Presumably,
if you bought a $200,000 house, you did not pay cash for the home.
You got a mortgage, too. Suppose you put as much as twenty percent
down – that would be an investment of $40,000.
At
an appreciation rate of 5% annually, a $200,000 home would increase
in value $10,000 during the first year. That means you earned
$10,000 with an investment of $40,000. Your annual "return on
investment" would be a whopping twenty-five percent.
Of
course, you are making mortgage payments and paying property taxes,
along with a couple of other costs. However, since the interest on
your mortgage and your property taxes are both tax deductible, the
government is essentially subsidizing your home purchase.
Your
rate of return when buying a home is higher than most any other
investment you could make.
There
are times when the economy is brisk and everyone feels confident
about his or her prospects for the future. As a result, they spend
money. People eat out more, buy new cars, and….
…They buy
houses.
Then, for
one reason or another, the economy slows down. Companies lay off
employees and consumers are more careful about where they spend
money, perhaps saving more than usual. As a result, the economy
decelerates even further. If it slows enough, we have a recession.
During such
a time, fewer people are buying homes. Even so, some homeowners find
themselves in a situation where they must sell. Families grow beyond
the capacity of the home, employees get relocated, and some may even
find themselves unable to make their mortgage payment - perhaps
because of a layoff in the family.
Supply and
Demand
When the
supply of available houses is greater than the supply of buyers,
appreciation may slow and prices may even fall, as happened in the
early eighties and the early to mid-nineties.
If you are
lucky enough to purchase a home during a slow period, you can be
reasonably certain the economy will begin to show strength again. At
times, real estate values may even surge drastically. In many
regions of the country, this is precisely what occurred in the late
eighties and nineties.
Market Timing is
Difficult
One problem
with attempting to time your purchase to the business cycle is
that no one can
accurately predict the future. Another challenge is that interest
rates are generally higher during a depressed market and income may
not be keeping up because less overtime is available and bonuses or
commissions are down. With higher interest rates and lower earnings,
fewer people can qualify for a home purchase than in more prosperous
times.
Why You Should
Not Wait
Plus,
"timing the market" generally works best for first-time
buyers. People who already have a home usually need to sell it in
order to buy their next one. If a "move-up" buyer wants to
buy a home during a depressed market, that means they usually have
to sell one during the slow market, too. If a seller wants to sell
his home to take advantage of a "hot" market when prices
are fairly high, they generally have to buy their next home during
that same hot market.
It tends to
equal out.
Finally, the
business cycle can change over time. Since 1983, we have had two
fairly long expansions with only a slight recession in between each.
You would not want to wait nine years to buy a home, would you? You
could miss out on a substantial amount of appreciation by waiting,
and end up paying much higher prices.
As you read
and study about buying real estate, you will often find the words
"house" and "home" used interchangeably. There
is a huge difference between a house and a home.
A
house can be a place to eat, sleep, park your car, and put all your
"stuff" (including other family members). It is a material
possession and an investment. A home is where you feel comfortable,
warm, safe, and protected. A home is where you live.
A house is
something you buy logically. A home is an emotional purchase. When
buying real estate you have to balance your emotional wants and your
logical needs because there will almost certainly be a time when the
two conflict.
Example
For example,
you may want a house with a view, but the payment is higher than you
feel comfortable with on a thirty-year fixed rate mortgage.
What do you
do?
Purchase the
house anyway and budget more carefully for the next few years? Buy
the same house without the view and get it cheaper? Make a larger
down payment by borrowing from your 401K or family members, so you
get a lower payment? Get an adjustable rate mortgage with a smaller
payment instead of a fixed rate loan? Or buy a smaller house and
still get the view?
When viewing
the house, most people look at it emotionally and envision it as a
safe, happy, comfortable home. Later, when making the offer or
filling out a mortgage application, your logic may begin to kick in,
instead.
Balancing Act
The trick in
buying real estate is to view all decisions with both a logical
perspective and an emotional perspective. If a situation presents
itself that requires a trade-off, decide on whether there is a huge
conflict or a small one. Logic should win the big conflicts, but
emotion should always be a factor, even winning the small ones.
You will
find yourself owning a warm, happy, safe home – and an investment
for the future at a price you are willing to pay.
