Over the last 2 years, we have seen tremendous corrections in the housing market, meaning almost across the board, the price of homes have come down. There was a time when we all took the housing market for granted. A once “no-brainer” decision to invest in real estate now requires us to evaluate whether buying a home is the right decision. In fact, the information provided on the current market has many potential home buyers confused and sitting on the sidelines, watching and waiting for things to turn around. Many are asking me if buying is the right decision. The answer is that it depends. There are no guarantees in any investment. However, history has been our clearest window into the future and my money is in real estate. The decision to invest in real estate is a personal one. If you are already in debt over your head, then biting off more than you can chew is never a good idea.
Time Magazine’s cover story two weeks ago was titled “Rethinking Homeownership: Why owning a Home May No Longer Make Economic Sense!” Potential homebuyers read articles and similar reports on a daily basis. As a result, many people are making the decision to sit on the sidelines and wait it out or not purchase a home at all. However, even if we do experience a further decline in home prices, there is little question that future interest rates will be higher. When you finally decide we are at the bottom of the market, your decision to wait may have cost you thousands of dollars because of higher rates and greater financing costs. If you share my opinion that the price of homes will go back up, then now is probably the time to buy.
Here is an example of the high cost of waiting to invest in a home purchase. Consider a typical home that sells for $300,000. If you invest the minimum down payment allowed (3.5%) and get a 30-year fixed mortgage at today’s rate of 4.250%, monthly principal and interest will be $1,438. Let’s say that 12 months from now the same house goes for 10% less, or $270,000. As mentioned above, interest rates are predicted to go up. If interest rates rise to say 6.000%, your monthly payment on $270,000 would be $1,578, and you have saved nothing. It actually ends up costing you more, to the tune of almost $8,400 over 5 years and $50,400 over 30 years. Meanwhile, home prices will likely stabilize and sellers will become less willing to negotiate. In addition, if you decided to sit on the sidelines, you will have spent more time living someplace you’d rather not, lost out on the tax deductibility of homeownership (which could mean thousands of dollars depending on your tax bracket), and probably just helped someone else pay their mortgage instead of paying your own. This is truly a window of opportunity we most likely will never see again in our lifetime.
It bears mentioning that if you had invested $100,000 in real estate in January 2000, your home would likely be worth $144,200 as of October 2009. Once again, history has shown that buying real estate is typically not a short-term investment strategy. Nonetheless, in the 9 years between 2000 and 2009, the real estate market produced a 44.2% rate-of-return even considering the mortgage and housing crisis of the last 2 ½ years. Compared to the Dow, NASDAQ, and S&P, which all were still negative during the same timeframe, real estate has still remained in the black in terms of investment. (Source: MSN Money, Case Shiller, Steve Harney). Fundamentally, real estate will continue to be a phenomenal investment in your future.
Christian Durland
Cherry Creek Mortgage
