You Can’t Afford NOT to Buy a Home
You may wonder whether it is worthwhile to wait to purchase
your home until prices are at their lowest. The prices are very low now.
Read my previous blogs.
However, prices are not the only factor that should drive your decision.
Currently, interest rates are at generational lows that greatly improve the affordability of homes.
Further on the annual cost table, you can see that even
if home prices decline, the possible tax savings of owning a
home lead to a lower cost for the buyer, not the renter.
Also, there are special, additional tax benefits for first time home buyers that may be available for a limited time only in 2009.
Finally, and most importantly, when you have made the decision to commit to homeownership because you are financially ready, market conditions are a secondary concern.
Tax advantages
Over the last ten years, the cost of rental housing in the U.S. has increased an average of 3.5% per year. If that trend continues, that means that an apartment or home renting for $1,000 per month will cost more than $1,300 a month in ten years.
If you rent the same home for ten years, the total amount you would pay for rent will equal $140,777.
None of that $140,777 ( rental payments over 10 years) is returned to you, either through savings or as an investment.
Homeownership, on the other hand, has tax advantages over renting a home, and those advantages can help you save money.
For many homeowners, part of the monthly mortgage payment “comes back to you” in tax savings.
Homeownership is a Good Investment for Qualified Buyers
For the majority of Americans, their home is their largest
financial asset and a major player in their investment portfolio.
The NATIONAL ASSOCIATION OF REALTORS® estimates that home value rises, on average, by 4.5 percent a year. That’s a steady return on investment; one’s own home is a much less volatile asset than stocks, bonds or mutual funds, even when the recent downturn is considered.
How do you build up your net worth?
As a homeowner, you build wealth in two ways:
1. through paying down the principle on your mortgage
2. through those “appreciating returns” on your home
“Appreciating” Returns
As an example, let’s look again at that $200,000 home.
Unlike your rental unit, your home should appreciate over time.
Instead of assuming average growth, we assume that prices
are flat in the first year of ownership and pick up, but only
slightly, in the second year. In the third year of ownership, your
home has appreciated to a modest $210,858. After ten years,
assuming a return to an average 4.5 percent appreciation rate*,
your $200,000 home will be worth $286,948. Not only do you
earn a rate of return on your original purchase price, you also
get a return on any subsequent appreciation.
* Average price appreciation from 1970 to 2008 was 6.0%
Buyers Come Out Ahead
You may be surprised to see that the homeowner still comes out ahead of the renter even if there is a decline in the home's value over the next year.
Extraordinarily low interest rates and lower prices have ushered in some of the best affordability conditions in a generation in 2009.
Homeownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2007.
In 2007, the median net worth for homeowners was $234,200 compared to $5,100 for renters.
Even though that difference will surely narrow as a result of house price declines since 2007, median homeowners will likely still have substantially greater net worth than median renters."
As home price growth returns to a normal level the amount of wealth that you net from appreciation will increase. At the same time you pay your mortgage reducing your outstanding debt.
As your debt decreases through the years and the home value increases, you accumulate
wealth from the value of your home. In addition, over this ten year
period, you will have a significantly lower after-tax payment
for housing. Each year as your home appreciates and you
continue to pay down your mortgage debt, you increase your
own net worth.
Stimulus package
Given recent changes in home prices and the current low mortgage rate climate, there have been significant gains in affordability for prospective first-time homeowners.
In 2009, a provision in the Stimulus Bill provided for a first-time Homebuyer Tax Credit of 10% percent of the purchase price of the home up to $8,000.
Requirements:
1. property should be pricipal residence.
2. the buyer must not have owned property during 3-year period before date of purchase.
3. the property must be the buyer's principal residence for 36 month after the purchase, othervise, the credit must be re-paid back.
4. some income restriction exists. Tax credit begins to phase out if modified adjusted income is over $75,000 (or $150,000 for joint filers) no tax credit at all if modified adjusted gross income is over $95,000 ( or $170,000 for joint filers)
5. Date of Purchase should be before November 30, 2009
Call to Tatyana Baytler if you have any questions about the stimulus package or any other questions.
