In the summer of 1992, my wife and I lived in Dallas. I had just turned 26 and had two years of marriage under my belt. My career was moving along, but I wasn’t making much money. And I was in grad school.
This is the point at which my wife informed me that we should have a baby. Clearly, with little or no savings, no time to spare, and not much life experience, we needed to bring another soul into the world.
Oh yeah, and before we have a child, she told me we needed to own a home. We bought our first place at the end of that year, almost eight months before our first child was born, using an FHA loan and what little savings we had.
Just three years later, I planned a career move that would take me to Tulsa, Oklahoma. We put our home on the market and began house hunting in the new town.
Our home sold in two days, and the job opportunity suddenly fell through.
I had to scramble for both a new job and a new home. That was OK, because our family now included two kids.
Six years later we had three children and my wife was itching for more space, both inside the home and out. She found a fabulous community north of town and the perfect home. For a couple of weeks we owned two residences but everything worked out.
Three years later, our business took me to Florida, where I bought another home, almost at the top of the market in 2005. I knew things were out of control, so we chose a more modest house than we otherwise would have purchased. We sold that home in 2010 then rented for a brief six months.
My wife told me that renting didn’t suit her because she couldn’t renovate. I thought that was a feature, not a bug, but I understood. We quickly purchased a home in a great area of Tampa… before moving back to Texas five years later after our last child left the nest.
That’s the story of my homeownership life. I bought homes out of want and need, which I think describes most of us.
Here’s what I didn’t do: Calculate the value of the property tax deduction; calculate the value of the mortgage interest deduction; compare those, along with other deductions, to my standard deduction based on the size of my family to determine if itemizing made sense in future years; then use that analysis to figure out if I should purchase a home and how much I could pay.
I’m certain there are people out there who do this, but I’m a numbers guy, and I didn’t do it. And none of my numbers-oriented friends do it. And my wife certainly didn’t care about such things. Instead, we all approached home ownership the same way, based on our age and stage of life.
Based on our 30 years of research and analysis at Dent Research, I know that most consumers approach life just like I do. We don’t ignore financial factors; we’re not stupid.
We just understand that if you lived life according to exact financial calculations, making nothing but quantitative, rational decisions, you’d miss out on many good things.
We wouldn’t drive nice cars, since basic vehicles provide the same thing (transportation between two points). We’d only buy homes if price appreciation and tax deductions outweighed associated costs, including the opportunity cost of doing other things with our capital.
I think if I tried to follow this logic my wife would hate me. I know my kids would, and I’d probably have a little self-loathing to throw in as well.
That’s what makes all the hand-wringing over eliminating or curbing the home mortgage deduction so laughable.
Such calculations aren’t what drive most homebuyers. It’s where they are in their life cycle!
Do they have kids? They need more room. Are the kids school age? They need good schools or close proximity to private institutions. Have the kids left? They need less space. Are they retiring? They might want something near the shore. No spreadsheets on interest rates and tax deductions can top such considerations.
If you want proof, just consider the last five years. Since real estate bottomed in late 2011, home prices have shot higher while interest rates remained in the basement.
If we all based our homebuying decisions on financial calculations, home ownership should be at the highest rate in history, or more than 69%. But it’s not.
In fact, we’re still languishing around 64%, just off of the 25-year low of 63% registered in the second quarter of last year. Interestingly, as prices moved higher, home ownership dipped.
Of course, there are other considerations, such as affordability and availability. But the point remains that we base most of our consumption on major lifetime milestones, like getting married, having children, becoming empty nesters, and retiring.
That’s why we’ve focused our research on such predictable consumer spending patterns. We want to know where consumers are headed next.
We get there by determining the next big change in their stage of life, not by calculating tax savings on potential mortgage deductions.
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