Should assistant professors buy a house or apartment? TL;DR: Not necessarily, and not necessarily right away.
There are several factors affecting whether or not it makes financial sense for assistant professors to buy a house, as opposed to renting and investing the difference in total costs. Several of these factors suggest that starting assistant professors would be better off waiting.
Preamble: Double-Check Your Thinking
The first thing to keep in mind here is that you may need a mental adjustment before you can approach this question rationally. For decades, the idea that the American Dream consists of making it financially to the point that you can own a single-unit home (with a yard with your hetero life partner and 2.27 children) has suffused our culture. A recent survey found that more respondents rated this as a central component of the American dream (74%) than anything else, including the ability to retire (62%). Think for a moment about how flabbergasting that is for a moment: at least 12% of people thought that owning a home was more important than the ability to retire. That is absolutely a bonkers position for 1/8th of the populace to hold!
Now, I’m sure very few of that 12% are among the very smart, good looking readers of this blog who surely tell all their friends about this amazing resource. But still, let’s be clear: You probably have a lot of messages in your head about homeownership that don’t hold up to rational scrutiny:
- Renting is just throwing your money away! That makes just as much sense for food as for housing. Are you going to go buy a farm to avoid throwing your food money away? Housing is just a cost to meet your body’s needs and mind’s wants. It also comes with the potential for capital appreciation/loss, but you do not need to bundle these attributes by any means.
- You haven’t really made it if you’re renting. Financially, making it is about your net worth more than its composition. Owning a home is one way to build your net worth, but often not the best way. Of course, you can’t just happen to mention the size of your investment accounts in casual conversation, whereas you are expected to invite others over and give them an envy-inducing tour of your grandiose McMansion that you hamstrung yourself with unaffordable debt to buy. Owning your home isn’t how you know you’ve made it — it’s just the most socially-acceptable way to let others know, and often it’s misleading.
- You shouldn’t raise children in a rental. This one drives me crazier than any of the others. I’m sorry, but as precocious and wonderful as I’m sure he is, little Johnny has no freaking clue what a mortgage is or about the prevalent interest rate environment or whatever. It matters to him whether your family has enough to meet his needs and wants, keep your stress levels down, and maintain a reasonable level of household stability, but not how you get there. Your need to buy a home to raise your children in is mostly that — yours.
- Your colleagues will think you want to leave your university if you don’t buy a home. I’ve heard this one before, believe it or not. Frankly, if this is the case, your colleagues need to get a goddamn life. If it ever comes up or if you want to forestall these rumors, tell the departmental gossipmonger (lookin’ at you, Jerry) that you’re saving for a down payment or waiting for mortgage interest rates to come down or waiting for the housing market to crash again, or whatever you want. What your colleagues might think is not nearly a good enough reason to make one of the biggest purchases of your entire life if you aren’t ready.
There are lots more messages like this buried deep down in our overdeveloped primate brains, but these are sufficient to make the point: Housing is a combination of a need and a want, same as many other purchases. What matters most is acquiring it in a manner you can afford that efficiently maximizes your housing-related utility balanced against your other needs and wants.
Now that I’ve gotten that off my chest, here are some reasons why you might want to buy a home.
Should Assistant Professors Buy a House? Good Reasons for Doing So
You Have a Lot of Cash Saved
The ideal financial scenario for buying a home includes you having the following in liquid or liquideatable cash form:
- A 20% down payment
- 3-6% closing costs
- A 3-6 month emergency fund
- 1% of the home’s value in a home maintenance fund. 2% if it’s an older house.
20% down payment
Obviously that down payment is the biggest ticket item. I know you can get a mortgage for less than that, but be sure to account for the costs of doing so. Paying <20% in down payment costs you in two ways:
- More total interest paid over the life of the loan. See this article for how much it can add up to (a lot!).
- Private Mortgage Insurance, or PMI, typically about 1% of the loan’s total value annually, though the range varies widely depending on your credit score and down payment (see table pp43-44 here). In the same article linked in the last bullet, they show that a 10% down payment leads to paying PMI for 10 years before you pay up to the 22% threshold needed to release you from it, significantly increasing your purchase costs.
In many cases, those added costs will make renting until you have the 20% down payment saved a much better choice.
3-6% closing costs
Home buyer closing costs typically cost 3-6% of the purchase price, depending on your state, and they’re due up front. So you’ll want to have them saved up in advance.
However, note that which closing costs are paid by the seller and the buyer, and whether they are paid as part of the home price versus on top of it, varies by state or even county. Look up the specific rules in your area and adjust accordingly.
Home maintenance fund
It’s just as important to have that first year’s 1-2% of home value costs saved for maintenance. One of the key differences between renting and buying, and Ramit Sehti regularly argues, is that your rent is the most you will ever pay for your home; your mortgage is the minimum you will pay. Accounting for the costs of maintaining, furnishing, and upgrading the home, the costs will often be much higher than your mortgage.
If you want to fine-tune this amount, look at the home insurance policy you’re thinking of getting if you buy the house. It probably has a deductible per damaging event. At minimum, I would want to have two deductibles’ worth of cash saved in this account, and add that amount every year. Tune it higher or lower depending on other circumstances like the local risk of natural disaster, tree/storm damage, break-ins, etc.
Emergency fund
Remember the Donald Rumsfeld quote about known unknowns and unknown unknowns? I argue elsewhere on this blog that you should save for the known unknowns using the digital envelope system. This is for the latter: You don’t know what’s going to happen, but you better be prepared when it does. In many cases, that means having cash on hand.
How much you need saved here depends a lot on your situation. If you’re a tenure-track assistant professor, you probably won’t get fired mid-year (and probably will get around a year’s notice if you are let go), so that removes a lot of the risk that this fund is supposed to cover for others. That’s why I picked the low end of the 3-12 month range commonly offered by financial gurus. Eventually I’ll write a more developed post on how to size your emergency fund as an academic, but for now I think 3 months is a reasonable guideline.
I hate math, Prof. Elbow Patch. Can you just give me a number I need to have saved?
Jeez, you sound exactly like every single one of my undergrads. I will caution you that the total amount of cash you need saved before buying a home in this ideal scenario completely depends on the cost of living where you’re considering buying and how much the specific house costs. But fine, just to give you an idea, let’s say you’re looking at a $400,000 (a little less than the Q2 2023 national average) 25-year old house where you think your maintenance costs will be <=1% a year, and you think you can live on $5,000 per month if you need to. That means you would need to have at least $111,000 ($80,000 for down payment, $12,000 closing costs, $4,000 for home maintenance fund, $15,000 for emergency fund). Let’s round it down to $110k as an average market guideline.
This is probably where a lot of y’all stop reading. “What?!? Who the heck has that just sitting around?!?!” Probably not a lot of new assistant professors, which is why I argue below that many assistant professors should probably wait to buy. But if you have the money and no other consideration is a waving red flag, you have my blessing to buy a home if you want to!
You Feel Confident That You Will Remain in this House for at Least 5-10 Years
The transaction costs of buying a home are high, and you pay them when you sell too, primarily in the form of 5-6% realtor fees. So think of the cost of buying and then selling a home as around 10% of its total value. You need time either for your house to appreciate or (if your mortgage payment + maintenance costs is lower than a comparable home’s rent would be) monthly payment savings to add up to that amount just to break even compared to your renting counterfactual.
If Interest Rates are Low (and You Have Good Credit)
Unlike mortgages, rent isn’t subject to interest rates (though they may both be influenced by inflation rates). So at least in the short to medium term, the higher prevalent mortgage rates are, the less interested you should be in buying. If mortgage interest rates are anomalously high, you could gamble that they’ll come down soon and go ahead and buy the house then refinance later, but know going in that gambling is what you’re doing.
Additionally, having no or bad credit effectively raises the interest rates you’re subject to. If your credit is sterling, there’s more advantage in buying.
You’re Unwilling to Move in Case of Rent Shocks, or Crave Residential Stability
Depending on your local rental laws, one risk of renting is that you never know when your jerk landlord will send your rent through the roof, perhaps to more than you can afford or care to pay. If you’re willing to move periodically to avoid this nonsense, it doesn’t need to be a big deal. However, as Ben Felix at the Rational Reminder podcast (highly recommended, btw) is fond of saying, one key advantage of buying is that a fixed-rate mortgage is a perfect substitute for your exact home. It may cost more or less than an equivalent rental, but at least you have price certainty on the specific mortgage costs and house details. If moving every 5-10 years sounds like a hassle you’re unwilling to countenance in exchange for potential price savings, perhaps you’d prefer to buy.
I know I railed earlier against the idea that it’s somehow damaging to children to raise them in a rental, but I can see why you might weight the residential stability factor more highly if you do have kids. It just shouldn’t be determinative.
You Can’t Find the Housing Quality You Want in the Rental Market
In some housing markets, the units available for purchase and for rent are pretty different, with the purchasable units being of higher quality. So maybe it would make better financial sense to buy all else equal, but all else isn’t equal, and your housing preferences much more strongly align with the units available in the purchase market. That’s a reasonable consideration.
The Market is Almost Certainly Trending Up
I’m very hesitant to include this because lots of people found out the hard way in 2008 that you can’t always predict this. But, if you can certainly afford the mortgage payments, are comfortable with the risk that you might have to sell at a loss, have actually done your homework on this, and check all the other cash savings boxes mentioned above, I’m don’t object too strenuously if you put 10% down on a house in a hot real estate market in the hopes of your home value riding up with the market.
Here’s what I don’t mean by a hot market: I don’t mean that your realtor or your buddy who flips houses tells you it’s hot. I mean that you have researched trends in local home prices in the area overall and in your specific neighborhood. If it’s been going on long enough, I would want to see that prices didn’t crash in 2008.
The easiest way to do that if you have some basic data crunching skills or at least access to a Stata license is to use Zillow data. I suggest downloading the ZIP code or neighborhood file. Then you can quickly make a graph of the place you’re looking at using the following Stata code (I’m assuming you’re using the ZIP file here):
cd "[directory]"
import delimited using [filename].csv , delim(",") clear
keep if regionname==[zip]
reshape long v@ , i(regionname) j(date1)
gen date2=""
local month=1 //v10 is Jan 2000 value
local year=2000 //v10 is Jan 2000 value
forval d=10/292 { //v292 is highest as of writing - update
replace date2="`month'/1/`year'" if date1==`d'
local ++month
if (`month'==13) {
local month=1
local ++year
}
}
gen date3=date(date2,"MDY")
format date3 %td
keep if !mi(v)
sort date3
tw line v date3 , ytitle("ZHVI") xtitle("Date")Just fill in the bracketed values with your directory, filename, and zip code. Let’s look at a couple examples. Here’s Beverly Hills’s 90210:
First off, obviously few assistant professors without a trust fund or very high-income spouse are going to be buying in Beverly Hills, even if they get chaffeured to class in a limo driven by a “lacrosse player” at U$C, but this serves as an example of a graph I would consider risky. Yes, the values have been skyrocketing since January 2016, but they also dropped 26.1% between March 2007 and October 2009, and didn’t recover to March 2007 levels until December 2013. Looking at the graph in March 2007 and January 2016, the recent history looks identical — you won’t know which future you’ll get until you’re there. If you buy in 2016, you’re incredibly rich. If you buy in 2007 and don’t hold on long term, you could lose a lot of money. You would need a high tolerance for risk to buy with <20% down payment, insufficient cash reserves, and a cloudy professional future ahead of you.
Let’s look at somewhere more realistic next: ZIP code 47401 in beautiful Bloomington, IN:
This graph is far less concerning. Prices flattened, not dropped, during the housing crash, and have risen curvilinearly since not long thereafter until a recent hiccup. I don’t know anything about the University of Indiana’s financial situation, but if enrollment were projecting to be steady for years to come and they were competing for strong faculty and annual ‘raises’ weren’t horrifically insulting, I don’t mind too much if you put 10% down if your ducks are otherwise in a row. If you can afford it, increase your payments so you can get out of PMI faster.
Same goes for if the market has recently crashed. If you have reason to believe the freefall has bottomed out and you think there is strong reason to believe it will rebound quickly, I don’t mind you accelerating your time table a bit in that case, either.
Finally, another benefit of buying a bit early in a strong real estate market is you can reappraise or refinance your mortgage later if the home value has appreciated to the point that you have 20-22% of the house’s current value in equity. It’s just that betting on that is an added risk, since reality may not cooperate with your hopes and dreams.
Should Assistant Professors Buy a House? The ‘Con’ Case
The con case is that probably a lot of the above doesn’t describe starting assistant professors.
You Probably Aren’t Rich
Chances are that relatively few newly-minted Ph.D.s are sitting on $115k in cold, hard cash when they start their first position (unless you followed by Coast FIRE, then Apply plan!). Probably the most common exception are those with wealthy parents who can gift them a down payment. If that’s you, congratulations on winning the birth lottery. Or maybe your university offers a down payment assistance program, or you can negotiate for one. That can help a lot, but the housing costs in the area of such universities are probably also much higher than the example above. Anyway, for the rest of us, we have some saving to do before we get there.
