June 27th, 2007 @ 5:01 pm by: Marc
A House or A Car… Which Should I Buy First?
You graduated from college, landed a good job, and have been diligently saving money for awhile now. Your car is getting old and pretty soon you are going to need a new one, but you also have the desire to be a homeowner. Should you buy a new house or a new car first? This question is actually extremely difficult to answer. It truly depends on the immediate financial circumstances of the individual involved.
Before thinking about it, most people would probably advise buying a house before buying a car. After all, a house is an appreciating asset and a car is a depreciating liability, right? That statement might be true in the long term, but in reality, most working professionals will eventually buy both a house and a car. In the end you will have the money for both. So it’s not really an issue of which is the better long term investment, it’s a question of which one should be purchased first.
I’m going to assume the following:
- You have about $40K saved in cash.
- Your current car is old and only worth about $1,500.
- You want to avoid financing a car.
- You live in a rental property.
- You are looking to purchase a new car under $25K
- You will be a first time home buyer
- You are looking to purchase a house for about $275K with at least a 10% down payment and 5K in closing costs.
Answering the following questions will assist you in making the right decision based on your own individual situation.
How long will your current car last?
Have a decent mechanic estimate your car’s life expectancy. Are there any cheap repairs that could increase the life expectancy? Are the repairs worth the money based on the car’s overall worth?
Will your overall living expenses be cheaper before or after you purchase a house?
Is the total cost of your current rent and utilities significantly cheaper than the cost of a mortgage, utilities, homeowner’s taxes, and insurance? In other words, which living arrangement allows you to save cash the quickest?
If you buy a house first, how long will it take you to save enough cash in order to purchase a car outright? How much money can you comfortably afford to save each month?
Likewise, if you buy a car first, how long will it take you to replace the cash necessary for a down payment on a house? How much money can you comfortably afford to save each month?
Do you expect decent short-term real estate appreciation in the housing market you intend to buy into? Ask a real estate agent for numbers on local market trends. Have home prices been rising or sinking? What do the overall unsold inventory numbers look like? In other words, is there any foreseen disadvantage to holding off on a house purchase for a year?
Consider the following scenario:
You really want a new house, so you decide to deal with your old car’s problems and instead purchase a new house first. Now you have zero cash, but you do have a slowly appreciating asset, a beautiful new home. 6 months later your old car completely breaks down and the repair costs are close to the total value of the car. If the car isn’t worth the money, you will have no choice but to finance a new car. You will now be paying interest on an auto loan in addition to paying your monthly mortgage payments. The annual appreciation of your house is counterbalanced by the finance charges you are paying on your car loan… at least for the first couple of years. In the end was it really smarter to purchase the house first?
The bottom line: As I stated earlier, most people assume that buying a house first is the smarter choice. While it very well could be, it isn’t necessarily the best order of operations for everyone. It completely depends on individual circumstance.
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18 Comments
June 27th, 2007 at 9:12 pm
1. buying a new car is financially stupid - it loses half of it’s value once you sign the papers
2. housing prices are set to drop drop drop in the near future, and long term
3. having said that, the long term prospects of USD isn’t that good, so buy some euros and some gold.
June 27th, 2007 at 9:49 pm
Great blog! Choosing which to buy first - a house or a car. Whew! One should think it over a hundred times before making a choice. List all the pros and cons. I guess, it would really matter on one’s personal choice and priorities. Money is all a big factor in making a decision. If I were to choose at this point, I’ll probably buy a house, since my car is still in good condition and I had recently installed a new mazda carburetor. I really want to have a house on my own especially that I’m planning to get married this year.
June 28th, 2007 at 12:57 pm
mind,
My point here is not to debate the obvious fact that a car depreciates quickly. Nor is it my goal to argue for or against someone’s decision to purchase either a new house or a new car. The purpose of this article is to simply discuss the following question:
If you are in a stable financial position and you intend to eventually purchase both a house and a car… which one should you buy first?
My answer: It depends on your immediate individual circumstance.
As for buying gold and Euros… that’s not bad advice. As a conservative investor, I personally buy into shares of international mutual funds.
June 28th, 2007 at 1:00 pm
klum,
I completely agree with your decision to purchase a house first. If your car is in good shape, there is no reason to waste money on a new one right now.
Good luck with the wedding and the house.
July 1st, 2007 at 8:51 pm
I am in a similar situation. My truck has 165,000 miles on it and it is almost time to upgrade. I just recently graduated with an Electrical Engineering degree and started at $57,000 a year. Presently my only bills are a truck payment and truck insurance. I plan to purchase a house in about two years once my girlfriend graduates. I am putting money aside for a down payment already. Being that I am waiting at least two years to purchase my home, is getting a new truck a bad idea. I have about 2000 dollars extra each month. What are your views. My credit score is 750 and and the home price will be in the high 200’s. Will buying a truck hurt me that much.
