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How can we buy a house?
Are we 'bad people' for renting during the housing boom? We're not sure we can afford to buy.
August 5, 2003: 12:22 PM EDT
By Walter Updegrave, Money Magazine

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NEW YORK (CNN/Money) - My fiancée and I almost feel as if we're "bad people" for renting during this real estate boom. But we just don't see how we can fit in a mortgage with our wedding, a year of working abroad and my continuing graduate school.

I also wonder whether housing values can keep rising they way they've been. We're diligent about saving in our retirement accounts, but wonder whether we should also be buying a house. What do you think?

-- Richard, Washington, DC

What? You don't own a home??? Is there something wrong with you? Are you...un-American?

Given how the entire country has become real estate-obsessed the past couple of years, I can understand why people who haven't jumped onto the homeowners' bandwagon must be feeling awfully left out, as if they somehow missed the memo. I mean, it seems everyone is buying homes these days.

Just the other week the Wall Street Journal ran a story about how Generation Xers are piling into the housing market like never before. And many minority groups, particularly Hispanics, have also become a growing force in today's housing market.

It's a craze, but is it a bubble?

This craze to buy has pushed up housing prices by roughly 50 percent on average across the country over the past couple of years and in some markets, house prices have more than doubled during that time. (For more on the recent path of home prices, click here.)

And, on the whole, I think that's a good thing. As I pointed out in a recent MONEY Magazine cover story, buying a house gives you all sorts of neat tax benefits and wealth-building opportunities, plus it's got all sorts of social benefits as well. But that doesn't mean that it's a no-brainer investment or that home ownership is the right option for everybody.

Homes: How to spot a winner
Foreclosure sales: hit or myth?
Will it last?

For one thing, as good an investment as housing has been for most people, it's not bulletproof. House prices have been known to flatten out or even go down, especially after big run-ups like we've had the past couple of years.

I'm not making a prediction that we're in a housing bubble and that the bubble is about to pop. I only want to point out that house prices, just like, say, the price of stocks in the '90s, can't grow faster than underlying factors like income and population growth indefinitely. They are ultimately subject to the laws of economics.

Indeed, a recent report from the Mortgage Bankers Association of America predicts that although house prices will continue to climb in the near future, the rate of growth will start to decline.

Think about your real reasons for buying

The mere fact that price growth may slow -- or that prices may stagnate or even slip back -- doesn't necessarily mean someone who wants to buy a home shouldn't. As long as you plan to stay in the house for a long time -- and as long as you really want the intangible benefits of owning your home -- then I don't think the possibility that your home's value could decline over a period of several years ought to deter you from buying.

You'll want to be careful about what you buy and where you buy and how much you spend, but I don't think the mere possibility that house prices could slip should prevent someone who really wants a home from buying one.

On the other hand, if you don't plan on being in a home for many years, or you're really unsure how long you'll be living in a given area or you simply aren't at a point in your life where you're ready to commit to the responsibilities of home ownership, then I don't think you should feel compelled to buy simply because you're worried you might be missing out on a good investment. Indeed, I think it would be a mistake.

Buying a house with the idea of selling it for a nice gain within a few years can be an iffy proposition. You might come out with a profit. But considering the high transaction costs of buying and selling a home and getting a mortgage, you could easily come away with a loss as well.

And in your particular case, it doesn't sound to me that you're ready to settle down in one area yet. You want to work abroad, you've got grad school ahead of you -- who knows where you might end up living or working? Sounds to me like you're better candidates for renting now. Once you have a better idea of where you'll be living and working you can consider joining the homeowners' club.

In the meantime, if being outside the loop of homeownership really bothers you, you can always fake it. When you meet someone at a barbecue or other social occasion, just say things like, "Man, those grub worms are really tearing up my lawn" or "Just when I decide to pull the trigger on my refi, mortgage rates start to climb -- damn Fed!" You'll fit right in.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He also answers viewers' questions on CNNfn's Money & Markets at 4:40 PM on Monday afternoons.  Top of page

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