Homeownership
It’s NOT Just About Money
There are other, non-financial benefits to homeownership that may partially explain the fact that buyers buy when they are ready. Research studies indicate that owning a home adds to the value of communities, has many positive effects on children, and even contributes to increased voter participation rates.
Homeownership:the American Dream
More than two thirds of American households own their home. They know the benefits of homeownership, from the accumulation of home equity, other financial benefits, and the pride of owning a place of their own. They also had to take that first step of deciding “I’m ready to be a homeowner.”
REALTORS® assisted many of today’s 75 million homeowners in both their decision to buy and their first home purchase. REALTORS® are real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and who abide by the Association’s strict Code of Ethics and Standards of Practice. They can help guide you to first-time homebuyer programs in your area, as well as assist you in searching for and buying your home.
©2010 NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Item #186-90 A REALTOR VIP® Publication (01/10 BFC)
Year Home Price Mortgage Debt Net Worth
1 $200,000 $187,441 $12,559
2 201,200 184,737 16,463
3 210,858 181,880 28,977
4 220,346 178,863 41,483
5 230,262 175,675 54,587
6 240,624 172,308 68,316
7 251,452 168,750 82,701
8 262,767 164,992 97,775
9 274,591 161,022 113,570
10 286,948 156,828 130,120
After the first year, you now only owe $187,441 on a home that is worth $200,000. As home price growth returns to a normal level the amount of wealth that you net from appreciation will increase. At the same time, mortgage payments reduce your outstanding debt. As your debt decreases and the home value increases, you accumulate wealth from the value of your home. In addition, over this ten-year period, you will have a significantly lower after-tax payment for housing. Each year as your home appreciates and you continue to pay down your mortgage debt, you increase your own net worth.
Why Buy Now?
You may wonder whether it is worthwhile to wait to purchase your home until prices are at their lowest. Prices are not the only factor that should drive your decision. Currently, interest rates are near generational lows that greatly improve the affordability of homes. Further on the annual cost table, you can see that even if home prices decline, the possible tax savings of owning a home can lead to a lower cost for the buyer, not the renter. Also, the homebuyers tax credit is currently available but only through April 2010. Finally, and most importantly, when you have made the decision to commit to homeownership because you are ready, market conditions are a secondary concern. In fact, the NATIONAL ASSOCIATION OF REALTORS® 2009 Profile of Home Buyers and Sellers found that four in ten first-time buyers purchased a home because the buyer was ready to make the commitment to homeownership.
As an example, let’s look again at that $200,000 home. Unlike your rental unit, your home usually appreciates over time. Instead of assuming average growth, we assume that prices are flat in the first year of ownership and pick up, but only slightly, in the second year. In the third year of ownership, your home has appreciated to a modest $210,858. After ten years, assuming a return to an average 4.5 percent appreciation rate*, your $200,000 home will be worth $286,948. Not only do you earn a rate of return on
your original purchase price, you also get a return on any subsequent appreciation.
* Average price appreciation from 1970 to 2008 was 6.0%
“Appreciating” Returns
Year Price Growth Home Value
1 0.0% $200,000
2 0.6% 201,200
3 4.8% 210,858
4 4.5% 220,346
5 4.5% 230,262
6 4.5% 240,624
7 4.5% 251,452
8 4.5% 262,767
9 4.5% 274,591
10 4.5% 286,948
Total Appreciation After Ten Years $ 86,948
Homeownership Builds Wealth for Households
The Federal Reserve Board estimates that homeowners’ net worth has ranged between 31 and 46 times more than that of renters in the years 1998 to 2007. In 2007, the median net worth for homeowners was $234,200 compared to $5,100 for renters. Even though that difference will surely narrow as a result of house price declines since 2007, homeowners will likely still have substantially greater net worth than renters. How do you build up your net worth? As a homeowner, you build wealth in two ways: through paying down the principle on your mortgage and through those “appreciating returns” on your home. We’ve already seen how your $200,000 home could be worth $286,948 in ten years. In addition, you are paying down the principal on your mortgage. Remember that $200,000 you borrowed at 5.5 percent over 30 years – that debt amount is decreasing every month and every year as you make payments.
Contact Frank to become a Homeowner! Frank.hanson@azmoves.com
