rent rooms. it worked well and I was able to sell the home after college for a little extra, I did learn though it’s hard to explain how huge of a responsibility it was. There were many days I had to do chores instead of go have fun, so if your ready to deal with that then go for it.

  3. Anthony says:

    Jim, I can’t agree with you more.

    I graduated three years ago. I got married and decided to buy a house last year. Now, I am looking to advance in my career (preferably in some other state!). And my wife wants to move home (to where her mom is). If we didn’t buy a house, moving for an advance in career would have been easy (easier). But now, I feel somewhat stuck…

  4. Augiebball says:

    Why didn’t you publish this article in May 2006!? I think this is a fantastic idea. I finished grad school at that time and the recommendation I received from everyone was to buy a house. So, I bought a house. I moved across country 3 years later and still own that house. I’ve had it on the market for >250 days w/ minimal to no interest and I can’t afford to lower my asking price because I’ll have to make up the difference on the mortgage. Great advice, just wish I would have had someone tell me this advice about 4 years ago.

    • It gets to be a bit of a balancing act, though. If you have a $200,000 mortgage at 5%, every month you don’t sell costs you about $800/month in interest plus probably at least $200/month in property taxes (plus things like insurance, maintenance, etc. If you can sell the house 4 month sooner by lowering the price $3500, you come out ahead (since you’d incur $4000 in interest and taxes). If you end up having to sit on the house for a year, that’s $12,000 in interest and taxes.

      Of course, it’s very difficult to predict what the magic price point is. I’m also assuming that the house is vacant, rather than being rented.

    • lostAnnfound says:

      Have you considered renting our your house? You’d probably to pay a rental company to manage your property, but it would certainly be better than letting sit there while you’re on the other side of the country paying the mortgage. A rent with an option to buy might help get a potential buyer in there.

  5. BrianC says:

    Totally agree. I like having the option of moving where I want to with a minimum of hassle.

  6. Pat says:

    In general, I’d agree with your advice. But with any advise, the user needs to taylor the advise to their situation.

    1) In my case, my wife and I knew exactly where we wanted to live and putting down roots was a goal, not a detriment.
    2) I’m an engineer, so maintenance isn’t a big deal. It’s actually nice to do some of that type of work instead of technicians at work doing it.
    3) We knew what we wanted. My in-laws are realtors and they were looking out for us, so that was a huge help.
    4) Finally, we couldn’t really wait. My wife and I had been living with our parents leading up to our marriage and NEEDED to move SOMEPLACE. We knew what we wanted, the finances weren’t an issue, so the logical move was to buy a home.

    You points are all valid, just not in my case. :-)

  7. Paige says:

    I understand your points, but agree with Pat. It depends on the person’s situation. We are on house #3 and are 27 and 28. We should have never bought house #2, but we thought we needed bigger and better for our 1 child. Live and learn!

  8. Amanda says:

    Sage advice. I also think it’s good to wait because after 5 years you’re more likely to be able to afford the type of home you really want. Right out of college, I wouldn’t have been able to buy a place as nice as I can afford today. My husband and I are currently 28 and 27 respectively and about to buy our first home… and I’m glad we waited.

  9. RJ Weiss says:

    I bought my first house when I was 24, 2 years out of college. Haven’t regretted the purchase.

    The goal is to not have a home payment by the time my wife and I are ready to have kids, so 5 years. So we’re trading some flexibility in our 20′s for flexibility in our 30′s.

  10. aa says:

    I bought my house AND got married 2 years after grad school. Well, if you’re really moving elsewhere, that means you’re getting much richer, and the house shouldn’t be a big drag while it’s listed, no?

  11. That seems like the opposite point of vies of most people. Even when rates and prices are this low, and first time buyer inentives are available?

    John DeFlumeri Jr

    • Jim says:

      Yes, I think the reasons I outlined outweigh the soft financial environment.

