There are some people that have not purchased a home because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent free, you are paying a mortgage – either your mortgage or your landlord’s.
As a paper from the Joint Center for Housing Studies at Harvard University explains:
“Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return. That’s yet another reason owning often does—as Americans intuit—end up making more financial sense than renting.”
Also, if you purchase with a 30-year fixed rate mortgage, your ‘housing expense’ is locked in over the thirty years for the most part. If you rent, the one guarantee you will have is that your rent will increase over that same thirty year time period.
As an owner, the mortgage payment is a ‘forced savings’ which will allow you to have equity in your home you can tap into later in your life. As a renter, you guarantee the landlord is the person with that equity.
Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, owning might make more sense than renting since home values and interest rates are still lower than projected.
According to the latest CoreLogic National Foreclosure Report, “approximately 552,000 homes in the US were in some state of foreclosure as of December 2014”. This figure is down 34.3% from the 840,000 homes in December of 2013. December marked the 38th consecutive month in which there were year-over-year declines.
Anand Nallathambl, the President and CEO of CoreLogic, is hopeful for the future, saying:
“At current foreclosure rates, we expect to see the foreclosure inventory in the U.S. drop below 500,000 homes sometime in the first quarter of 2015 which would be another milestone in the healing of the housing market.”
The map below shows the percentage of foreclosure inventory in each of the 50 states and Washington, D.C. Thirty-six states have inventory below the national rate of 1.4% and can be seen in two shades of green.
Even though some states have not recovered completely from the foreclosure crisis, the nation as a whole is on the right track as inventory decreases.
Two recently released reports reveal that the American public is starting to feel much better about the U.S. economy. The University of Michigan’s Surveys of Consumers showed that:
“Consumer optimism reached the highest level in the past decade in the January 2015 survey…Consumers judged prospects for the national economy as the best in a decade, with half of all consumers expecting the economic expansion will continue for another five years. The anticipated strength in the overall economy has been accompanied by more favorable income and employment expectations.”
Here is a chart showing results over the last decade:
As all consumers are feeling more optimistic, more young adults are moving out of their parents’ basements and into a residence of their own. The recent Census report shows that new household formations skyrocketed in 2014. Below is a chart showing the historical significance of the numbers:
The economy is definitely improving and, more importantly, the American consumer is beginning to feel much more confident. This should lead to a very robust real estate market in 2015.
Over the last six years, homeownership has lost some of its allure as a financial investment. As homeowners suffered through the housing bust, more and more began to question whether owning a home was truly a good way to build wealth.
Every three years the Federal Reserve conducts a Survey of Consumer Finances in which they collect data across all economic and social groups.
Some of the findings revealed in their report:
- The average American family has a net worth of $81,200
- Of that net worth, 61.4% ($49,856) of it is in home equity
- A homeowner’s net worth is over 36 times greater than that of a renter
- The average homeowner has a net worth of $194,500 while the average net worth of a renter is $5,400
There are many reasons why owning a home makes sense, the Fed study shows that owning is still a great way for families to build wealth in America.
The housing market has taken a great turn toward recovery over the last few years. The opinions of the American public toward real estate took longer to recover, until recently.
For the first time since 2006, Americans have an overall positive view of real estate, giving the industry a 12% positive ranking in a Gallup poll.
Americans were asked to rate 24 different business sectors and industries on a five-point scale ranging from “very positive” to “very negative.” The poll was first conducted in 2001, and has been used as an indicator of “Americans’ overall attitudes toward each industry”.
Americans’ view of the real estate industry worsened from 2003 to the -40% plummet of 2008. Gallup offers some insight into the reason for decline:
“In late 2006, real estate prices in the U.S. began falling rapidly, and continued to drop. Many homeowners saw their home values plummet, likely contributing to real estate’s image taking a hard hit.”
“The large drops in the positive images of banking and real estate in 2008 and 2009 reflect both industries’ close ties to the recession, which was precipitated in large part because of the mortgage-related housing bubble.”
“Although the image of real estate remains below the average of 24 industries Gallup has tracked, the sharp recovery from previous extreme low points suggests it is heading in the right direction.”
If the news of recovery has you considering homeownership, meet with a local real estate professional to discuss the opportunities that exist in today’s market.
As a seller, you will be most concerned about ‘short term price’ – where home values are headed over the next six months. As either a first time or repeat buyer, you must not be concerned only about price but also about the ‘long term cost’ of the home.
Let us explain.
There are many factors that influence the ‘cost’ of a home. Two of the major ones are the home’s appreciation over time, and the interest rate at which a buyer can borrow the funds necessary to purchase their home. The rate at which these two factors can change is often referred to as “The Cost of Waiting”.
What will happen in 2015?
A nationwide panel of over one hundred economists, real estate experts and investment & market strategists project that home values will appreciate by almost 4% by the end of 2015.
Additionally, Freddie Mac’s most recent Economic Commentary & Projections Table predicts that the 30-year fixed mortgage rate will appreciate to 4.5% by the end of 2015.
What Does This Mean to a Buyer?
Here is a simple demonstration of what impact these projected changes would have on the mortgage payment of a home selling for approximately $250,000 today: