Is it a good time to buy?
With prices rising as much as they have over the last year, many people are wondering if we are in the midst of a housing bubble. Almost all experts say no. You can read our own Matthew Gardner’s explanation here. Even so, many of my clients are wondering whether or not this is the time to buy.
It’s very hard to time the real estate market. We could have never predicted the pandemic for example and certainly not the huge run up in the market as a result. We all thought it would go the other way. So your decision to buy a home or not really should be based on your own needs and those of your family at this time. That said, I tell my clients that, ideally, you want to plan to be in your home for 5-7 years to weather any market downturns but that is just a general guideline.
The housing market, like every type of market, unavoidably has its ups and downs. As a long-term investment, homeownership is still one of the best investments for individual households. Historically, real estate has consistently increased in value, despite shorter periods of depreciation due to local markets and/or national economic conditions. The data shows that homes generally appreciate about 5% per year.
Five percent may not seem like a great return on investment, but you have to think about it in the context of the situation. For example, let’s say you put 10% down on a $200,000 house. That’s a $20,000 down payment, or initial investment. At a 5% annual appreciation rate, your $200,000 home would gain $10,000 in value during the first year. Earning $10,000 on an investment of $20,000 is a whopping 50% return.
For further perspective, let’s say instead of spending that $20,000 on a down payment, you invested it in the stock market. With a 5% return, you would gain only $1,000 in profit. Because real estate is usually leveraged with a loan, you stand to gain on the total amount even though you only invested a small portion of your own money. This is why you hear people say that home ownership is one of the best ways to build wealth.
So you may be thinking that even though a home may have a higher return, you still have to consider all of the costs of home ownership, such as taxes, mortgage interest and maintenance. Your property taxes and the interest on your mortgage are both tax deductible. You can deduct those costs from your income thus reducing your overall taxable income. In other words, the government is subsidizing your home. There are some limits. Currently you can deduct the interest on up to $1M of your loan if your home was purchased before 2017 or $750K if your home was purchased after 2017. Property taxes can be deducted up to $10K (combination of property, state and local taxes).
It’s easy to get carried away with all of the economic reasons for home ownership, but it’s important to remember that not every reason is financial. Have you ever wanted to paint the walls of your apartment? Well when you’re renting, you usually can’t. Has anything in your apartment ever needed updating, but the landlord refused to do it? When you own a home, you can make the space yours in almost any way you want. And you benefit when you do home improvements, both financially and psychologically. Homes generally have more space, for storage, living, etc. than other living arrangements. Not to mention that you have space outdoors for barbecuing, pets, and kids. Owning your home carries with it a sense of pride, accomplishment, and security.
So when you’re considering buying a home, consider the broad range of benefits that owning a home can have. And always make sure you have an experienced real estate agent and loan officer to help make sure you’re getting a home that is right for you.