by The KCM Crew on November 17, 2014 in For Buyers
Eric Belsky is Managing Director of the Joint Center of Housing Studies at Harvard University. He also currently serves on the editorial board of the Journal of Housing Research and Housing Policy Debate. Last year, he released a paper on homeownership – The Dream Lives On: the Future of Homeownership in America. In his paper, Belsky reveals five financial reasons people should consider buying a home. Here are the five reasons, each followed by an excerpt from the study:
1.) Housing is typically the one leveraged investment available.
“Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.”
2.) You’re paying for housing whether you own or rent.
“Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.”
3.) Owning is usually a form of “forced savings”.
“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”
4.) There are substantial tax benefits to owning.
“Homeowners are able to deduct mortgage interest and property taxes from income…On top of all this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if they sell their homes for a gain.”
5.) Owning is a hedge against inflation.
“Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.”
We realize that homeownership makes sense for many Americans for an assortment of social and family reasons. It also makes sense financially.
Since 2009, we’ve seen the local market increase annually, and 2013 was no different. The average sales price of single-family homes in Santa Clara County rose 19% (Los Gatos 7%, Los Altos 9%, Saratoga 11%, Palo Alto 16%, Mountain View 17%, and Sunnyvale 19%). San Mateo County rose 24% (Menlo Pk 15%, San Carlos 17%, San Mateo 18%, Redwood City 20%, Burlingame 21%, and Hillsborough 25%). This rapid rise in price was driven by low inventory, historic low interest rates, and abundant buyers who had the financial backing to bid up list prices, significantly over the asking price in most cases. So what should you do if you or someone you know are thinking of selling or buying….here are my thoughts:
Sellers: There is no better time than now since it’s a seller’s market.
Buyers: Don’t despair and don’t try to time the market. Although prices have increased, the prices in 2012 are about the same as the 2008-peak level, so the double-digit growth this year is the net growth over the past 5 years, so it’s not that exorbitant. If you’re buying for the long-term, then it’s a good time to buy.
Investors: Yes prices for multi-unit properties have gone up but so have the rents! Rental properties are excellent options to diversify anyone’s investment portfolio, and real estate has some excellent tax shelters that does not exist elsewhere.