Buying a Home Is a Perfectly Fine Decision. It's Just Not a Financial One

Many young workers today are mired in a kind of adulting limbo, yearning for a mortgage that they simply cannot afford. Homeownership among people aged 35 and younger has fallen by 18% since 2006, according to the Pew Research Center, thanks to the Great Recession's aftershocks and the strain of historic levels of student loan debt.

Even so, three-quarters of young adults believe owning a home makes more financial sense than renting, and eventually want one for themselves. But should you inflict such self-torment? Is it really that much smarter to buy than to rent? That all depends on what a home means to you -- because ultimately, buying a home might not even be a financial decision.

23 and a Homeowner

Claire Levinson lives the American dream, and yet she's still not old enough to rent a car without a hassle.

The 23-year-old earns a nice salary as a civil engineer in Denver, and recently acquired something fewer people her generation have these days: a mortgage. "I wanted to buy a house as both an investment and a haven to come home to each night," says Levinson. "It was important for me to have a place that was mine."

Levinson's decision was pretty straightforward. She likes her neighborhood, her parents live nearby, and Denver's real estate market has been booming. "I know that I'll be in Colorado long-term," Levinson says.

It also seemed like a sensible investment. With interest rates hovering near historic lows, she was able to secure a mortgage with a 3.7% APR, and used a combination of savings and an inheritance from her grandmother to afford the 20% down payment on her $360,000 condo.

The mortgage interest and property taxes she pays will likely lower her IRS bill, and each monthly payment will increase her home equity, with her mortgage working as a forced savings vehicle. If Denver prices continue to rise, she'll do even better.

That's the financial case for buying, in a nutshell.

Risks of Buying

Yet homeownership comes with a host of risks, too. You're sinking a large portion of your savings into an asset that's expensive to maintain, and may be extremely difficult to sell. People move, jobs change, markets tank, life happens. There's no guarantee that you'll want to live in the same area in two years, much less that your family situation will remain constant.

Rent prices have moved higher since the financial crisis -- but not being the master of your domain comes with certain advantages. You can move more easily, since you don't have to worry about finding a buyer, and won't end up spending the $1,100 or more that the average homeowner shells out each year on maintenance costs.

Meanwhile, you could very well earn a better return on your down payment by investing it in a diversified portfolio of low-cost index funds instead of a half-acre plot. Stocks rebounded much more quickly than home prices after the Great Recession, and over the long haul there isn't that much evidence that homes provide a decent return for your money. From 1900 to 2011, according to a study by three London Business School professors, housing gained 1.3% annually after inflation -- compared to 5.4% for stocks.

Your home can also change abruptly from an asset to a liability. The national median home price dropped 23% from just before the housing crash to the bottom in December 2011, according to Zillow. Home prices, excluding inflation, have only just now returned to pre-crisis levels. Nearly a third of homeowners were under water five years ago -- owing more on their mortgage than their home was worth -- according to Zillow.

Emotional Decision-Making

The truth is that, for most people, buying a home is as much about sentiment as it is about dollars and cents.

Beyond the financials, Levinson says, she wanted a place that was hers. "Owning a home feels terrifying -- yet liberating," she says.

Indeed, young renters who aspire to homeownership do so to control their living space, have a sense of privacy and security, and establish a place to raise a family, according to Fannie Mae. They want a home for the freedom it confers. Don't like those cabinets? Hate the carpet? You can generally do what you please if you're the owner.

You have to pay for that freedom, and it doesn't come cheap. But it's worth remembering that whether to rent or buy isn't a clear-cut decision. And it's certainly not only about finances.

Rather it's a reflection of your particular desires -- which means you should think deeply about what it is you're after. If you're looking to leverage your savings to build more money for the future, you could easily end up disappointed. You're likely to be more satisfied, however, if you're trying to create something lasting for you and your family.