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Why Buying a Home is a Good Idea
The Best Investment
As a fairly general
rule, homes appreciate about four or five percent a year. Some years will be
more, some less. The figure will vary from neighborhood to neighborhood, and
region to region. Five percent may not seem like
that much at first. Stocks (at times) appreciate much more, and you could easily
earn over the same return with a very safe investment in treasury bills or
bonds.
But take a
second look…
Presumably, if you bought a
$200,000 house, you did not pay cash for the home. You got a mortgage, too.
Suppose you put as much as twenty percent down – that would be an investment
of $40,000.
At an appreciation rate of 5%
annually, a $200,000 home would increase in value $10,000 during the first year.
That means you earned $10,000 with an investment of $40,000. Your annual
"return on investment" would be a whopping twenty-five percent.
Of course, you are making
mortgage payments and paying property taxes, along with a couple of other costs.
However, since the interest on your mortgage and your property taxes are both
tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a
home is higher than most any other investment you could make.
The Business
Cycle and Buying a Home
There are times when the economy
is brisk and everyone feels confident about his or her prospects for the future.
As a result, they spend money. People eat out more, buy new cars, and….
…They buy houses.
Then, for one reason or another,
the economy slows down. Companies lay off employees and consumers are more
careful about where they spend money, perhaps saving more than usual. As a
result, the economy decelerates even further. If it slows enough, we have a
recession.
During such a time, fewer people
are buying homes. Even so, some homeowners find themselves in a situation where
they must sell. Families grow beyond the capacity of the home, employees get
relocated, and some may even find themselves unable to make their mortgage
payment - perhaps because of a layoff in the family.
 Supply
and Demand
When the supply of available
houses is greater than the supply of buyers, appreciation may slow and prices
may even fall, as happened in the early eighties and the early to mid-nineties.
If you are lucky enough to
purchase a home during a slow period, you can be reasonably certain the economy
will begin to show strength again. At times, real estate values may even surge
drastically. In many regions of the country, this is precisely what occurred in
the late eighties and nineties.
Market
Timing is Difficult
One problem with attempting to
time your purchase to the business cycle is that no one can accurately predict
the future. Another challenge is that interest rates are generally higher during
a depressed market and income may not be keeping up because less overtime is
available and bonuses or commissions are down. With higher interest rates and
lower earnings, fewer people can qualify for a home purchase than in more
prosperous times.
Why
You Should Not Wait
Plus, "timing the
market" generally works best for first-time buyers. People who already have
a home usually need to sell it in order to buy their next one. If a
"move-up" buyer wants to buy a home during a depressed market, that
means they usually have to sell one during the slow market, too. If a seller
wants to sell his home to take advantage of a "hot" market when prices
are fairly high, they generally have to buy their next home during that same hot
market. It tends to equal out.
Finally, the business cycle can
change over time. Since 1983, we have had two fairly long expansions with only a
slight recession in between each. You would not want to wait nine years to buy a
home, would you? You could miss out on a substantial amount of appreciation by
waiting, and end up paying much higher prices
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