Ask an advisor: Should I keep investing or buy a home?

Ask an advisor: Is buying a home really necessary?

December 27, 2023 5:37 PM

Buying a home can be a key way to build wealth, but it's also extremely expensive.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

For many people, buying a home is an important step toward the American Dream. But it's also an expensive step — especially these days. Ten years ago, the average price of a house sold in the United States was $324,400, according to Federal Reserve data. By the third quarter of 2023, it had risen to $513,400 — a 58% increase.

Meanwhile, mortgage rates have soared to historic highs. In October 2023, the average rate for a 30-year fixed-rate mortgage reached 7.79% — the highest it had been in two decades. (As of December, it's inched downward to 6.67%, but that's still unusually high.)

All these costs raise a question: Is buying a home still the only path — or even a viable one — to a sound financial future? One young Financial Planning reader has been struggling with this dilemma. He's already saving and investing for his future, and a hefty down payment could take away from those efforts. But would owning a house or apartment be worth the sacrifice?

For advice, he turned to the experts. Here's what he wrote:

Dear advisors,

Is it worth it these days to buy a home, even if it means less money for my investments?

For context, I'm a 25-year-old engineer in Providence, Rhode Island. My salary is $67,000. To save for retirement, I set aside about $600 per week, which I divvy up between my 401(k), my high-yield savings account and an S&P 500 GARP ETF.

I'm happy with how these investments are growing, but sometimes I wonder if I should be using my savings for a down payment instead. Right now my girlfriend and I rent our apartment for $2,000 (just $1,000 for me), which leaves room for saving and investing. But am I neglecting to "build equity"? On the other hand, with mortgage rates so high these days, is building equity even worth it? Which should I prioritize — my investments or owning a home someday?

Sincerely,

Perplexed in Providence

And here's what financial advisors wrote back:

No shame in renting

Jay Zigmont, certified financial planner and founder of

Childfree Wealth

in Mount Juliet, Tennessee

While historically buying a house has been one of the pillars of building your net worth, it is a choice, not a requirement. With housing prices at or near all-time highs, and mortgage rates on the rise, renting has become a better option for many.

The key is to save for your goals. If buying a house is a priority for you, then save for a down payment. If retiring early is a goal, save there. Remember that you can get exposure to real estate through buying REITs (real estate investment trusts) and the S&P 500 includes some publicly traded REITs.

Go for it!

Ralph Bender, CFP and founder of 

Enduring Wealth Advisors

in Temecula, California

Congratulations on your discipline. You're already doing more than most 25-year-olds. Let's make sure you're getting any available company matches on your 401(k) plan and you've got enough in your savings to cover six months of your expenses, including the additional costs you'll incur as a homeowner.

Buying a house is how most Americans build family wealth, for the simple reason that it's the best way to use leverage. Get into a home you'll like for years to come, and if rates fall you can refinance. But don't expect that to happen.

Slow down

Rob Schultz, CFP and founder of

NWF Advisory Group

in Los Angeles

At 25, it sounds like you are in a great place to explore the world. With a home purchase and maintenance, that would take a significant portion of income to support. In five years, rates could be more affordable, and it would allow time to build the non-retirement savings for a down payment. I would assume income growth also would be meaningful at this stage, and so the house you could get now might be less than you would want in your 30s. Without the need to keep kids in a certain school, I would wait. You are not building home equity but are building net worth. If you penciled out the true cost of buying and maintaining a home, would you feel cash poor?

Missing the point

Paul Monax, CFP and founder of

Agile Wealth

in Littleton, Colorado

I think you're asking the wrong question.

Investments aren't intended to just accumulate. They build toward a purpose, an end goal. It could be retirement or a down payment on a house or any number of other things, and almost everyone is accumulating toward multiple goals simultaneously.

So yes, you definitely need to continue investing toward all your goals. I think the question you're really asking is: Should it all go toward retirement, or should you split part of it off to go toward a down payment?

You're not ready to buy today, so today's interest rates are really irrelevant. How long is it going to take you to accumulate a down payment? What are rates going to be then?

The high-yield savings account and S&P 500 GARP ETF are non-retirement accounts, so those could go toward any goal, including a down payment or retirement.

If you accumulate toward a down payment and then decide to delay your purchase due to high interest rates, or not finding the right home, or whatever, you can always keep those funds invested until later.

Take your time

Andrew Herzog, CFP and associate wealth advisor at

The Watchman Group

in Plano, Texas

You could consider making the high-yield savings account the bulk of your $600/week investments for a while. That will help with anything in the immediate short term, as well as a future down payment on a home. A 20% down payment is also not necessary, by the way, but consider your options when the time comes.

You're so young that retirement is far enough away that you shouldn't worry about that long-term goal over more immediate wants and needs. Don't neglect the retirement savings, but you can probably afford to ease up on some of those savings in favor of an emergency fund and down payment fund. You're not neglecting to build equity — you're building net worth still in the form of liquid investments.

You're off to a great start at such a young age! Do not purchase a home for investment reasons; only purchase if you can afford it and will enjoy the responsibility of one. Most of the time, a home is a negative cash flow in your life, so don't ape in and feel like you're missing out on something. Prioritize short-term and mid-term goals through your high-yield savings account, while keeping the habit of retirement saving.