      Rates have been low for many many years, there’s no reason to believe they will suddenly shoot up. Even if they do, home prices will react to higher rates by falling even more. What someone will be able to pay will depend on their income and their ability to get a loan. If rates go up, they can afford less house… so the balance is still preserved. Home prices were so high, relative to history, because rates are so low. In the end, the monthly payment is dictated by one’s income, not rates or anything else.

      As for incentives, $8,000 sounds like a lot of money but it’s not compared to your career. First, if you can change jobs and get a healthy raise for it, it magnifies over the years as your compensation is increased based on your current base pay. Second, if you can change careers to something that is better suited to your skills and your preferences, I think that’s worth more than $8,000.

      I’m not saying that someone buying a house within five years is making a huge mistake, but I think that in most cases you should wait. Flexibility and freedom are two of your greatest assets as a young professional, don’t lock it away just to own a house (unless it makes sense to!).

      • pcallaghan says:

        I see this as a very good point, but there are times where it does make sense. I’ve been out of school for 2 years and just bought a home, while yes it reduces my flexibility, but I got the home for a steal as well as my recent job/career change plus in the process of getting my masters degree locks me in to the area for awhile anyway. But I agree with Financial Samurai, where has there been no price depreciation, I also want to invest.

  12. CK says:

    Solid advice, people in general should think long and hard before buying a home. In today’s world of ever changing jobs they can really tie you down.

  13. Jim – Can you let me/us know where you live where you’ve seen no price depreciation over the past several years?

    I want to invest in that market! Seriously, I’ve got cash burning holes in my bank account and I’ve been looking all over.

    Thnx man.

    • There are such places … I’m in Iowa and my house is worth more than I paid for it 4 years ago.

    • Jessica says:

      It’s all about location. I live in the cultural district of Fort Worth, TX. Our home value has slowly but surely increased since we’ve been in it (since 2005). Obviously we never saw the bubble that the rest of the country saw so there was nothing to burst.

  14. eric says:

    Completely agree! Young people shouldn’t stress about home ownership until they’re set financially and mentally. There’s plenty of time to get a house once you’re ready.

  15. dmeanea says:

    “Then people did some math and saw that homes appreciated in line with inflation.”

    Jim, isn’t this an argument FOR home ownership? I’m not being argumentative, I’m asking for your opinion: is owning a home a good hedge against the inflation that is being predicted for our not-too-distant future?

    • Jim says:

      It’s not an argument for home ownership because people argued that homes were “great investments.” Keeping pace with inflation is not what you want out of a “great investment.”

      Is it a good inflation hedge? Yes it is because you lock in the cost of your housing. I pay $1600 a month for my mortgage. I paid $1600 in 2005 and I’ll, presumably, pay $1600 (+ real estate tax increases) in 2015, 2020… etc.

  16. AustinMorgan says:

    I graduated in June from college and I’ve already seen 3-4 friends on Facebook mention their interest in buying a house.

    It must be the “American dream” that we hear so much about. People often feel lost in their 20s due to differing career aspirations so maybe a house is a way for these people to get some stability.

  17. Sorry, I have to disagree. I bought a house a year out of college and it was by far the best investment of my life – 3% down, 6 figure profit when I sold a few years later and bought something bigger when we started our family. Granted, I hit a nice patch in terms of appreciation earlier this decade, but let’s say it only appreciated at the inflation rate, which is the long-term mean.

    This “flexibility” topic becomes moot if you have a decent job and are in demand. A good job offer that requires a move would not only have a full relocation package, but also a signing bonus. I see people jumping jobs for a 5K raise which makes no sense to me. But, if you’re willing to wait for the right offer before switching companies, there should be no issue with flexibility.

    Why would you pay rent when you could be building equity (with potential for capital appreciation)?

    While it may not be right for a lot of people, to make a blanket statement that you shouldn’t buy a house through most of your 20s just doesn’t sit right with me.

