Before making the biggest financial decision of your life, it’s a good idea to get all the facts. What’s that decision? For most people it’ll be whether to buy a house. Today on MoneyWise, we’ll discuss the facts you need to know to make the right decision.
- After the housing crash of 2008, when we saw home values plummet and stay low for several years, many experts advised people to not look at their home as an investment, but simply as a place to live.
- That perhaps gave comfort to some, but it certainly didn’t help anyone who needed to sell their home, whether due to a job transfer or the inability to make the payments. They were stuck.
- So while it’s easy to say that a home isn’t an investment, it sure has a lot of the same characteristics. You’re putting money into it … like an investment. And in the case of a home purchase, a LOT of money.
- Also, like an investment, you never want to see the market value of your home decline, because if you have to sell, you’ll be taking a loss.
- TO BUY OR NOT TO BUY
- Of course, the housing market today is red hot, even though it’s beginning to show signs of moderation. “Would be” home buyers are still faced with a tough decision: to buy or not to buy and just keep renting.
- The Wall Street Journal did an analysis of the current market to answer that question, and the most obvious finding was that anyone buying a home today will have to wait a good deal longer for the investment to pay off.
- That means buying a home today is not just more expensive, it’s also more dangerous because the time needed to “break even” is significantly extended.
- To determine the length of time for breaking even, the analysis compared the cost of buying a home to the cost of renting a similar home.
- Both of those numbers have shot up since the pandemic hit. Rents across the country have risen sharply, but the price of homes has gone up even more.
- The cost of renting a single-family home went up over 13% in February compared to last year, but home prices increased 20% in March over a year ago.
- So, in the Wall Street Journal analysis, the break even point is where the cost of owning a home matched the cost of renting the home over the same period. It found that in Austin, Texas, an extremely hot market, you’d need to stay in the home 5.6 years before reaching “break even.”
- That’s assuming a 10% down payment with a 30-year, fixed-rate mortgage at 5%. That’s a huge jump over the 3.7 years it took before the pandemic. And again, those break even times are based on a comparison to the cost of renting a similar home in the same market.
- Of course, the results vary by market. In Miami, the cost of renting has outstripped the rise in home prices, so the time needed to break even actually decreased a bit to 2.3 years.
- Well, the upshot of all this is that if you buy a home now and have to sell, you’ll be in for a big loss.
- Let’s go back to that home in Austin, Texas with the 5.6-year span of time needed to break even. The analysis showed that if you sell the property after 3 years, you’ll lose $30,000 over what you’d have paid to rent over the same period.
- Why is that the case? Because of all the added costs of home ownership … like closing costs, private mortgage insurance, property taxes and maintenance. Those expenses would be greater than the estimated appreciation on the home’s value.
- Now, I’m not saying you shouldn’t buy a home in today’s market. But you should know what you’re up against. Two things will help make sure you don’t lose money.
- First, don’t buy unless you have 20% of the home value saved up for a down payment. That eliminates private mortgage insurance. Second, don’t buy unless you are reasonably sure you’ll be in the home 5 years from now.
- Those two factors should give you enough equity to at least break even if you have to sell.
On this program, Rob also answers listener questions:
- How can you set up a special needs trust
- How do you determine whether you’re taking unnecessary risk in your investment portfolio?
- What should you do about a joint credit card account when your spouse passes away?
- What do you do if you find a credit card account on your credit report that you don’t recognize?
Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.