Should you Buy or Rent in this market
Buy a Home or Rent?
It may seem an odd time in real estate to be making the case for homeownership as an investment. We all know that real estate values in many parts of the country have dropped dramatically over the last four years. Yet, with that being the case, there is still tremendous evidence that buying a home today makes perfect sense . FINANCIALLY!
1. Buying May Be Cheaper Than Renting
Home values are back to 2003 prices in many parts of the country. Interest rates are at all time lows. It may just make economic sense to buy now because your housing expense will be less.
Professor Case, in the article mentioned above, states:
Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000. housing has perhaps never been a better bargain.
In many parts of the country it makes sense to take advantage of the current market and become a buyer at those numbers. A formula to determine whether to buy or rent used by Andres Carbacho-Burgos, a Moody's economist, was explained in the Palm Beach Post last week:
Carbacho-Burgos looks to a price-rent ratio that considers the buy-vs.-rent question in a more mathematical way. The ratio is calculated by taking the median cost to buy a home and dividing it by the annual cost to rent.
A price-rent ratio less than 20 is considered a sign that it is better to buy.
For example, if the annual rent on a three-bedroom, one bathroom home is $15,000, and a similar home is selling for $200,000, the rent ratio is 13, favoring buying as the better option.
According to Moody's, the average price-rent ratio using apartment rents in 2006 in Palm Beach County peaked at 31 but was down to 18 in the first quarter of this year.
Look at the numbers in your area and decide whether buying is the better option. And, there are tax advantages.
2. There Are Tax Advantages to Homeownership
There are several tax advantages to owning your own home. Karl E. Case, professor emeritus of economics at Wellesley and co-creator of Standard & Poor's Case-Shiller housing index, discussed some of these advantages in a New York Times op-ed piece last week titled A Dream House After All:
(The) yield on investment in a house is the capital gain you receive if it appreciates and you sell the house. Gains are excluded from taxation if the property is a primary residence and the gain is less than $250,000 for a single filer or $500,000 for a married couple filing jointly. and, you can deduct the interest you pay on the mortgage.
You get a tax break on the interest now and you pay little or no taxes when you sell!!
3. Homeownership Builds Wealth
When you own a home, you are 'forced' to save by paying your mortgage every month. Part of that payment goes to paying down the principal on the mortgage money you borrowed. The equity you are creating is a form of savings. In a recent article, Even in a Stagnant Market, There Are Benefits to Homeownership, Karen Dynan, vice president, co-director of the Economic Studies program, and the Robert S. Kerr Senior Fellow at the Brookings Institution claimed:
I am doubtful that we should be giving up on homeownership as a way for households to build wealth . (because) owning a home induced people to do some saving, first for the down payment and later through paying down principal as part of their monthly mortgage obligations.
You may argue that this only works if the home appreciates over time. Let's look at this issue.
4. Real Estate is a Good Long Term Investment
The minute you mention a home as an investment today the first thing you hear is - "Go ask what someone who bought in 2006 thinks." We don't have to ask. We know what their answer will be. However, any investment vehicle deals with market fluctuations.
A person who placed money in the Dow in 2007 and sold it in January 2009 would have lost 49.3%. Even if they sold today they would still be at a 25% loss. Does that mean that we should never again invest in stocks?
If someone bought gold at the end of 1987 and sold it in 2000 they would have lost approximately 50% of their investment. I am sure there were those in 2000 who decried gold as an investment when it dropped to almost $250 an ounce. I hope people didn't listen as gold is now trading for over $1,200 an ounce.
Real estate was never touted as a great 'short term' investment. Let's see how home values compare to other investments over a ten year time span - the last ten years. According to the Case Shiller Pricing Index real estate prices have appreciated 40.3% since their August 2000 report. During that same ten year time period, the Dow Jones Average lost 7.04%.
Obviously, as a longer term investment, it beats the stock market. But, what will happen to prices going forward?
5. Experts Expect Home Price Appreciation Starting Next Year
Macro Markets surveys over 100 housing industry experts each month to determine what they believe will happen to home values over the next five years. Though they believe that prices will continue to soften for the rest of this year (-2.08%), they feel that prices will stabilize next year (.78% appreciation) and then show three more years of increasing percentages of appreciation (2012 - 2.43%; 2013 - 3.2%; 2014 - 3.69%).
Bottom Line
We believe that purchasing a home now will prove to be a sound financial decision for years to come. People who didn't believed all the hype in 2006 made good economic decisions. People who do not get caught up in the negativity of today's market and purchase a home now will do the same. As Warren Buffet said, "When others are greedy, be fearful. When others are fearful, be greedy."
Posted at 05:26PM Sep 19, 2010 by Linda Bayles in Real Estate | Comments[0]