    • Gates VP says:

      OK, so you disagree by stating your (statistically improbable) personal success. I can’t run off and give that advice to everybody, b/c it won’t work for every body. Let’s face it, you got lucky, by simple law of averages, there will be just as many people who get hosed in the same situation as you were in, and for them it will obviously be a bad investment.

      Why would you pay rent when you could be building equity (with potential for capital appreciation)?

      Because in most cases capital appreciation on homes is very slow at the start. For the first 5 years or so (of a typical 25-year mortgage), you earn very, very little capital. The value of the homes is likely to be equal to or less than the amount you paid for it (averages again) and you’ve been dumping money on property taxes and home repairs, just to maintain the value of your home.

      On average, the first 5 years of home ownerships are at best break-even. And there’s a carrying risk in owning the home that you will have to take a loss on your house if you need to move.

      Why would you pay rent when you could be building equity (with potential for capital appreciation)?
      - Rent can often be cheaper and I can save the difference. Especially true when home prices have risen dramatically and people bought rental units for way cheaper than I could get them today.
      - I don’t run the risk of suffering capital losses if I have to move.
      - I don’t have home maintenance risk against the capital value of the house.
      - I minimize my location risk.
      - I save a lot of valuable time on maintenance, time that is likely better spent on continuing education (or just putting in some extra hours early on in the learning curve).
      - I have more flexibility in managing my monthly costs. If I need to down-size my rental place because of changing life situations, I have that option readily available. Down-sizing your house is a non-trivial task that carries a lot of cost in both money and personal time.

      While it may not be right for a lot of people, to make a blanket statement that you shouldn’t buy a house through most of your 20s just doesn’t sit right with me.

      Look it’s obvious from your comments that you don’t really understand averages or median.

      I see people jumping jobs for a 5K raise which makes no sense to me.
      The median household income in the US is $44.5k. A 5k raise represents more than a 10% increase for the typical household (not just person, but household).

      A good job offer that requires a move would not only have a full relocation package, but also a signing bonus.
      Only in some mythical world of people with really in-demand skills. Ask the plumbers and McManagers of the world if their job offers came with signing and relocation bonuses. Those are the median income earners and they’re not getting signing bonuses when they need to move from Detroit to Texas to find their next job.

      Now, I will agree, there are exceptions to this rule. Some people will get lucky (you obviously did). But most people will, inherently, not get lucky, and this “blanket advice” is very good for those people b/c it correctly delays the very heavy risk that comes with owning a home early in your working career.

      • Hi Gates,
        I think perhaps it is you that needs to brush up on your statistics. While home prices have undergone an unprecedented correction, the general direction is up. There are hundreds of years of history in both the US and western Europe (best proxy for US prior to an established real estate market here). So, it is completely incorrect to state that “The value of the homes is likely to be equal to or less than the amount you paid for it (averages again)”. This is not reflected in reality over any reasonable period of time. Homes are not equally likely to be worth either more or less over time. They are vastly more likely to be worth more over time. You are making a broad statement on the future based on very recent history that has deviated from the long term trend. Housing was due for a correction. The market corrected. Housing will not be “equally likely” to decline years into the future.

        “Because in most cases capital appreciation on homes is very slow at the start. ” I think you’re misunderstanding capital appreciation vs. payment of principal vs interest. In the early part of a conventional mortgage, the principal portion of the loan is small and builds over time as interest declines due to the way loans are amortized. However, capital is the increase in home value itself due to market rates. There is absolutely no difference (or way to predict) what housing markets are going to do in relation to how early you are in a loan. i.e. you increase value through 2 sources – capital appreciation and principal payments which reduce your loan amount.

        On statements regarding income, signing bonuses, etc., forgive me, my comments were geared toward the professional/degreed segment of Americans. You rightly point out that white collar roles only represent a portion of America.

        Gates, I’m gonna guess you also rail against owning stocks too since we recently underwent a market correction. Many of our friends and colleagues moved all their money out of equities at the worst possible point – the bottom. They went into money markets and CDs in early 2009 and since then, they’ve made 1% while US equities have returned over 60%. My 401K is now back to its old levels while theirs are 50% off.

        What’s my point? People tend to make serious errors in their financial decisions based on recent events only without regard for the long-term historical performance of an asset class.

        Over time, real estate is an absolutely incredible investment. You can use 5:1 leverage, realize upside in capital appreciation based and actually OWN something as opposed to being owned by your landlord.

        For those of you that have delayed or continue to delay, in 5 years if you’re still in the same location and don’t intend on moving, and home prices are up 20% from here, will you still be saying “yeah, great move. I’m so glad I rented that apartment for the past 5 years. I’ve had so much flexibility, it’s just great. Who needed that large equity/capital build for a new down payment on a larger home now that I have two kids and need something larger?”.

        If you KNOW you’re going to move, obviously it doesn’t make sense to buy. Everyone knows this.

        • Gates VP says:

          While home prices have undergone an unprecedented correction, the general direction is up.

          You’re going to have to duke it out with Yale’s Robert Shiller on this one. He wrote the book on this one and even provides his datasets on-line.

          His inflation-adjusted numbers would argue with the “up” direction and are referenced by Jim in the original post.

          Homes are not equally likely to be worth either more or less over time. They are vastly more likely to be worth more over time.

          Again, please feel free to argue Shiller’s work.

          I think you’re misunderstanding capital appreciation vs. payment of principal vs interest.

          You are correct. I’ll re-iterate the statement thusly: payment of principal in the first five years of a typical 25-year mortgage is basically nil. Particularly after overhead fees associated with home ownership transfer.

          The capital appreciation is arguably also nil, basically averaging inflation.

          Gates, I’m gonna guess you also rail against owning stocks too since we recently underwent a market correction.

          No it’s still all sitting there. Stocks have their own completely mis-understood risk issues, but they’re not related to buying a home in your first five career years.

          Over time, real estate is an absolutely incredible investment…

          Obvious blanket statement, just like the one you accused Jim of making. Let’s just talk to the guys who ran the Silverdome.

          For those of you that have delayed or continue to delay, in 5 years if you’re still in the same location and don’t intend on moving, and home prices are up 20% from here…

          OK, can we cycle back to reality here.
          - People in the first 5 years of their career probably don’t know if they’re going to move in the next 5 years.
          - It’s unlikely that prices will jump 20% in the 5-year period after you graduate and if they do, it’s likely that they’ll revert downwards at some point. If inflation-adjusted prices jumped 20% in 5 years, much of the young population would be completely priced out of a home in 15-20 years. It’s not like North America is really have a space crisis here.
          - The first five years of a professional career typically mark the largest percentage jump in salary for the growing worker. A 5-year worker is likely to be able to afford a house that they simply could not in their first year.
          - The average US student graduates with several years of debt to their name. Adding more debt in the form of a house magnifies their financial risk.

          You can use 5:1 leverage, realize upside in capital appreciation based and actually OWN something as opposed to being owned by your landlord.

          Yes, b/c a student fresh out of college needs 5:1 leverage. Again, the average student is graduating with several years worth of debt. 5:1 leverage is really not terribly important here.

          And being owned by your landlord? Really? The contract I signed with my landlord didn’t involve any transfer of ownership rights. At worst, it is a trade (money for lodging) on par with a typical employment contract (time for money).

          My renter’s contract has a significantly shorter duration than a mortgage. Relative to a mortage, it carries almost zero liability and zero downside risk outside of an initial deposit and maybe a lease period (which can typically be sublet in most states).

          Given the significant liability risks that come with home ownership, I think it’s pretty obvious that being owned by your landlord is far less relevant than being owned by your home/mortgage.

