STACEY VANEK SMITH, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. It used to be that owning a home was just part of life, right? You grew up. You got married. You bought a house. You built equity and wealth with that house. You sold it, bought a bigger house. That was just the thing that everybody did. But now, ever since the financial crisis, buying a home can seem kind of scary. And, like, maybe it's not always a good financial move.
The housing market's been a little mixed lately. The data's been all over the map. And so this question has been coming up again. Is it a good idea to buy a home? Or is it better to just rent? To answer this question, we brought back someone you might remember.
JILL SCHLESINGER: Hello. My name is Jill Schlesinger, CBS News business analyst, author of "The Dumb Things Smart People Do With Their Money."
VANEK SMITH: Today on the show - home ownership; when to buy, when to rent and how to know the difference. Also, I love you, Dad.
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VANEK SMITH: Today we're talking with Jill Schlesinger, personal finance guru and author of the new book "The Dumb Things Smart People Do With Their Money." And we're talking about one of the biggest topics in personal finance - owning a home. So, Jill, this has been coming up in the news a lot lately. Tell me about homeownership in the U.S. right now.
SCHLESINGER: Homeownership has a mythical quality to a certain generation, which I understand because if you're lucky enough to be born in that generation, you purchased a home. It went up in value. And when you were ready to, maybe, downsize or - maybe, when your parents died, you sold their home and you got a bunch of money. And so you understand that that worked for a certain generation. But then there were so many misguided pieces of advice around that because then we started getting into - you own a home at any cost, even when it makes no financial sense for you.
VANEK SMITH: Right, even when it's a real financial reach.
SCHLESINGER: Right. And so what became clear was that people felt bad that they could not own a home. Then the financial crisis hit. They said, oh, thank God I didn't buy a home. But now they actually, maybe, should buy a home. The argument is that people are not thoughtful enough about how they approach this thing called real estate. So the traps that they fall in is they say, oh. Well, real estate always appreciates, even though 10 years ago, we know that that was disproven. The other trap is that people sort of feel bad about themselves as renters.
VANEK SMITH: Yes. Like, maybe they hear from their, like, parents all the time, you're just burning money every month...
SCHLESINGER: Yeah, and...
VANEK SMITH: ...On your apartment in New York.
SCHLESINGER: That's - or San Francisco.
VANEK SMITH: I wouldn't - asking for a friend.
SCHLESINGER: I know. And...
VANEK SMITH: No, but I've heard this from my dad for years.
SCHLESINGER: Of course, because he is of a certain generation.
VANEK SMITH: He is of a certain generation, yeah.
SCHLESINGER: And it worked for him. The real important issue is that if you lived in a place, and you looked at the numbers and you said, wow. You know, I could buy something for, essentially, the same price as my rent. And I really want to stick around here. And that would make me feel better. And it works - great. But I think too many people are plunging into buying without really thinking about, what is the effect long-term? There are times in your life where renting is so much more appealing, it's almost a silly conversation.
So when that voice in the back of your head of your parents or your grandparents says, you're throwing money out the window, stop it. And here's what you say to yourself. Rent is not throwing out the window - money out the window. Rent is buying opportunity. It's buying flexibility.
VANEK SMITH: Oh, my gosh. I love this. I'm using this line.
SCHLESINGER: Right. And so you say, hey. You know what, Dad? I totally get that. I ran the numbers. It doesn't really make sense to me. And the way I think about it is, renting gives me fantastic opportunity, gives me mobility. So much of the economy stalled out after the financial crisis because people were stuck in their homes. What if people could just say, hey, I was renting; I moved to where the job was?
VANEK SMITH: Yeah. Yeah. Yeah.
SCHLESINGER: So - and I just want to remind you that you're in an interesting business - a business where there are, let's say, positions all over the country.
VANEK SMITH: Yeah, that's true. Yeah.
SCHLESINGER: Right? And you could pick up and go any time. So what's your dad's name?
VANEK SMITH: Jim - James.
SCHLESINGER: Jim - James, listen up.
VANEK SMITH: (Laughter).
SCHLESINGER: She's very smart. She knows what she's doing. Renting's fine.
VANEK SMITH: Thanks, Jill. I'm 100% leaving this in the podcast. I love you, Dad.
VANEK SMITH: So how do you know when it is right to buy for you? - because I feel like a lot of people are probably in a position where they have some savings. It can just be hard to know...
VANEK SMITH: ...What that tipping point is.
VANEK SMITH: I know for some people, it's obvious in one direction or the other. But...
SCHLESINGER: Yeah. I mean, I think that for a lot of people, the decision is around a life event. So you - maybe you're having a baby. OK, so you're having a baby. And you say, I want to be in a certain school system. So I want to start looking to be in that school system. That's important to me. And so at that point, what would be great is if people could say, OK. Let's look at my financial condition or our financial condition if you've got a partner. And you say, all right. What can we afford? And you look at it side by side. And you say, what would it cost me to rent something equivalent in that same neighborhood?
