Feeling stressed about the real estate market? You might be surprised to learn that owning a home isn't the only path to financial security, or even the best one.
You may have heard at least one of the following tips:
"Real estate is a sure thing!"
"Houses are always appreciated!"
"Don't spend money on rent!"
“Owning a home is the best way to get rich!”
How to find a low mortgage rate.
The "American Dream" of owning a home is deeply ingrained in our culture, but it does not guarantee a path to wealth. Of course, depending on your situation and goals, owning a home may not be the best option for financial security.
In the first half of this year, homebuyers around the world appear to have made huge profits that far exceed stock market returns. According to the National Association of Realtors (opens in a new tab), the average price of a used home in May was $407,600, up about 15% from a year ago and a record high.But after several rate hikes by the Fed, house prices are starting to cool - with an estimated 10% fall in prices (opens in a new tab) in most markets by the end of the year.
Even as housing costs begin to fall, house prices are still staggering in some markets. The median value of used homes sold in Silicon Valley in the first quarter of 2022 was $1.88 million. The median for the Boston and Denver metro areas exceeds $600,000, while the average price in the Seattle area is over $700,000.
But keep in mind that there are always booms and busts in real estate, some of which can be very violent. A major cause of the housing collapse in the 1990s was that interest rates rose from his 12% to 14%. Homeowners with big mortgages were struggling, and interest rates kept people on the sidelines or continued to join the ranks of the "poor households."
But the housing market crashes of 2007 and 2008 were a real wake-up call to how bad things could get. Subprime and subprime mortgage defaults, a stagnant economy, and the tendency to treat home ownership like an ATM have burst the housing bubble, rendering homeowners unable to pay and leading to foreclosures. Paddy field.Others find their mortgages disastrously inadequate. This means you owe more than your home is worth.
There are many reasons to buy a home, and many reasons not to wait or buy. But don't base your decisions on these common hosting myths.
Myth 1: Your home is an asset.
Assets are things you own. Responsibility is responsibility. So is a house an asset or a liability?
both at once. Yes, you can sell your home for profit (assets), but you have a lien (debt) on the property. A home is an asset to mortgage companies and banks, and they generate income by paying interest on the mortgage. If you don't pay off your loan, the bank will keep your house.
As a homeowner, you need to sell your home or pay off your mortgage in order to turn your home into an asset.
For homeowners who experienced the Great Recession, their home was definitely a liability, not an asset.In fact, some simply left a "property."
Many people see their home as a retirement asset. This can happen if you sell and downsize or move to a lower cost location and invest the proceeds from the sale. But most retirees stay put, hoping to stay close to their families and communities in a home filled with memories.
13 Tax Exemptions for Homeowners and Homebuyers
If you're a retiree, consider a reverse mortgage to use your home equity to cover your living expenses. Reverse mortgages have received a lot of bad press in the past, most of which have been accepted. But today's industry is more organized, The government-backed reverse mortgage can be considered fairly safe. It might not be the right choice for everyone, but it's a way to transform your home into an asset.
Myth 2: You won't regret your purchase
Despite rising prices, the U.S. the number of homeowners (open in a new tab) increased by 1.3% by 2020, the largest annual increase on record. Millennials make up 43% of homebuyers (open in a new tab), more than any other generation, up from 37% last year. Many people feel they have to shop around and go to extremes to make it happen.
Millennials were the most likely to respond to the market by increasing their willingness to spend, with 46% expecting to hit their budget. This could pose dangerous financial risks at a time when fuel and food prices are rising and inflation has not been seen since the 1970s.
Millennials are also looking for a quick way to buy a home in a competitive market, including buying a home they've never seen (90%) and a home in need of major renovations (82%). More likely to make a decision (opens in a new tab). ) and offers above the asking price (80%).
A seller's market can cause buyer remorse. Nearly two-thirds of millennials (opens in new tab) regret buying a home. More than half (51%) feel stressed or anxious about owning a home, and more than 40% worry about a possible housing market crash.
Being "poor" is not fun.
