Home Ownership – Are we Giving the Wrong Advice?

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We’re all about promoting home ownership, particularly in the black community. Since 2019, we have spoken with many people from all walks of life. A doctor in Charlotte, a college student in Memphis, a paralegal in San Francisco, an engineer in Milwaukee, a young family in Orlando…

Some of us are very financially successful. Some of us are living paycheck to paycheck. Lately, it seems like we’ve been speaking with more and more people who are in the latter camp. There seem to be a lot more people either struggling to get by, or doing phenomenally well, and very little in between.

It’s either been one or the other. Like the gap between rich and poor, even within the black community is widening.

We have been saying for years that homeownership is the key to generational wealth. It’s the American dream! Naturally, people have been doing any and everything to buy a home, regardless of their personal circumstances.

But is home ownership right for everyone? Have we been giving the right advice?

Buying a House will not make you Rich.

There’s this misconception/myth out there that buying a house is the key to solving all of your personal finance problems. We have created over 1,0000 posts on social media and written a ton of articles about buying a home so maybe we’re part of the problem.

Some people think that:

  • If you could buy that house, your finances would magically improve and you will become wealthy.
  • Buying investment properties is the key to getting rich and solving your personal financial problems.

Both of these scenarios are possible, but unlikely.

The truth is that 99% of people would be better off if they reversed the order:

  • Step 1: fix your personal finances (make more money, have less debt)
  • Step 2: Then buy the house(s).

Income + Assets = Wealth.

Buying assets will help multiply your income. It helps money grow. But you still have to make the money first. Buying the asset (home) will not necessarily lead to an increase in income.

Here are real life examples from people we’ve spoken with that will illustrate our point. They also make us wonder whether we’re providing the right advice.

picture of stressed out woman cartoon illustration

House Poor in Raleigh

This lovely lady bought a home in 2021 with the help of a mortgage lender and black realtor in our network. This lady was a veteran, used a VA loan, and got pre-approved for a loan with a 3% interest rate.

Bought a $300,000 home for $0 money down out of pocket, except a few thousand dollars in closing costs. A short 3 years later, and that home is now worth about $400,000! That’s the dream scenario, right?

Thing is, she recently contacted us again seeking a realtor to help sell her home. The problem is that her mortgage payment, even at a 3% interest rate, was taking up so much of her monthly income that she felt like she could barely breathe.

She didn’t have any left over money to go on vacation, to buy herself anything but the essentials, to spend a dime more than her tight monthly budget would allow.

She was essentially on a fixed income because she was barely getting any salary increases, and didn’t have time to take on a second job. A home equity line of credit would simply kick the can down the road, and potentially make things worse so she felt that her only option was to sell the home.

The problem is that she needed to remain in the same school district for the sake of her kids and have at least 3 bedrooms to accommodate them. Home values and interest rates had gone up so much that she couldn’t afford to buy even a smaller home in the same school district. Essentially, she felt like a prisoner in her own home.

For most people, their income usually increases a bit every year. For whatever reason, this wasn’t happening for her. The root of the problem was that she needed to fix her personal finances.

On one hand, her net worth has increased by $100,000 (on paper). On the other hand, that home equity won’t really benefit her unless she sells her house, but then she might be back to square one.

Did we give her the right advice?

illustration of black family signing loan documents for a home loan

Stuck in Austin, TX

If you’re having some personal finance issues (lower than avg credit score, a mountain of debt), buying a home won’t help. The answer to solving your debt problems, is NOT to take on even more debt. In fact, it will probably make things worse.

If you need to get out of a hole, stop digging.

But this is America. Credit is the American way so let’s figure out a solution. We got it, an FHA loan. These loans have lenient credit and debt-to-income requirements.

In plain english, this means that even though you have less than perfect credit (650 or lower) and your monthly debt payments – auto loans, student loans, credit card loans – are fairly high compared to your monthly income, you can still get pre-approved for a home loan.

The problem is that even though the banks will let you borrow money, it’s going to cost you even more money to borrow it. This could potentially make a bad situation worse.

For example, instead of paying 6.5% interest on the home loan of $300,000, you might have to pay 7%. To make matters worse, if interest rates finally decrease next year or the year after that, you probably won’t be able to refinance to a lower interest rate because you only put 3.5% down. You will be stuck with that monthly mortgage payment.

There’s also no guarantee that your home value will dramatically increase in 3 years. Long term, it absolutely will. That’s almost guaranteed. But short term, depending on your local market, home values could be flat.

picture of a young homeowner thinking it over

That’s exactly what happened to a gentleman in Austin TX we spoke with in 2022. He was offered a nice promotion if he is able to relocate out of state to the company’s new office. But if he sells his home, he may barely break even when all is said and done.

On one hand, he owns a home. On the other hand, he feels like he’s stuck in Austin and won’t be able to relocate to pursue other opportunities as they arise.

Did we give him the right advice?