It is true home prices are down and it’s a buyers’ market. Mortgage rates are low, too, and the $8,000 tax credit has been extended another year (thru 2011) for first-time buyers. It seems like buying a home today would make good sense, but does it?
Most people think buying a home is the most stable investment they can make. Wrong.
There are many things to consider when buying a home.
First, think about home sales.
Obviously, the last three years have proven home prices can rise and fall with a whim. On average over the last 50 years homes have appreciated only 4%. It is true some homes in some urban areas like San Francisco and in coastal areas have done better, but then there are Chicago and Houston where homes have significantly depreciated. To repeat, the average appreciation is 4%. Over 6 trillion dollars has been lost in home values since 2005.
Also, you have to stay 7 years in one home today to make it possible for your home to go up in price. The market today is bad, and short term advantages on property do not exist. The flip has disappeared.
Next consider how good an investment homes really are.
Would you put 60% to 70% of your net value in one stock? Investors would not. “Diversify” is the mantra. No one should be looking for significant enough gains for retirement through one investment.
But, doesn’t buying trump renting?
Why? You are paying a monthly payment either way for a place to live. With a rent you have no property taxes or maintenance costs. You can also easily move or upgrade if things change. You can’t be stuck with an on-going payment; you’re only going to lose your deposit fee at worst.
So, the tax deduction for the mortgage interest makes the difference?
Think again. What you are getting that tax deduction on is mostly interest, not principal. Your deduction only lowers your monthly payment on your mortgage by about a third—of nothing—not on equity for you until after about 20 years on a 30-year mortgage.
But people have made a profit on a house they bought and lived in for many years!
In an article entitled “Why Your Home is Not Worth the Investment” it becomes only too clear the profit is not what you think it is. To live in a home, you do not only have to buy it; you also have many other financial obligations. Between 1977 – 2077 a house that was bought for $50,000 could sell for $290,500. Wow—what a good deal. But if you calculate the costs an average homeowner has paid for this home over thirty years, the home really has been an expenditure of $394,000. Ooops, a loss of almost $100,000.
Today a house that costs $300,000 becomes a $600,000 house after interest paid on a mortgage over 30 years will. Then add in maintenance, repair, insurances, and property taxes. That same house will likely have cost you about $1 million over the time it takes to pay the mortgage. How much profit will you make, even after 30 years?
And, what about that profit?
Can you stop living someplace after selling your house? Let’s say you make a $200,000 profit on the sale of your home. Can you buy another house with that amount without a mortgage? You might buy a condo for that amount free and clear, but then there are the associations fees—already back to renting! What has all this home-ownership gotten you?
All this is not to say you should only rent and never buy, but the reality of the true cost of a house may sober you enough to look at and compare houses for sale carefully, buy at the right time for the right house, and consider all the hidden costs when you figure your house buying budget.
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