July 8th, 2007 at 12:44 pm
[…] and Angel presents A House or A Car… Which Should I Buy First? posted at Marc and Angel. You graduated from college, landed a good job, and have been diligently […]
July 8th, 2007 at 6:28 pm
MARC,
IT WAS INTERESTING TO READ THE RESPONSES TO THIS SUBJECT. YOU AND ANGEL HANDLED THIS DECISION WITH GREAT DECISION - MAKING SKILLS!
July 9th, 2007 at 4:33 pm
@Chad:
Sorry it took me so long to reply. Somehow I overlooked your comment. To answer your question…
I’d say it depends on whether or not you need the new truck. There is a big difference between a need and a want. If your old truck is breaking down on you and buying a new vehicle is inevitable, it might not be a bad idea to invest in a new car now. As far as your credit score is concerned, it probably won’t break you. But it’s always better to have your car paid off.
@Drew:
From someone who knows me well, I appreciate the kind words.
July 10th, 2007 at 7:32 am
I would easily go for buying a house rather than a car. Reason being is that in the long term the house will only grow in value and the car will only depreciate in value. However, buying a car is easier than buying a house. For example, in the UK, its difficult to find a house to buy in Nottingham!
Very good article by the way! Very useful.
July 10th, 2007 at 8:33 pm
@Andrew:
You are 100% correct. A car is not a good investment, and a house could be in the long term. If you can only afford one of the two, stick with buying a house. However, that wasn’t really my point.
See my comment above:
http://www.marcandangel.com/2007/06/27/a-house-or-a-car-which-should-i-buy-first/#comment-36433
Also, thanks for the comment!
July 12th, 2007 at 8:35 pm
Marc,
Great question.
Based on the assumptions your provided, I would hypothetically go for both
$32,500 is needed for the house which leaves $7,500 for a car. Add that to the $1500 you will get for the old car, which gives me $9000. For about 10-12K, there are some good year end clearance deals on low cost new cars, and I would work to find the addtional money.
July 16th, 2007 at 10:01 am
@Super Saver:
Not a bad way to look at it… Put roughly 10% down (plus closing costs) on the house and then buy a brand new low cost car.
The only problem I see in this scenario is the required monthly PMI (mortgage insurance) requirement for not putting down the full 20% of the house price. That will put you out about $120 a month, and that money just vanishes into thin air. But, at least you won’t have a car payment.
November 28th, 2007 at 11:39 pm
Really interesting post
Im recently married, and one year away from graduating Medicine. My wife has just graduated, and between us our income is going to be around AUS$60,000 next year, and AUS$110,000 the year after.
So Im wondering, is the delay in buying a house for the sake of saving for a car (probably a year) a big loss?
Or is it possible to save a home deposit, and borrow extra to just buy a car and thus have both with only one payment?
March 23rd, 2008 at 1:48 pm
I saw a commercial recently that suggests that a house historically doubles in USD value every 10 years. This could be an estimated annual 10% return.
Effectively, your $275k house could be estimated to gain enough value to completely afford your new car after even just a year. (assume your rent is roughly equal to your mortgage.)
I think that the biggest question determining the answer is your long term outlook. A car travels with you and a house doesn’t. If you get promoted to a different office, get married, have more kids, or get tired of the neighborhood in a couple of years you don’t get much gain on owning the house - especially if you’re in the losing part of the 10 years.
To the newness of a car, if you’re happy with a $1,500 car, you will probably be happy with a 5-10 year old better condition car. The question of a 60,000 bmw versus a 30,000 bmw could come down to just the mileage and style.
February 2nd, 2009 at 10:39 pm
Very interesting article, as are some of your other posts. I have bookmarked for for future visits, keep up the good work
March 28th, 2009 at 2:54 am
Given the fact that the housing market is estimated to be on the decline for at least the next 9 years, I’d say get the car, then play wait and see for when things REALLY bottom out before purchasing a home.
Idealy with the market being as it is, you would be crazy to invest into a person owned home in the US with so many Forclosed properties for sale, some at a fraction of the cost of the actual home.
May 6th, 2009 at 10:26 am
I was searching for an article on this subject and found this post, but I stopped reading immediately when you said you assumed people have $40K saved. I actually laughed out loud.
June 24th, 2009 at 10:22 am
I agree with MGZ’s comment. Most people do not have that much in savings, especially not a recent college grad (student loans, hello?!). You have made your assumptions based on an ideal situation. What about people who need to finance a house purchase and a car purchase?
I am a recent college grad with just about enough savings to finance buying a house or buying a car. I bought the house first. While I could afford both the car and house payment (btw, if considering a house purchase please consider all costs, principal and interest, taxes, homeowner’s insurance, mortgage insurance, homeowners association fees and maintenance fees; same with car: car payment, insurance, taxes and cost to maintain), I decided to buy the house first since the car payment would increase my debt to income ratio and I would qualify for a lower mortgage amount. Also, when you take out new credit, your credit score temporarily takes a hit. With a depressed score it is easier to get car financing than mortgage financing, imo.
And as for waiting to buy the house, my mortgage payment is cheaper than renting. So I will be saving about $200 a month for the 9 years that some others are waiting out for the housing market to hit bottom.
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