Home Ownership Carries Greater Risk Than Before.

HOMEOWNERSHIP is a "sure thing," perhaps the last one. Whatever we do, whatever our income, whatever our family circumstances, we all need to live somewhere.

So we should own instead of rent. And while we're at it, our home should be as big and as expensive as possible. Our stocks may crash, our cars may depreciate and DVD may outmode our videotapes, but homeownership is good for everybody, all the time. Besides, it's the last major source of tax deductions. That's the conventional wisdom.

In fact, the new world of mobility and rapid change has made homeownership a much bigger risk than it was for our parents and grandparents. The increased risk comes from four different sources: leverage, mobility costs, lost savings and real deductions.

Suppose you visit one of the popular Web sites that will tell you how much house you can afford. At Quicken.com, for instance, you'll learn that an income of $60,000 a year, modest credit commitments of $300 a month and a down payment of $25,000 will enable you to buy a house that costs $177,700 to $200,100. That top figure is more than three times annual income.

Indeed, if you plug in a variety of incomes and circumstances, you'll find that you can qualify for a mortgage that is about three times your annual income. In addition, you may also buy a house that is worth 10 or even 20 times the amount of your down payment. Either way, you've got a lot of financial leverage.

If the house rises in value only 5 percent, your 5 percent down payment equity will double in value. Similarly, a 5 percent rise in home value will feel as though you had saved 15 percent of your income. Better still, the gain is tax-free.

Unfortunately, the same principal also works in reverse. If the value of the house sinks by 5 percent, your 5 percent down payment is wiped out and, worse, you'll have to save 15 percent of your income to recoup the loss. Still worse, you'll have to pay taxes on that income, so you'll have to put aside 23 percent of your income to recoup the loss. (This assumes a 28 percent federal tax bracket and the employment tax. Add a state income tax, the full employment tax or a higher tax bracket, and the burden will be higher.)

Leverage means more risk. Buying less house reduces your risk.

Cost of mobility

If you were going to have one job for the rest of your life, leverage would be your friend. But in the free-agent economy, we're changing jobs and careers more often.

With selling costs of about 7 percent of your home's sale price, it would take more than two years of 3.5 percent annual appreciation just to recover the commission and other costs of any move. Each time you move, you are rolling the dice on selling time vs. selling price.

With homes costing about 1 percent of market value per month to operate, a three-month wait in a level market can take a year of appreciation out of your pocket. Again, the lower the initial cost of the house and the smaller the monthly cost of the house, the lower your risk.

With a $10,500 limit that may be raised to $15,000 on 401(k) plans, anyone who doesn't contribute to his or her limit is losing a tax deduction and choices of highly liquid investments in mutual funds. Yet many people have mortgage commitments that make it impossible to save the maximum amount, foreclosing the opportunity for the easiest tax deduction available. And unlike home equity, money in a 401(k) plan can be moved without expense when you change employers.

Most homeowners believe that the tax deductions from homeownership have greater value than they actually have. In fact, the purchase of a house valued at the U.S. median ($137,800) with a 20 percent down payment, a 7.5 percent mortgage, and a 2 percent tax rate will produce about $11,000 of tax deductions in the first year, exceeding the standard deduction of $7,350 by only $3,650. So the real tax saving is just over $1,000.

Anyone who buys a house for $91,875 or less gets no tax benefit from homeownership.

The bottom line: If you're young and believe that your work is your fortune, the best home may be one that's smaller, less mortgaged and less of a stretch.

Real-Life Story

Question: I often find myself having little sympathy for the individuals whose questions you respond to. A couple makes $200,000 combined, has a $200,000 home, just inherited $1 million, and wants to know whether to lease or buy new cars! In the real world, my husband and I earn a combined income of about $75,000. We have credit debt of $20,000 that we are trying to pay off at $600 a month. We've been trying to save for a new home but are discouraged after learning our 30-year-old starter home (worth $50,000) has foundation problems. We also have new and used car payments. Should we sell the home and take the hit? Keep it and rent it out? Stay and pay off credit debt first? We're 31 and 32, have two young boys and want to get in better financial shape. Where do we start? -- C.D. San Antonio 

Answer: The real world is a very large place, and it has a growing number of people blessed with large incomes, large inheritances, fortuitous stock options, wild IPOs, etc. They are trying just as hard to cope with their good fortune as you are trying to cope with the real and difficult problems in your life. The first thing you should know is that you're in pretty good shape with respect to both income and debt. Let me tell you why.

First, your household income is over the median income for two-earner households, and you're young. Many of the people you read about in this column have a 10- to 30-year running start on you. Second, while you have a painful burden of consumer credit debt, your home mortgage is small relative to your income.

Unfortunately, your credit card debt and car payments work to limit the amount you could borrow to buy a new home because it raises what lenders call your "back-end" ratio -- the total of your mortgage payment, real estate taxes and other committed payments. What to do? First, think about eliminating your supplementary savings plans and making additional payments on your credit card debt. Second, you didn't mention how much you owed on automobiles, but most families, including those with incomes higher than yours, can't sustain two auto loan payments without reducing their mortgage borrowing power.

If you can arrange to drive less-expensive cars, you can reduce the payments. Try to have just one car payment. Make a plan, see what it will do for you, and then put it into action.

Jane Bryant Quinn is on vacation. Scott Burns is a columnist for the Dallas Morning News.