  18. Shirley says:

    A friend bought a fixer-up house at a great price when he was 21. He spent so much time working and fixing it up that there was no time for anything else. I honestly believe that happened without him even realizing it. Now he has a nice house, but no social life and no family.

  19. otipoby says:

    Jim, I agree with most of your statements. However, I disagree on the time (5 yr). That number will vary depending on an infinite number of variables. I was really lucky when I graduated from college. In my first job, I became good friends with a more “experienced” (cough, cough, older) man who was a home inspector. He taught me how to look at a home when buying. Don’t focus on what can be easily changed (ie paint, countertops) and instead spend time in the attic, crawlspace, looking at the electrical and HVAC systems, roof condition, drainage, etc. His help was invaluable. My advice is to befriend someone who is in the business (contractor, home inspector, ownes rental properties). They will tell you what it REALLY means to be a homeowner of an older home.
    I bought a house 1 yr out of college FSBO. I wanted to get to know the area first. My advice on buying the first house is to be ultra – ultra conservative. Don’t listen to mortgage brokers or realtors on “what you can afford”. Since the house will probably be older, be prepared to spend quality time (and $$) at Lowes.
    That house was by far the cheapiest house I have owned and it still has a special place in my heart. I occasionally look it up on google maps to make sure it is still OK.

  20. Chris says:

    The problem is compounded even more when or if you become upside down in your new home.

  21. Caitlin says:

    I agree that they are all valid points, but I’m with Pat in that people should evaluate their own situation.

    I graduated (with my second degree) in 2006, got married in 2006, and we bought our first home in 2008.
    We knew exactly what we wanted, roughly where we wanted to live, and we had secured jobs that would allow us to follow our chosen career paths (we rented a house while waiting to buy our own), and we had saved enough during school for a nice down-payment.

    We knew our own scenario, our likes and dislikes from years of renting while being a student, and our career goals.
    For us, it made sense to purchase a house. For others, it might be the wrong time and they should wait.

  22. Seth @ Boy Meets Food says:

    I’d like to add one more point to your argument… Regardless of the amount of time after college… if you are not certain you will be living in one place for more than 3-5 years, I would not recommend buying a house. I bought a house, and sold it one year later for $1K more than what I paid. I saved a ton of money versus renting, right??? NO! Even though I “made” $1K on the sale, I paid 7% in realtor fees. My monthly interest payments on the mortgage were at least the same as what an apartment would cost to rent, and that doesn’t even include all of the money I put into home repairs / improvements during that year. In the end, it turned out to be a horrible investment (but looking back, I had no idea I would only be there 1 year when I bought it).

    • Gates VP says:

      Here, here, I’ve run the numbers multiple ways and I always end up around the 5-year mark just to break even (on mortgages over 20 years).

      And that’s really a key takeaway. The “average” person is just a likely to go “nowhere” or “down” in the first five years as they are to make any real headway on the mortgage.

  23. Seth @ Boy Meets Food says:

    On the opposite side of that argument, I would like to echo what Clayton said. I purchased a home within a year of graduating college. At the time, I was not yet married, and as such, we could not live together. So, I rented rooms to 2 of my friends for about a year and a half. They got rooms for less than they would have paid for an apartment, and it paid for a significant portion of my mortgage during that year and a half.

    Even after we got married (and later decided to upgrade to a larger house), I kept the house and now rent it out. So, it is continuing to pay for itself from other renters.

    Just wanted to toss in that alternate perspective…

  24. jsbrendog says:

    i plan on waiting as long as possible. a friend just bought a condo, had a kid, and now, with only 2 bedrooms and being stuck in a new ocndo what if they decide they want another child? not the biggest deal but still..

  25. Izalot says:

    Buying a house literary grounds you into sticking it out and adapting to circumstances around you. I agree with forecasting 5 years in living in a particular area, but not necessarily waiting if this is the perfect place for you. I think waiting it out for the “perfect” place is destined to fail and can even translate to finding the “perfect” job and the “perfect” mate.


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