You May Move Sooner Than You Think
For many starting assistant professors, it may be reasonable to think you’ll stay for 5 years, since tenure tracks are typically six years and then you can often get a grace year to find another position before you’re completely canned. However, anecdotally, a lot of my colleagues (including myself) have voluntarily moved at least once while on the tenure track. Plus, your assistant professor years are often a highly ‘demographically dense‘ period of the academic life course — this is a time when many academics get married, have children, split with their partners, establish their long-term intellectual reputations, rage quit academia, etc. You may think you know what the next years hold, but many are surprised. It might make sense to let the dust settle before making major financial commitments.
Interest Rates are Currently Hilariously Not-Low
Currently, mortgage rates are the highest they’ve been since the Great Recession. Last time they were this high, they took 5 years to come down to more reasonable levels. I don’t have a crystal ball handy, so things may well turn out differently this time. But the higher the interest rate, the more you should hesitate to buy, and right now, the interest rates are high. (And if you’re reading this five years from now after they’ve possibly come all the way back down, I guess I made it as a blogger!)
There’s room for it to go higher, too: In October 1981, the average hit a gobsmacking 16.83%. I don’t think it will go that high again, but again, I’m not a warlock imbued with the gift (and curse!) of foresight, I’m just a bored tenured professor who decided to start a blog on a subject well outside of his core area of expertise. ¯\_(ツ)_/¯
Your Credit Score Might Suck
I was not exactly super financially responsible in grad school, and I don’t think I was alone. Between my dissertation defense date and my official graduation, I had to take out a low 5-figure student loan to wipe out my not-insubstantial high-interest credit card debt and finance my cross-country move to start my postdoc. I missed payments, continued spending when I knew I couldn’t afford to, and couldn’t even supplement my income with online poker to make up for it after Black Tuesday. It’s been a whole journey for me to come to financial competence, and that’s likely true of a lot of newly-minted Ph.D.s, too. Which all is to say that your credit score might currently suck, which may threaten your ability to get a mortgage at all, and will certainly cost you more if you do.
Soon I’ll write a post about how to reduce the risk of this scenario while you’re in grad school. For now, suffice to say that if you’re in this boat, you might want to think twice about buying a home if it means your interest rate will be well above-market.
You’re Probably Used to Moving
According to a quick review of my saved addresses on Amazon, I lived in at least 5 different addresses as a grad student and then postdoc, plus 3 in undergrad if memory serves. I was used to moving. If you’re a new assistant professor and are too, consider this part of your superpower ability to keep living like a grad student to help save money. If it will help you save money and establish yourself long-term, consider forestalling residential stability lifestyle creep a little longer.
My Advice
Based on the above factors, my advice is that for many brand-new assistant professors without rich parents or down payment assistance, it probably makes good sense to wait to purchase a home. Spend those years saving aggressively, getting to know your university and city better, learning more about your tenure prospects, and whether you want to stay there long-term anyway. Once you hit the magic number of 20% down payment, 3-6% closing costs, 1-2% maintenance costs, and 3-6 months of expenses (which will likely take several years of diligent work without help or prior savings), buy away if you still want to! I also won’t argue with you if your target area’s Zillow graph looks strong and low-risk but you only have a 10% down payment, or are willing to pull the trigger a little early in order to prioritize residential stability.
To finalize your decision, you should use one of the hundreds of rent or buy tools out there on the internet: for instance, this. You should map out the full range of scenarios and stress test your finances: If the worst happened after you bought your house, would you be ok? (If not, prefer renting.) If you’re thinking of paying more for a home because you think it will appreciate, compare that likely appreciation to what you could get if you rented and invested the difference in the stock market. Look at the full range of tax implications: If you buy, how much would the mortgage interest deduction reduce your total tax bill compared to the standard deduction, and are you missing out on the opportunity to maximize tax-advantaged retirement accounts to buy that could offset those advantages? If you’re not sure how to unwind it all, consider hiring a fee-only fiduciary financial advisor (NOT your uncle’s buddy’s son) to help you work through all the variables — a few hundred bucks could save you a ton later.
Chances are that any saving you do toward a down payment will come at least partially at the expense of your retirement investments, but please don’t neglect them entirely. The first years after you finally get a salaried job after a decade in school are the most crucial you have remaining for harnessing the power of long-term compound growth (which is the key idea in Keep Living Like a Grad Student). How you balance the two is ultimately a personal choice, but I myself would prioritize retirement savings more highly.