Benefits Of Home Ownership

Much has changed in the housing industry over the past few years.  Every day we see and hear on the web and radio and TV and newspapers what a disaster real estate ownership has been in recent times.  Not to rehash what I have written many times, but the real disaster has been concentrated in just a few states. (If you’re interested, see How Does Texas stack up in the Case-Shiller report? and Foreclosure Impact in Austin.)  Even in those hard-hit locations, if you’re still holding property that you bought before 2004 the odds are good that your value is still intact — not necessarily higher than your original cost, but probably not lower either.

In Austin, the situation is much different.  We have not seen anything near the reported “national” rate of foreclosures, and property values have continued to maintain or to appreciate throughout the recession:

Pick any 5-year period since 1990 and, on average, Austin area real estate gained value.  Would it have been possible to pick the wrong property or the wrong neighborhood (or the wrong mortgage product) during that time and find that you lost ground financially?  Absolutely!  But the trend is unmistakable, and forecasts for Texas generally and Austin specifically are consistently optimistic for the near future and the next twenty years.

And we’re now seeing optimism about the national picture:  Why 2011 May Be the End of the Housing Crash(Wall Street Journal, 02/27/2011) and Economy Embarking on Period of Expansion, According to Fannie Mae’s Economic & Mortgage Market Analysis Group (RISMedia, 02/28/2011).

Against that backdrop, virtually all market watchers agree that now is the time to buy real estate in the United States, including Austin and Central Texas.  Professional investors should understand market dynamics and apply a variety of techniques to judge how well a property fits a specific set of investment objectives.  Buying a home to live in is a different kind of decision.  I consistently counsel my buyer-clients to (a) buy within your means, (b) plan to stay for at least 3 to 5 years, and (c)do your best to pick your time to sell, rather than being pushed into selling at the wrong time by too much debt, etc.

With those guidelines in mind, the benefits of home ownership really haven’t changed.  You’re going to pay for somebody’s property anyway, whether you rent or own.  Why not be an owner and gain the pride and financial advantages that come with it?  Fundamentally, there are four ways you gain from ownership: 

• Paid-in Equity — the accumulation of loan principal you pay off a little bit every month, reducing your mortgage debt and increasing your eventual “net proceeds” when you sell.
• Market Appreciation — the increase in property value over time, already shown for the Austin area in the Average Sale Prices graph above.
• Property Tax Deduction — apply the amount of property tax you pay every year to reduce your income tax liability.
• Mortgage Interest Deduction — apply the amount of mortgage interest you pay every year to reduce your income tax liability.

As a renter, your landlord gets to pay off his or her loan and realize the gain in property value when the property is sold.  In the meantime, the rent you pay includes the landlord’s property tax and mortgage interest expenses, but to you those are just more dollars every month for which you got nothing but a place to live for the month.  If you pay $1,100 per month in rent for five years, you will spend $66,000 for a place to live.

Instead, here’s a sample of what five years of home ownership could look like:

Note the four categories of benefits outlined earlier.  This assumes a $150,000 purchase with a minimum down payment FHA loan at 5%.  With typical homeowner’s insurance and Austin-area property taxes, this produces a total mortgage payment of $1,131 per month.  To keep this conservative, I used a market growth rate of 3%.  (The average rate of property appreciation in  Austin from January 1990 to January 2011 was 7.8%.)  I also assumed that you’re paying income taxes at a very low 15% rate.  If your tax rate is higher, then the value of the mortgage interest and property tax deductions will be higher. 

With those conversative assumptions, five years of that payment will add up to about $68,000, just a little more than the rent expense above.  But look at the end of the 5-year period:

At the end of five years of ownership, using the assumptions I outlined, your actual cost would be

$68,000 – $40,000 = $28,000.

Isn’t that better than spending $66,000 in rent?

Ownership is not the right decision for everybody.  If you have credit “issues” you may need time to qualify for a mortgage loan.  If you’re really bad at managing your money, you should probably keep renting.  If you need to save for a down payment, by all means do so.  (There are still ways to buy a home with little or none of your own money, but you need some skin in the game.  It will help you if you have times when your self-discipline weakens.)  Most importantly, if you expect to move in just a couple of years, you should probably rent for now.

Otherwise, now is a great time to buy real estate.  Property values are as low as they are likely to be for years to come.  Interest rates are on the way up this year and beyond.  Mortgage insurance premiums (FHA and Conventional) are going up.  And Austin continues to grow and attract new companies and their employees and families — and all of those people will need a place to live when it’s time for you to move up.

Don’t miss this opportunity!