Why Buying a Home is a Good Idea

The Best Investment

As a fairly general rule, homes appreciate about four or five percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.

Five percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could easily earn over the same return with a very safe investment in treasury bills or bonds.

But take a second look…

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.

Income Tax Savings

Because of income tax deductions, the government is subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.

For example, assume your initial loan balance is $150,000 with an interest rate of eight percent. During the first year you would pay $9969.27 in interest. If your first payment is January 1^st, your taxable income would be almost $10,000 less – due to the IRS interest rate deduction.

Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation.

When you rent a place to live, you can certainly expect your rent to increase each year – or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage – and interest rates aren’t as volatile now as they were in the late seventies and early eighties.

Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense?

Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.

Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate.. Over time, history has shown that owning a home is one of the very best financial investments.

Freedom & Individualism

When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend thousand of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you.

Since your landlord wants to keep his expenses to a minimum, he or she will probably not be spending much to improve the place, either.

When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make, plus you get to live in an environment you have created, not some faceless landlord.

Both indoors and outdoors, you will probably have more space if you own your own home. Even moving to a condominium from an apartment, you are likely to find you have much more room available – your own laundry and storage area, and bigger rooms. Apartment complexes are more interested in creating the maximum number of income-producing units than they are in creating space for each of the tenants.

If you are moving to a home for the first time, you are going to be very pleased with all the new space you have available. You may have to even buy more "stuff."

The Business Cycle and Buying a Home

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.

In the business cycle of real estate, there are buyers' markets and sellers' markets...and some markets in between. It is all based on supply and/or demand.

Supply and Demand - Inventory

During sellers' markets, homes sell quickly and sellers have a lot of pricing power. As a result, prices rise more rapidly than at other times. During buyers' markets, homes may sit on the market for awhile before selling, so sellers become more flexible and may even drop their prices.

The market is determined by supply and demand.

In real estate, the relationship between supply and demand is calculated as "available inventory." At the current sales pace, how long would it take to sell the total number of houses available on the market? That is how the real estate industry measures inventory.

Inventory is measured in weeks and months. Longer inventory times are associated with buyers' markets. Shorter inventory periods are associated with sellers' markets. Some buyers and sellers hope to time their purchase to take advantage of market cycles.

Timing Your Purchase to the Market Cycle

One problem with attempting to time your purchase to the business cycle is that even experts have problems accurately predicting the future economy. Even when they can, the real estate market does not necessarily move in tandem with the stock market or the economy as a whole.

Part of the reason is interest rates.

When the economy is doing well, interest rates are generally higher. The result is that fewer people can afford houses. When the economy slows down, interest rates fall, the "affordability index" moves up and more people can afford houses.

As you can see, this cycle does not move "in sync" with the rest of the economy. It is also influenced by how many people have jobs, whether they are well-paying jobs, and consumer outlook for the future. All these factors make it difficult to know, in advance, whether the housing market is going to boom or bust.

What makes most sense is the "buy and hold" strategy. Buy a home you expect to remain in for at least seven years or more.

Why You Should Not Wait to Purchase a Home

Even if you could "time the market," that strategy would most benefit first-time buyers.

You see, people who already have a home usually need to sell it in order to come up with the down payment for their next home. Even if they don't, they would have to carry the debt and obligations on two homes at the same time. This can create financial hardship, even when you rent out the previous home. There are maintenance costs, renters don't always make their payments on time, the rent may not cover the mortgage and other costs, and sometimes the property may be vacant.

So if you are a move-up buyer and want to purchase your next home during a depressed market, you generally have to sell your current home during that same depressed market. If you want to sell during a boom, then you also have to purchase during the same boom.

It tends to equal out.

Finally, suppose you are a first-time buyer and wait think the end of a boom is near? If you guess wrong, are you going to wait...and wait...and wait...till the next depressed market? If so, you could miss out on loads of depreciation...

...and that is assuming you guess right about your market timing. In 1996, when the home market was struggling, who would have predicted what the next seven years would bring?

Finding Your Realtor by "Accident"

When someone decides it is time to sell their home, they interview several Realtors from different companies to determine which one is best for them. They want someone who will represent them and someone they feel will do an effective job at marketing their home.

However, when someone decides to buy a home, they usually end up with their Realtor through sheer accident. Why don’t homebuyers search for a Realtor the same way that homesellers do?

