Originally Posted by lmonter
If you think of a house as just a place to live and not an investment, you can definitely be okay.
I actually feel the opposite - you need to look at it as an investment and not just a place to live. I agree with what Imonter is saying, but I think that the choice ultimately comes down to the idea that buying a house can be a sound investment IF you can afford it, and you make an educated, thoughtful choice. Purchasing a house is not just getting a place to live, it's about investing in your future. A place to live can be many things, and the ability to have a say in the way you live, be it cosmetic or otherwise, is going to depend on a lot of different circumstances.
Some factors to take into consideration:
1) Cost of living: If the cost of living is too out of sync with the median income, you can anticipate a shift in the market. If cost of living is low, but income is increasing, you may be in an "up in coming area" and see an (overall) profit if you choose to purchase vs. rent. If the cost of living is really high compared with the amount of money people are making, logic would say that problems could ensue, and home values may decrease in order for people to be able to afford to live in that area. There will always be fluctuation in the market, and you can't always predict the job market, but it's good start to look at the overall prices of homes to see if you think they are over valued.
2) Length of Stay: This is a biggie. It definitely makes a difference if you are planning on staying in one home to "grow" in, or if you are the type of person who likes to change things around every few years. It's possible to purchase a small house and sell it a few years later and use the equity to get a nicer house later on, and although that is getting more difficult to do, it's certainly still doable. There are programs you can plug your information into and they will "compute" if it's worth it to buy vs rent, and what they are basically doing is calculating how much equity you could establish within the time frame you think you would be staying in a home for compared with renting. Renting definitely requires less responsibility, but no matter where you live, you need to pay for it. So if you are thinking about staying somewhere for a long time, the equity you establish can be worth something. Owning does require keeping up the home and fixing problems, which does cost money, and those costs do need to be included in the calculation, but they also need to be look at in terms of the long term or big picture.
3) Savings: Being prepared to buy a home is a huge deal, and it takes a lot of money! It's not easy to come up with the money, but being able to come up with it is a good indicator of if you can actually afford it. When we bought, we had a budget set aside in order to make any repairs needed on the home when we moved in AND we had enough money to cover us for a couple of months in case DH lost his job. "They" used to say to have 3 months worth of money saved, but in this economy that is probably a modest amount. We dipped into those funds when we had a pipe burst and we had to redo our bottom floor (which needed to be done anyway), but we were able to pay cash, and are now working on replenishing that account. It also costs a lot of money to landscape, to furnish, and to decorate a house. Thousands! And that's not including upkeep, fixing any issues that arise, and any upgrades that you would want to make. And again, if you make smart choices, you should see some of your money back.
4) Be realistic about your Finances: We were approved for WAY more than we should have even thought about spending. Make sure that you have a budget and stick to it! Our goal for buying a house was something that we would be able to swing a 15 year mortgage with. (That can save hundreds of thousands of dollars where we are). That put us in a price range nearly $150,000 less than what the banks said we could afford. I don't know where they got their numbers from, but we could NOT have afforded to live on what they "said" we could. We ended up still getting a 30 year mortgage, but we overpay every month to cut down that principal.
5) Think Like an Investor: You are not just buying a home for yourself. Many circumstances could result in the reality that you need to sell your home. Is it resalable? How much "work" does it need? How does it compare with the other homes in the neighborhood? Check recently sold homes to make sure that the price is good, and that the workmanship is comparable. Your money will generally work harder for you if you are buying the smallest/least nice house in a nicer area than if you are buying the nicest house in an okay area. Don't be afraid to walk away if it's not worth it. And don't forget about insurance/flood insurance, taxes, and any other fees (i.e. HOA if you are buying a condo) - those can add up super fast.
6) Consider your End Game: What are you trying to accomplish? For us, we wanted to buy something that we could pay down quickly so that we could establish equity and have the ability to live without needing to pay a mortgage/rent, upgrade to a better place, or downgrade when we retire. We were lucky enough to stumble on a foreclosure where any of those things are possible. And if after we pay off the house, the market crashes....we won't have paid much more than we would have had we rented. And the market probably won't crash so hard that the house is worth zero. Unless global warming floods the east coast, in which case we are screwed.
So while having the ability to garden and paint to your wildest dreams is nice, it can't be the only thing you consider.