Hey everyone, we’re going to switch gears for a second this Finance Fridays off of the “Let’s Gamble” and things outside of The Philosophy to contemplate a question. Let’s explore “Why do Doctors Buy Big Houses?”

Stock Photo from: Pexels

Of course, this question has an inherent generalization. Obviously not all doctors buy big houses.

However, please bear with me and let’s just assume that a majority of physicians do buy big houses.

So then “Why Do Doctors Buy Big Houses?”

Well, let’s first examine some background. As a physician, you are on “The Track” if you don’t “Fall Off“. So you go through a long path of undergrad, med school, and residency. Most likely you will be living in apartments for the majority of that time. If you accepted my general advice and didn’t buy a house as a med student or a resident. Then that means after leaving your house at 18, you’ll have lived in apartments for 4 years of undergrad, 4 years of med school, and 3+ years of residency. So basically, 11+ years.

Then, if you continue to follow my advice, even if I didn’t (Do As I Say Not As I Do), then you’ll want an additional 3 years after starting as an attending to buy a house. This puts you at around 14+ years. That’s a long time, especially when you factor in the delayed gratification already inherent in going down the path of medicine in the first place.

For many, the “American Dream” of a house still exists. However, I’m not sure it’s all it’s cracked up to be.

In fact, there have been a few articles lately which discuss that the American Dream nowadays may not include owning a home.

• Is owning a home still essential to the American Dream? – Chicago Tribune
• American Dream of Home Ownership is Changing – VOA News
• Does the American Dream no longer include homeownership? – CNN Money

Now, I didn’t read through all of those articles word for word, but I can guess what they say.

Things are different. Buying a home used to be a “sure thing”. If you can do it, then buy. “Real estate always goes up”… right?

Except… it doesn’t always go up…

If you talk to people who bought before the housing crash of 2007-2008, then they know just how bad things can get. Some of them were able to weather the storm, but others were not able to. Everyone likes to talk about how the economic crash of 2007-2008 (related to the housing crash) has already rebounded back up to pre-2007 levels. However, has the housing market really rebounded? If you ask someone in San Francisco, then they’ll say “What Housing Crash?”, but if you ask someone in Detroit, well, I don’t think it ever recovered at all.

I think that home ownership is still something that many people want (including milennials), but I don’t think it’s the necessity it once was when speaking about the American Dream.

So what about doctors then, are they still stuck on the American Dream?

Well… this is a generalization, but I think physicians in general are pretty conservative.

I think the path and the profession itself, while having a high barrier to entry, have relatively low risk in comparison to other professions.

I haven’t been able to discuss much with the new physicians of this generation, but I have spoken to some recent graduating fellows. They are pretty deadset on buying a house or condo fresh out of fellowship with the “ink still wet” on their first employment contract.

Why?

I think there are a lot of reasons behind this.

One is that owning your own place connotes independence and stability. “I’ve made it” is probably the feeling associated with it. It’s the same feeling that comes from finishing your residency or fellowship. As such you want to jump into all the other things that give you the same feeling.

The house, the car, the clothes… everything that says “I’m not a trainee anymore, I’m a full-fledged doctor now.”

It’s almost like you were holding back for the 11+ years of training. Then once you signed that contract, cashed your signing bonus, and had your first paycheck on the way, you decided “I’ve made it. I deserve this.” Please refer to my post The Biggest Mistake of Your Like ft. Dr. Yoloswag.

With that all said… I understand. After starting my first job in Rhode Island, I wanted so much to start looking at houses to buy. My wife and I both had good jobs and we “had made it.” I wanted to move forward with my American Dream.

However, life comes at you fast. 3 months into my first job I was informed my job wouldn’t exist anymore in the next 7 months.

Sometimes life punches you in the face and tells you to slow down.

Representative comic here:

From: poorlydrawnlines.com

It’s a good thing I didn’t buy a house.

What else?

Well, there’s also the sense of “it’s an investment”. Physicians have an interesting financial problem to deal with once we finish residency/fellowship.

We start off behind everyone else in terms of saving for retirement, unless you did a Roth 401k/403b in Residency (How to, Portfolios, Analysis, Case Report). However, because our salaries are pretty good, even after contributing to our 401k, once our Student Loans are on auto-pay, we still probably have a small surplus of money… and we don’t know where to put it.

I advise paying off your Student Loans as quickly as possible, even if I’m not.

So where do you put this excess money? Well, you could put some into a 529 for your kids, or maybe you want to start a taxable account, or buy dividend stocks, or gamble with cryptocurrency. However, I think a lot of physicians gravitate toward buying a house. It’s something that is seen as lower risk and is tangible. It’s hard to trust something that you can hold, like some dollars in the stock market or cryptocurrency.

Whereas a house is something you can live in, build equity in, and you aren’t “paying someone else’s mortgage”… right?

Hmm ok… but why a big house?

Well. This is kind of difficult to understand. However, I think the rationale is that “bigger is better”.

For the most part, physicians, especially if there is two physician income, can afford to buy pretty large houses. For the above reasons of “I deserve it” and “It’s an investment”, we believe that it’s a good idea to pay the 30 year mortgage at the “low interest rate” because the house will appreciate for more than that.

In general, I think that is true. If you buy a nice large house, it’ll probably appreciate over the long term. However, is it enough to offset your interest rate?

If your interest rate is 4%, then your house needs to increase in value more than 4% a year in order to offset that rate. Of course, we need to also take into account that you aren’t paying rent anymore since you live in your house. Therefore, the calculation becomes more complex depending on where you live and how much rent would be for you.

There is threshold where buying is better than renting.

The New York Post has a nice calculator here.

However, I believe, that in general, if you buy a nice, large house in a desirable area and live in for 30 years (the life of the mortgage), then you will probably come out on top.

The problem with that sentence is the ability to live in the same area for 30 years. Physicians change jobs all the time, some more than others. It’s virtually impossible to guarantee that you will be in the same house for 30 years.

Even with that, I think that physicians choose to put a lot of money into a large mortgage because “the money is in the house”. Or if you prefer: “There’s always money in the banana stand.”

As long as you don’t burn it down I guess…

Wait… what about taxes?

Good point.

Physicians have a problem with being taxed for having high salaries, but also needing to pay down their student loans.

Unfortunately, the loan deduction for student loans is difficult because the deduction is phased out for a Modified Adjusted Gross Income (MAGI) at $160,000 if married filing a joint return or $80,000 if single, head of household, or qualifying widow(er). (Source: IRS.gov)

However, being a house does provide a tax advantage because home mortgage interest deduction (Source: IRS.gov)  Obviously, the bigger the house, the bigger the mortgage, the more interest paid, and the more interest deducted. Now, this isn’t all that helpful, but every little bit helps.

It’s better than “giving it to ‘The Man’ right?

Is that it?

Yeah. I think so. It boils down to:

1. “I deserve it.”
2. “I think it’s safe.” (stable)
3. “I don’t trust anything else.”
4. “I get a tax deduction.”

Not exactly the best way to think about a huge monetary decision, but it’s not technically wrong.

Like I said, I can understand why many physicians go down this path. However, I just caution biting off more than you can chew. You don’t want to be in the situation where you or your spouse lose their job and are forced to move while still weighed down with a huge mortgage. There are also other life circumstances that may cause you to move suddenly, like illness or death in the family.

Selling at an inopportune time can be costly, especially when you consider closing costs.

TL;DR

1. “I deserve it.”
2. “I think it’s safe.” (stable)
3. “I don’t trust anything else.”
4. “I get a tax deduction.”

What do you guys think? Am I being too harsh or overgeneralizing? Is there more to it?

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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