Instead, homebuyers usually end up with a Realtor as a result of answering an advertisement. The advertisement will give a brief summary of a home available for sale along with the price, but it says nothing at all about the Realtor.

So...

...does it really make a difference?

Listing Agents and Selling Agents

You see, there are two "sides" to every sale. The listing side and the selling side. Most deals have an agent representing each side, so there are generally two agents involved The seller's side is represented by the listing agent. The buyer's side is represented by the selling agent (also known as the buyer's agent).

Agents can deal with both buyers and sellers, but the majority tend to focus their efforts on one or the other. Some even exclusively handle either buyers or sellers.

So what should you do?

We simply recommend that you take as much care to hire a real estate agent as you would for any other professional. Ask questions. Ask about education, experience, and focus.

After all, buying your next house is probably the biggest purchase you've ever made in your life. Does it make more sense to find your agent by accident...or by design?

Do You Make an Offer With the Listing Agent?

For argument's sake, suppose you see a property that is "just perfect" and you don't have an agent yet? Do you make an offer with the listing agent?

Well, most deals have two agents involved. The listing agent markets the house and represents the seller. The selling agent represents the buyer. The seller pays the real estate commissions to both agents.

When you make an offer directly to the listing agent, there is only one agent involved instead of two - so things work a little differently.

Agency and Disclosure

When you make an offer directly with the listing agent, the agent will disclose the possible working relationships that exist - whether they are going to represent both you and the seller, or just represent the seller. There will be a document you sign called an "agency disclosure" that spells out the relationship.

When representing both sides, an ethical agent becomes more of a transaction facilitator or perhaps a "dual" agent, depending on what state you are in. In effect, they are not an actual advocate of either party but mostly an information provider and communication conduit.

The agent will convey offers and counter-offers back and forth, but won't provide opinions to one party or the other on how "negotiable" the other party might be. In addition, they will answer questions, explain things as the transaction progresses, make suggestions about whether getting inspections is a good idea - and so on - but they won't be your advocate or the advocate of the seller.

If the agent discloses that they are acting just for the seller, then they are the advocate of the seller -- and you are on your own.

Road Bumps & Conclusion

Most real estate transactions go fine, but almost every one has a challenge or two. These challenges are often routine, but sometimes not. One party may come out on top in a dispute and the other may feel that they did not.

When there is only one agent, the buyer may sometimes feel that the agent took the seller's side in a dispute. Often the criticism is not merited, but human nature being what it is - it happens.

In the end, make an informed decision. If you are considering making an offer directly to the listing agent, ask questions. What are you giving up by not having your own agent? What will you gain by presenting an offer via the listing agent? When you get your answers, make your decision on what you want to do.

Why Listing Agents Advertise - Is it What You Think?

Listing agents place ads for several reasons. First, they need to show the seller that they are doing something to sell their home. Second, by showing how much they advertise, they can also attract other individuals who are thinking of selling their homes.

They point to their ads to show their clients that they are aggressively marketing the property. When other home sellers constantly see ads from a particular Realtor, they are inclined to want to list with that Realtor, too. So even though the ads look like they are directed toward home buyers, they often have another purpose. To attract home sellers.

What sellers don’t normally realize is that a listing agent’s true marketing emphasis is directed toward other Realtors, not the general public. Their main goal is to convince the selling agents (buyer's agents) to find buyers and make offers. This is a good thing because if you are selling a home, you want as many Realtors as possible bringing buyers around to take a look. Most of a listing agent's marketing efforts toward other Realtors are invisible to the general public, but it is where an effective listing agent does a home seller the most good.

Additionally, many listing agents now have "teams." One member of the team will probably be a licensed agent who acts in the way described just below:

Selling agents (buyer's agents) do advertise homes for sale in order to attract buyers. Although the ads do market a specific property, they are mostly intended to attract buyers in general -- not a buyer for that specific property. The agent would be happy if you did buy the property you called on, but it happens so rarely that they do not expect it.

What happens when you call on a real estate ad is that you often schedule an appointment to go look at the advertised home. While you are out looking at that home, you will probably want to look at others -- so the agent will show you a few other homes, too. Eventually, you and the Realtor will zero in on what you need and like in the proper price range and you will make an offer.

That is how most buyers find their Realtor -- by "accident."

Finding and Using Your Own Realtor