For many decades, owning a home has been a quintessential element of the American dream, an unmistakable sign of achievement and success. However, that dream became a nightmare for many Americans during the past few years as real estate prices, propped up by a credit-fueled bubble, declined by more than 30% nationwide, leading to millions of underwater mortgages and financial-wrecking foreclosures.

Although there are signs that the real estate market has finally started to stabilize, the recent crisis has led many Americans to reconsider their conception of the American dream with respect to housing. No longer is housing a “can’t-miss” investment that would always increase in value. Instead, real estate is seen for what it actually is: a financial commodity that’s just as prone to the booms and busts of the business cycle as the stock market.

Of course, many people tend to lose perspective in the vagaries of the moment. Just as some were once deluded by the euphoria of thinking they could become house-flipping real estate moguls, the current malaise has put many Americans into an existential funk concerning the future of the housing market.

The reality, as if often the case, lies somewhere in the middle. The decision to buy a house is a very personal decision that depends on a variety of individual characteristics, not all of which are financial in nature. Before you can make an informed decision between home ownership and renting, you need to critically evaluate both your financial and non-financial goals.

With interest rates at record lows and housing prices at distressed levels, some people are tentatively dipping their toes back into the real estate market, but those who believe in the “housing-as-investment” philosophy should think long and hard about the commitment they’ll be making with home ownership. Unlike stocks and bonds, homes are illiquid — it takes time to buy and sell them — and impose considerable transaction costs. Closing costs and broker fees could easily add 5% to 15% to the total cost of a home.

In addition, the returns to home ownership could be widely exaggerated in the minds of many. Economist Robert Schiller has estimated that the long-term, inflation-adjusted returns to housing could be as little as 0.40% per year. Even given investors’ skepticism about future stock market returns — as highlighted by Bill Gross’ recent comment that “the cult of equities is dying” — most experts expect real stock market returns in the range of 3% to 6% per year going forward, which would still make it a far better investment than housing.

However, as many mutual fund companies repeatedly remind you, past performance is no predictor of future returns. According to Trulia, a real estate website, the price-to-rent ratio, a common measurement for the relative expensiveness of home ownership to renting, is below 15 in nearly every major metropolitan market. This indicates that buying a home is relatively cheap right now. Even if housing is not generally a great investment, the current moment could represent a unique opportunity, much like a prolonged bear market in stocks, to earn excess returns in real estate.

Regardless, even a great opportunity should be passed up if you can’t afford the costs associated with home ownership. As a general rule of thumb, you should be able to put down 10% to 20% of the purchase price of a home as a down payment. Your mortgage payments should also be below 30% of your gross income. In addition, in order to spread out the fixed costs of home ownership, you should expect to stay in a purchased home for at least five years, if not longer.

Ultimately, the biggest determinant in buying a home often times has nothing to do with its future investment return. Instead, it may just be a question of family stability and establishing roots in a community that you like. Of course, the importance of these considerations is a personal matter that you must evaluate on your own, but if you ultimately decide in favor of home ownership, Pathway Financial Planning can help you organize your finances in such a way that your home becomes a valuable piece of your overall portfolio, rather than a money pit that drains you of your security and your sanity.

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