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Q:
I have $10,000 to invest. Should I put that money in the stock
market, or build a new home?
A: Thanks to the
concept of "leveraging," purchasing a home is by far the best
long-term investment. Leveraging means putting down a small amount
of money to earn a big return.
For example, say you use that $10,000 to build a $150,000 home,
and the home appreciates five percent during the first year. That
means after one year, the home would be worth $157,500 - a gain of
$7,500. Your annual return on your $10,000 investment would be a
whopping 75 percent.
By contrast, putting the same $10,000 in the stock market and
posting a similar five percent gain would only net a $500 return
on investment.
And as a home owner, your savings continue to grow in two ways.
Every year, a greater portion of your monthly mortgage payment
goes to the principal, reducing the overall loan amount. Second,
your home appreciates over time, making it one of the very best
financial investments. Not only is homeownership a stepping stone
to a future of financial security, it also helps to build
neighborhoods and strengthen communities. It is truly the
cornerstone of the American way of life, and the fulfillment of
the American dream.
Q:
It seems that home prices appear to be moving down. So why should
I build now? If I wait, won't prices go even lower?
A: All the market
fundamentals show that now is a good time to buy - prices are
down, interest rates are affordable, there are lots of homes to
choose from and you can bargain with sellers.
If you try to wait and time the market until it hits rock
bottom, you are likely to lose out. Just as no one can accurately
predict the peaks and valleys of the stock market (name one person
who sold their tech portfolio in April of 2000), the same holds
true for housing. If you sit on the fence and wait for the
absolute best deal, you could end up literally waiting for years.
And most likely, your guess on market timing would be wrong. But
if you choose to buy now, you will not only be in the driver's
seat during the buying process, you will also reap the gains of
price appreciation once you become a home owner. Remember, those
who purchased homes in the early 1990s during the last big
economic and housing downturn came out as big winners.
Q:
My neighbor sold his house six-months ago for $300,000. Today, I
can only get $270,000 for my home. Why should I take a $30,000
loss on my home? Doesn't it make sense to wait out the market
until I get the same price on my home that my neighbor got before
buying a move-up home?
A: It's always better
to trade up in a buyer's market, like the one we are in now. While
the value of your house has fallen, the price of higher-end homes
has also dropped. Your home value is now down 10 percent to
$270,000. But don't forget that in today's buyer's market, higher
priced homes are also dropping in price.
But for argument's sake, let's say that a $500,000 move-up home
has also dropped 10 percent in value and now sells at $450,000. If
you sold your home today for $270,000 and purchased the larger
house for $450,000, the difference in price would be $180,000.
But if you waited to recoup the 10 percent value on your home
and sold it at $300,000, chances are that same move-up home would
also move up in price to at least $500,000. That's a $200,000
price difference between the two homes. So by selling today, you
would actually save $20,000. And most likely, by jumping into the
market today your savings would be even greater because consumers
have much more bargaining power when shopping for higher-end homes
in a buyer's market.
Q:
If I buy in today's uncertain economic climate, my home may not
appreciate in value. Isn't it better to wait until the economic
picture becomes clearer?
A: The fact is the
economy is still solid. After expanding rapidly over the past
couple of years, economic growth is moderating - and this is
actually good for housing. Most economists predict that overall
GDP growth will average about 2.5 percent for the rest of the
year. That means that job growth will continue to move forward at
a pace that should not trigger higher inflation rates or higher
interest rates. This period of moderate economic growth, job
creation and low inflation, coupled with a true buyer's market
where there are plenty of homes to choose from, makes this an
ideal time to purchase a new home.
Q:
But wouldn't it be better to "play it safe," keep renting and wait
to see if prices go down further?
A: The best way to
"play it safe" is to actually buy a home. And here's why. Studies
show that owning a home is the best way to build household wealth.
The sooner a person owns a home, the faster they begin to build up
equity and wealth. When you buy a home, you are also purchasing
price stability, knowing that you will pay the same monthly
payment for the life of your 30-year mortgage.
Now consider the current rental market. During the past few
years, many rental units have been converted to condos. As a
result, there are fewer apartment rentals on the market. While
home prices have been moderating, rents have been going up. Each
year, your rent can easily go up a minimum of five percent to ten
percent. Where is the economic security in knowing that it is
possible your rent could surge 30 percent in three years? You
don't receive any tax benefits from paying rent, nor do you
accumulate any price appreciation, as you would if you owned a
home of your own.
All of the economic fundamentals show that this is a good time
to buy a home and that there is upward pressure on rental
apartments. The real risk isn't in buying a home; it's sitting on
the fence.
Q:
Interest rates have come down in recent weeks. I think they will
continue to move even lower, so shouldn't I wait until that
happens before I decide to buy a home?
A: Interest rates
currently stand at about 6.5 percent and are extremely favorable
for buyers. In fact, they are hovering near 30-year lows. But
waiting to time the market is a dangerous-and losing-game. Even
those who follow the market for a living can't figure out when
interest rates will bottom out. If they could, they would all be
multi-millionaires. Because interest rates are near historic lows,
it is much more likely that they will head higher in the future as
opposed to moving even lower.
And home prices don't necessarily move in unison with interest
rates. So, if you decided to roll the dice and wait to purchase a
home and the price were to actually drop $10,000 from where it is
today, you could still end up losing money. How? If interest rates
were to move up a half-a-point during this period, the savings on
the reduced home price would be more than offset by the higher
monthly payment you would be making over the life of the loan.
In short, the smartest and safest time to buy is now. We know
that interest rates are low today. We know that home prices are
down. We know that there are plenty of homes on the market to
choose from. We know that sellers are willing to bargain. And we
know that builders are willing to offer attractive incentives to
get your business. Any or all of these favorable variables could
change for the worse six months from today.
Q:
I'm a first-time buyer and still can't afford the type of home
that I want. Is it best to wait and hope that prices eventually
move lower?
A: If you continue to
wait, you may never be able to afford to get into the housing
market. Even as home prices are currently moderating - or even
falling in some areas - rents continue to climb. The best way to
build household wealth is to own a home. Once you become a
homeowner, you are able to take advantage of the generous tax
deductions that homeownership offers, and you begin to build
equity in your property. As your property builds in equity, you
can use those gains to sell your starter home and afford to move
into a bigger house.
With so many homes on the market to choose from, your best
strategy may be to scale back expectations for your dream
starter-home. Instead of trying to buy a 2,000 square-foot home,
consider shopping for a 1,500 square-foot home. Remember, the
sooner you make the jump from renter to home owner, the quicker
you begin to create and build up wealth for your family. After a
few years, you will be able to leverage this investment and buy a
larger house.
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