Myth 3: Paying rent is a waste of money
Renting can be cheaper than buying, especially on the seller's market. If you need to move because of a job offer or just want to change your lifestyle, you can easily move into a rented apartment. If you sell it after a few years, you don't have to worry about getting your investment back.
If you are on a tight budget or need to use your savings to buy a home, renting may be the wisest decision. If you lose your job or other life changes, you could lose your home and affect your creditworthiness for years to come
Renting makes sense for other reasons, too. If your goal is to sell your home, downsize it, and buy another, you may not be able to save as much as you think
It's not about property taxes or insurance, it's about payment, maintenance and repair. Sales and leases can prevent you from buying, maintaining and paying for new recording equipment. In addition, tenants only have to insure their belongings, which is cheap.
Myth 4: Everyone buys but me
In a seller’s market, home prices rise, often seemingly without reason because inventory is tight, and it seems like everybody is trying to buy. The seller holds the cards, and the buyer has little negotiating power and feels the pressure to waive inspections or to pay over list price.
FOMO (fear of missing out) is real, but it can be financially advantageous to wait for the cyclical return of a buyer’s market. Markets correct themselves. And more potential buyers are taking to the sidelines and waiting it out. The number of Americans who say that now would be a good time to buy a house fell to 19% — the lowest level since October 2011.
Myth 5: A home is a better investment than a bank
Compared to stocks, homeownership is an inferior investment, according to Yale economics professor and Nobel laureate Robert Shiller. He points to data that, on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.
In the housing market’s best 30 years (1976-2005), real price appreciation averaged only 2.2% per year. In the worst 30 years for housing (1895-1924), real price appreciation averaged a loss of 2% per year.
That’s partly because homeownership comes with a slew of costs, including maintenance, property taxes, insurance and possibly private mortgage insurance (PMI) and HOA fees.
The "true" cost of buying a home
And ownership comes at a price. Closing costs, including initial costs such as taxes, insurance, title search and points, range from 2% to 6% of the purchase price.
A $350,000 house with a 5% down payment will set you back over $17,000.
Myth 6: Mortgage interest is tax deductible
This is not exactly a myth, as property taxes and mortgage interest are collectible and tax deductible, but about 90% of taxpayers take a standard deduction.
If you're one of the 10% individually disclosing, you need to do some math to determine if your tax savings are enough to make wise financial decisions. Paying most of the interest in the early stages of your mortgage can result in significant tax savings.
Keep in mind that even if you live in a high property tax area, the property tax deduction is capped at $10,000.
when you decide to buy
Buying a home is not just a financial decision. If you like planning, owning a home will provide you with hours of DIY fun. You take pride in owning it and its ability to adapt to your surroundings. Would you like to paint the door of your house yellow? Go ahead (as long as your HOA doesn't affect your color choices).Put this swing in the garden for children.
But don't let emotions cloud your financial decisions. You can claim that deposit as an insurance premium, but home repair and maintenance costs can eat up those savings. New homes also come with unexpected costs.Over 20% of Millennial owners (open in a separate tab) say they are not ready for maintenance and repairs.
As a general rule, you should spend between 1% and 3% of your home's value on major repairs. Invest at least $3,500 per year or about $300 per month for a $350,000 home. Old homes can be costly to maintain.
Even when buying a home, the ability to work remotely can be beneficial.
As property prices rise in some markets, you can find bargains. Buffalo and St. Louis. In St. Louis, the average retail price is just over $200,000. The median home price in Philadelphia, Louisville is under $300,000, Kaansas Siitii, Milwaakii.
My advice to clients weighing the pros and cons of owning a home is to visualize the next life stage and predict when that stage will occur.Planning to retire in 5 years and travel in a caravan? Dreaming of having a family and owning a 3 bedroom Central Lounge Colony in 2 years? Back to school and career. Stay in the area to take care of your aging parents?
Why is "buy a mortgage" the wrong question
First, have a clear vision of your future needs and be honest about your desire (or refusal) to own and your financial situation. Only then can you assess your decision to buy or rent. Instead of succumbing to the "American dream", you can invest in a dream that suits you.