Is it the right time to buy a home?
You have been thinking about buying a home, but you hear that interest rates have increased and you’re not sure you will benefit over the long haul.
The short answer is yes, and I’ll explain exactly why.
There are three main reasons why buying a home now (vs renting) makes sense:
1: The residential real estate market is shifting from a seller’s market to a buyer’s market. Interest rates have risen so there are fewer buyers. Fewer buyers mean less competition, less competition means more opportunities to negotiate with sellers. Buyers now have more leverage to get lower prices and/or seller concessions.
2: If you buy a home now, it will still appreciate in value over the next 5-10 years. It is unlikely that we will continue to see homes appreciate at 15-20% per year, but it is very likely that we will see appreciation at 4-8% per year. There are two main drivers that will affect appreciation in the short-term: we still have a housing shortage, not a surplus, and average rents are rising, not falling. These two factors were reversed in the last housing collapse of 2008. We will not see home values decrease like they did back then.
3: Buying a home is a great investment ($600,000 home, $540,000 conforming 30 year fixed loan at 5.75% over a 9 year period)
- Appreciation – a home purchased for $600,000 today will be worth $800,000 - $900,000 in 9 years.
- 30 year fixed mortgages offer fixed payments. Assuming rents continue to rise at 6% (the average over the last several years), a buyer would save $12,000 in monthly payments vs renting, over the next 9 years.
- Tax benefits – homeowners receive tax breaks from deducting closing costs and mortgage interest. A buyer would pay $14,000 less in income taxes than a renter over a 9 year period.
- Mortgage loan balance reduction. Like any fixed rate/term loan, the balance decreases each time a payment is made. An original loan balance of $540,000 would decrease by $79,000 over a 9 year period.
Watch the video to see the ROI Breakdown
In this example, the total gains from buying are $319,000 ($214K in appreciation + $12K in payment savings + $14K in tax benefits + $79K in balance reduction). If we subtract the closings costs for the loan and the real estate commissions to sell the home ($60K total), the net gains are $259,000. The original down payment ($ invested) is $72,000, this means the Return On Investment (ROI) is 38%.
Not a bad return for a necessity we all have – housing!
Bottom line: buying a home now, is still a great way to start building wealth.