10. The news is bad…for a reason
Quick…which is the more exciting scenario?
A man walks slowly down a flight of stairs, sometimes pausing or retracing his steps until he reaches a floor. After trudging along for while, he notices another staircase and begins ascending, occasionally pausing or taking a step back before methodically proceeding upward.
A second man hurtles down a terrifically high flight of stairs. Ignoring the safety railings, he runs recklessly downward, dodging obstacles in his path as he goes. He suddenly cries out as he loses his footing, sails through the air, tumbles down several flights of stairs in a spectacular crash. The badly injured man is bandaged from head to toe and attached to a variety of beeping, flashing medical devices that monitor his vital signs. Experts debate his condition but agree that the situation is dire and prospects for recovery are uncertain.
…and that’s why more headlines say “Home values off the cliff in Phoenix, Miami and Las Vegas” than “Things aren’t bad in Seattle, Portland and Charlotte.” Most readers just find sensational headlines more interesting. And while they may help sell newspapers, they also scare buyers and sellers to the sidelines, though the news may be very positive for home buyers in particular.
9. Uncle Sam wants you…to be a homeowner!
Wouldn’t it be great if the government kicked in some money to help make home ownership more affordable? Because of deductions on mortgage interest and property taxes, the practical effect is that the government is subsidizing your home purchase. In fact, home ownership provides two of the best ways to reduce your tax bill.
Speaking of tax smarts, be sure to also consult your advisor about tax breaks that may be available on the proceeds from selling your current home, and on any “points” paid when taking out a mortgage loan.
In another move to help restore confidence and stabilize the housing market, in late July President Bush signed a far-ranging housing bill into law. The legislation provides funds to shore up finance giants Fannie Mae and Freddie Mac, who guarantee a large portion of the nation’s mortgage loans. The law also provides help for troubled borrowers struggling with mortgages and tax credits for first-time homeowners.
8. Long term, owning usually beats renting
In recent years, the cost of buying a home in most markets has increased while the cost of renting remains flat. But it’s never a good idea to base long-term investment decisions on short-term conditions. If you decide to rent instead of purchasing a home, you may be in a bad spot if the cost of rentals in your area shoots up.
Typically, a weak housing market corresponds with a strong rental market. If the rental market is strong in your area, it may indicate weakness in the local housing market, which typically favors buyers over sellers.
When you buy a home with a fixed-rate mortgage, you can lock in a predictable monthly payment for 15 or 30 years. That means the largest part of your housing costs, principal and interest, are fixed. For some people, that stability, along with the sense of community that comes from being a homeowner, is enough to tip the scales toward home ownership.
If the monthly cost of buying vs. renting is comparable, you may consider some related factors to help you decide. When you rent, your landlord receives any appreciation and tax breaks associated with owning the property. If you plan on any significant remodeling, buying may be also preferable to renting.
7. Home ownership builds equity
Some people just don’t have the discipline to set aside money each month to save and invest. In this case, a home is more than a shelter, it acts as sort of an automatic savings account. You can build your savings in two ways:
First, each month a portion of your payment goes toward the principal to build equity in your home. In the early years of the mortgage, most of your payment goes toward interest. Over time, however, that turns around and your equity growth begins to accelerate.
Second, U.S. home prices have always appreciated over the long term. Average appreciation on a home is, 5-6 percent annually, according to the National Association of Home Builders. Over time, history has shown that owning a home is a solid financial investment despite periodic market downturns.
6. Market timing is far from perfect
No one wants to purchase a home only to see its value decline. But should you wait to buy a home until prices bottom out? A quick web search will yield a number of articles and opinions for and against timing the real estate market, but beware of those in favor of market timing who also want to sell you a how-to book or system.
Many people who have tried to time the market miss out on the chance to build equity by waiting to buy until prices rise again. The chart below shows the gradual increase – along with typical ups-and-downs – of home values over nearly 40 years. The arrows indicate market low points when home values dipped before continuing their historical rise.
The problem? Market cycles only become clear in retrospect. In the midst of a market slowdown, it’s very difficult to predict when housing prices hit their low points. In addition, this trend line represents home prices at the national level, which may be very different than housing prices in your neighborhood. Broad national indicators may lag the market by months – meaning the actual price floor would not show up in reports until weeks or months later.
The longer you own your home, the better chance you have of building wealth and protecting yourself from the market’s ups and downs.