Beyond the Mortgage: The High Costs of Owning a Home

Historically low mortgage rates

are making houses more affordable in terms of "the monthly nut" -- the total monthly outlay for mortgage, home insurance and property taxes -- but other considerations can trump simple affordability.

Though financial calculations such as, "Is it cheaper to rent than to own?" are often foremost in potential buyers' minds, other less-quantifiable factors such the reliability of future income can play as big a role in a buying decision as the initial dollars-and-cents calculations.

While answering the big questions "Can we afford this?" and "Is the house in a good location?" may be relatively straightforward, other considerations are much more difficult to assess. Here are a few things you should take into consideration before you jump into buying a home.

Mobility vs. Roots

One of the key benefits of America's open economy is the ability to move to a new job. But as employment security erodes and incomes become more contingent on unpredictable economic swings, the choice to invest in a house must be weighed against the sacrifice of one's mobility and the the odds that a change in employment might force a move, and thus a sale.

This is not an academic dilemma in an economy where the creation of temporary jobs is far outpacing that of permanent jobs.

There is a steep transactional cost to home ownership: When you add up the Realtors' fees, closing costs, transfer taxes, etc., a home seller loses between 7% and 8% of the value of their property. Even if house prices hold steady for the next few years, moving three times (buying and selling a house each time) would eat up between 21% and 24% of the properties' value. In a standard scenario in which the buyer ponies up 20% in cash for the down payment, buying and selling three homes would more than wipe out the that investment -- and very possibly the owner's entire equity.

For those who purchased homes with FHA mortgages, which require only a 3% down payment, then having to sell a house at break-even (i.e. the same price they paid) to accommodate a transfer or new job could put the owner underwater.

And that's assuming house prices will remain stable or start slowly appreciating -- a risky assumption in an economy teetering on the edge of a double-dip recession or extremely slow growth.

On the other side of the equation, owning a house offers the advantages of putting down roots. There is no threat of rent increases or eviction, and there is freedom to plant trees and make improvements without having to get permission from a landlord. And if your house is close to a large, diversified job market, then the possibility of being forced to sell due to changing jobs may be less of a concern.

But feeling trapped in a house because the current value is below the purchase price could preclude career moves which would reap long-term increases in earnings -- a cost that, over time, could be significant.

Security and Community

Home ownership is often pitched as a long-term investment, but the deepest human desire is for security, both physical and financial.

In a sense, both types of security come down to the community: Does your neighborhood have vigilant "eyes on the street" to offer deterrence to street crime and theft? Does the community define itself by specific boundaries and values? Are residents actively engaged in maintaining the neighborhood? These are characteristics of a vibrant, desirable community, and that desirability is what keeps property values stable or appreciating.

The benefits of a specific location are quantifiable: commute times, proximity to grocery stores and freeways, the quality of the school district, and so on. But the long-term value of a house also depends on the hard-to-quantify engagement of the community.

If the neighborhood has no boundaries (as delineated in the minds of the residents or defined by geography), is mostly transient (people come and go, few people seem to have lived there longer than a year, etc.) or is devoid of any spirit of neighborliness, then it won't feel secure -- and that suggests it won't be financially secure, either.

Homeowners as Tax Donkeys

Cash-strapped cities and counties are increasingly turning to property taxes and parcel fees to raise new revenue, and if your community has no California-style "Prop 13" type limits on how much property taxes and fees can be raised without voter approval, then homeowners may be viewed by local officials as a captive tax base. When local government repeatedly adds to homeowners' tax burdens, it's akin to incrementally adding to a donkey's already-heavy load.

When homeowners are viewed as tax donkeys, local municipalities expect them to stumble forward without complaint even as their financial burden increases every year. Governments know most homeowners are too committed to their neighborhoods to move simply because of a higher tax rate, so raising taxes on property owners can be seen as the line of least resistance.

While it may seem reasonable to assume that renters end up paying higher taxes and fees, too, as landlords pass along these higher costs, that's not necessarily true: Landlords can only pass on what the market will bear. If there is an oversupply of rental properties available, then the price will be set by the market, not the landlord's costs.

Homeowners are thus uniquely vulnerable to becoming tax donkeys. A mortgage might be fixed for 30 years, but tax burdens are not.

The Effect of Suburban Isolation

If the U.S. economy has entered an extended rough patch in which local government tax revenues continue declining, then services to distant residences will either be cut, or be paid for by user fees charged to those exurban residents. One of the primary cultural values of the post-war suburban era was the idea that bigger is better: Home buyers demanded bigger lots, bigger houses, and the more suburban they were, the better. This placed a premium on isolated households separated from their neighbors, and from any larger community.

If local services are shrinking or consolidating, this becomes less practical, especially for folks who might need relatively speedy access to emergency services or health care.

Energy Costs

If energy costs are likely to rise in the coming decade -- and in a world expected to add one billion new middle-class consumers in China, India and elsewhere, there are few plausible reasons to believe they will decline -- then a bigger house to heat and cool makes little sense in terms of maintenance costs.

Once again mobility becomes an issue: If rising energy costs end up making a long commute from an exurb or a large home too costly, a renter could move when their lease is up or with 30 days' notice, while a homeowner has to sacrifice 7% of the value of the home, and perhaps much of their equity, to sell.