Why do people buy houses they don’t plan to pay off? Most people don’t spend their entire lives paying off one house, so what is the financial benefit of getting a “starter home”? I’m new to the economics of real estate and I’ll take any wisdom offered.
In: Economics
Well to be clear, it is not a decision that is at all “automatically good”. If someone believes that
a) they will likely stay in that house for 5+ years (rough guideline)
b) have a relatively stable income during that period (to cover mortgage and still have living expenses and some savings) plus savings to cover downpayment.
c) that home prices will appreciate in that period by at least 10%-15% (in most markets, home prices generally appreciate over long enough periods) Some people have become over optimistic of short term property price appreciation.
d) can have the personal discipline or satisfaction to manage a property, pay taxes, repair and maintenance (this takes more time than one imagines)
then buying a starter home might make sense – financially. Even if the person decides to move (upgrade or relocate) after 5+ years, the home appreciation would likely have made up for the loan costs, property taxes paid etc.
However if the conditions above don’t hold, then there is risk of financial loss although if someone is very home proud, the added satisfaction of owning their own home might make up for it. The point of the starter home is also “forced savings” which makes it much easier typically to purchase the next home since the equity is easily reinvested.
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