Have you ever tried to keep track of your monthly purchases and expenses? It can be overwhelming. But concerning size and scope, the two most important purchases are your house and car. Because those are the two biggies, it’s only logical to think about them in the same way.
However, savvy consumers rightfully see these two large expenses in very different economic terms. A deeper understanding of how they differ can help you save money. More importantly, being clear about how buying a car and a home are fundamentally different has an impact on your peace of mind. Let’s take a look.
A home is fundamental to your well-being. Your car is an exchangeable utility.
For many generations, home ownership has been a central aspect of the American dream. It goes way beyond having a roof over your head. Owning your home is the means by which you obtain security and safety—for yourself and your family. Even as buying a house becomes a greater challenge, especially to debt-ridden Millennials, homeownership remains an enduring and meaningful aspiration.
On the other hand, the relationship between car and driver is more tenuous. Young people no longer race to the DMV to get their driver’s license when they become of age. The age of mobile apps and the gig economy has fostered new mobility services including ride-hailing, car sharing, and monthly car subscriptions. Public transit is abundant in most big cities. Self-driving cars are just around the corner. There are now all kinds of ways to gaining access to mobility without taking on a big loan or lease.
Your home gains value over time. A car loses money.
Here’s the adage: buy an appreciating asset but lease one that depreciates. All signs indicate that buying a home—rather than renting—pays off in the long run. In 1940, the median home value in the U.S. was about $3,000. Today, the median price, according to Zillow, is around $200,000. This increase far outpaced inflation. And in the markets where housing is undersupplied, like New York City and San Francisco, the rise in values has been meteoric. Beyond the security and meaning provided by home ownership, having that deed in your hand is a smart financial decision.
It’s just the opposite when it comes to car ownership. When you buy a new car, its value typically decreases by more than 10 percent the moment you drive off the lot. After about five years of owning a car—the period of a typical loan—the value is about 35 percent less than the original purchase price. Car buyers commonly consider maintenance, fuel, and insurance while overlooking the number one biggest cost associated with owning a car: depreciation. Keeping a car for 10 years or longer can mitigate depreciation, but it brings a higher risk of repairs.
Customizing your home adds to your enjoyment. Modifying a car adds cost.
Home renters commonly aren’t allowed to paint the walls, much less complete a renovation project. The ability to add an extra bathroom or update your kitchen is one of the privileges of owning a home. The expenses are often a tax write-off, reducing the net cost. But no matter what you spend, people who own their home have the freedom to turn a house into a home. And as you make home improvements, the home likely becomes more appealing to prospective future buyers—increasing its resale value.
A bland sedan can be livened up with a lower suspension or slick new rims. Auto enthusiasts have many options for turning their ride into a souped-up hot rod. But those enhancements are costly—mainly because they are not likely to increase the resale value of a car—just the opposite. Car mods might offend somebody else’s sense of good, reliable transportation. The market sees customizations as risky propositions that might even make a car less safe. If you’re a car nut—and your eyes are open to the expense that comes with the love of a classic automobile—then ownership makes a ton of sense. But smart consumers see a car first and foremost as a means of conveyance.
Your home is a long-term asset. A car can be sold or traded anytime.
Anybody who has moved a lot will tell you that it’s a painful experience. The hassle and inconvenience are made worse if you need to sell a home in the first few years of ownership—before it has sufficiently appreciated. There are closing costs and other fees to consider. The long-standing rule of thumb in the real estate industry is to keep a house for at least five years. Some experts say that seven years is even better. Also consider that in the first few years of a home loan, your monthly payments are almost exclusively on interest. It’s only when you reach the halfway point of, say, a 30-year-loan that the payments mostly go toward equity. On both a personal and financial basis, it’s best to approach a home as a long-term asset.
Given the rapid depreciation of a car, there’s the same downside to buying a new car and selling it in the first year or two. That’s the risk you run when you fork over a down payment on a new vehicle and take on the typical five-year loan. There are similar risks to a three-year lease that carries big penalties if you need to break its restrictive terms. Cars are supposed to bring greater freedom and mobility—not tie you down. The type of vehicle you need this year might be very different from what your life circumstances dictate next year. So the ideal approach is to view a vehicle as a fungible resource that can be easily returned, exchanged, or temporarily replaced with other mobility options.
Two Different Things
With a clearer picture of the distinctions between buying a house and car, we can make better economic decisions for those two big-ticket items. The times are changing. Demographic and technological shifts will continue to affect both real estate and transportation. The trends are clear: as housing costs continue to rise, the wisdom of buying a home will only become more critical. But for most consumers, owning a car doesn’t make sense.