The other piece of this is that now that we're 10 years out from the financial crisis, it's sort of the good news, bad news. The good news is, OK. Well, things have stabilized. A lot of people are making more money, and that's good. The bad news is that house prices are up again, and there isn't a ton of inventory.
So when you decide you think you want to buy, you may be surprised to find out that it costs a lot of money to get into the place where you want to be. And that may require you to put down all of your liquid assets into this house down payment and leave you what we like to call house poor. So I'm stuck paying mortgage and paying my property taxes and my homeowner's insurance.
VANEK SMITH: Is that a bad situation? Maybe that's, like, a weirdly naive question to ask.
VANEK SMITH: But is it a bad situation?
SCHLESINGER: I like to have a little nest egg. And everybody needs a little emergency reserve fund. So mine is bigger than most people's because I'm such a wimp. And I get into why that is.
VANEK SMITH: Well, 'cause you're a personal finance expert, so you have probably talked to a lot of people who didn't have a nest egg.
SCHLESINGER: Yes. And also, I had a father who was a huge risk-taker. And our families of origin can really impact the way we interact with our financial lives, you know...
VANEK SMITH: Sure.
SCHLESINGER: ...As adults, right? So when you think about your emergency reserve fund, what worries me is that people will say - let's just say you needed a $50,000 down payment to put - to get into the house you want, and they literally have zero dollars left. That's not a good situation to be in. So Stacey and I are married, and we put down - 10% down on a home.
VANEK SMITH: I think this is a good plan.
SCHLESINGER: So far, so good.
VANEK SMITH: Then we have a nest egg. You're happy. I'm happy.
SCHLESINGER: Right. And then all of a sudden...
VANEK SMITH: We're not burning money anymore.
SCHLESINGER: Exactly. We're not - and Jim is not worrying about us. He comes to the wedding. He's so happy.
VANEK SMITH: Dad is psyched.
SCHLESINGER: He's happy. And then I lose my job at CBS. And now all of the sudden, we can't really afford the home because I've lost my - I've really lost that stream of income. Now we have a little nest egg, but it takes me a while because that nest egg is depleted. And I don't have a job yet. We're eating into our nest egg. And all of that starts to happen at the time where we start feeling really uptight about the mortgage balance and the payments.
VANEK SMITH: OK.
SCHLESINGER: And all that starts to eat into our sense of financial security. And then we are making bad decisions because we are now going into this scarcity mode, where, oh, my God. I can - you know when people say they're living...
VANEK SMITH: Yeah, they're scared.
SCHLESINGER: They're scared.
VANEK SMITH: They're freaked out. Like - it's, like, one - you break your arm. And all of a sudden, you're in debt.
VANEK SMITH: Yeah.
SCHLESINGER: And so now when you're in that mode, you don't make the best financial decisions. You don't make the best personal decisions. You're not your best self. Now, poor Stacey's got to support our family - right?
VANEK SMITH: I know.
SCHLESINGER: ...'Cause you're the one working.
VANEK SMITH: Working myself to the bone over here.
SCHLESINGER: I know it - and getting so little for it.
SCHLESINGER: I mean, I'll clean the house. It's fine.
VANEK SMITH: (Laughter) They pay me in tote bags.
SCHLESINGER: (Laughter) And so what I realize is so much of our bad financial decision-making is because we are emotional, right? We're just, like, wired to do weird...
VANEK SMITH: Oh, yeah.
SCHLESINGER: ...Things, right? So what does the plan do? The plan kind of is a great way to look at those emotions and keep you on track. So when you're feeling freaked out, you go back to the plan. You say, OK. Right. I don't have to worry that much because we put 20% down. We've got a year of expenses in the bank. Jill - we'll pray - hopefully, will get a job within that time. It will be OK. So that moment of panic that you feel - when you feel that emotion, that fear, kind of chug up, you go back. And you say, but wait a minute. We did this the right way. We planned for this.
VANEK SMITH: So you're not making decisions out of this, like, place of fear. You're making decisions out of - off of a plan that you came up with when you weren't freaked out.
VANEK SMITH: Yeah.
SCHLESINGER: Now you're OK. We - you don't have to buy a house.
VANEK SMITH: I'm feeling better.
SCHLESINGER: All right. Jim...
VANEK SMITH: We'll discuss.
SCHLESINGER: Come on.
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VANEK SMITH: This episode of THE INDICATOR was produced by Constanza Gallardo, edited by Paddy Hirsch. Our intern is Willa Rubin. And THE INDICATOR is a production of NPR.
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