Are you waiting the market out?

By Bernice Ross, Inman News

Are you waiting the market out? If so, here are some things to think about.

Many buyers are convinced that waiting will allow them to buy the property at a lower cost. This flawed thinking fails to consider the true costs of home ownership, not only in terms of tax consequences, but also in terms of wealth accumulation.

A down market -- the ideal move-up market

If you are in a market where there is price depreciation, this is an ideal time for you to move-up, to purchase a more expensive home. Assume that you paid $300,000 for your property and the market has declined by 10 percent. The property is currently worth $270,000. If you are going to purchase a property that was $600,000 a year ago, it's now worth $540,000. By purchasing this year, you have an instant $30,000 in savings as compared to a year ago. Furthermore, your mortgage and property taxes over the next 30 years will be substantially lower as well.

If you are retiring or trading down, most real estate cycles are approximately 10 years in length (i.e., it takes 10 years to cycle through a seller's market to a buyer's market and then back to a seller's market.) If you can afford to wait a few years, you may be able to catch an appreciation increase later. On the other hand, you have the cost of maintaining the larger property rather than having lower overhead and more cash. To understand the exact financial ramifications, you need to meet with a CPA, tax attorney or financial advisor before listing the property.

It's cheaper for me to rent!

If you live in a pricey area, it's true that many may be unable to buy even an entry-level property. For them, renting makes sense.

On the other hand, the interest rates are so low that purchasing usually makes more sense. To illustrate this point, begin by using one of the online "rent versus buy" calculators. (Move.com has a good one.) According to the U.S. government, the average rate of inflation for the last 10 years is 2.54 percent. Check your local census or multiple listing service data to determine how much properties in your area have appreciated over the last few years as well. Furthermore, the longer a person stays in the property, the more substantial the savings are. Here are two examples that illustrate why renting is not usually a smart idea:

Example 1: Assume that you as a first-time buyer currently pays $1,500 per month in rent and plans to purchase a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6.25 percent. You are in the 28% tax bracket and will own the property for eight years. Appreciation keeps pace with inflation at 2.54% per year. The estimated cost of renting is $142,016 versus the estimated cost of buying, which is $117,754.04. You saves $24,262 by purchasing rather than renting.

Example 2: You are currently pays $2,000 per month in rent. Your plans to purchase a $400,000 property with $40,000 down and a $360,000 loan at 6.25%. You are in the 28% tax bracket and will own the property for 10 years. The property will appreciate at 5% per year. During the 10-year period, the estimated cost of renting is $241,189 as compared to the estimated cost of buying (due to appreciation and equity build up), which is $68,905. You saves $172,284 by buying rather than renting.

Example 3 for the Bay Area: People who live in the Bay Area might think that two examples that were used are not realistic compared to the home purchase price around here.  Therefore, I (Sabrina) tried to come out with an example in which is more close to our situation, and the comparisons are more apples to apples.

Assume you are currently pay $2,500 per month in rent and plan to purchase a $500,000 property with $50,000 down and a $450,000 loan for 30 years at 6.25%. You are in the 28% tax bracket and will own the property for eight years. Assuming inflation at 2.54% per year. The estimated cost of renting is $262,452 versus the estimated cost of buying, which is $180,384 (excluding appreciation growth). You save $82,068 by purchasing rather than renting.

On the other hand, people who prefer to rent might argue that s/he can make more money by investing the down payment to something else other than buying a house.  Here is what might happen.  Let’s say you put $50,000 (the down payment) into other investments such as Money Market, Mutual Fund, Stocks, etc.  The theory is the money would double every ten years in general, so your $50,000 would become $100,000 (but you need to pay tax on capital gain).  If you buy a $500,000 home, assume 6% appreciations, the home values would be $844,000 in 10th years which gives you a equity of $344,000 (and you can exempt capital gain tax up to $250,000 if single, $500,000 if married).

What if the prices go down?

Laurence Yun, the chief economist for the National Association of Realtors, shared the following facts at NAR's mid-year conference:

From 1995 to 2004, the average renter accumulated $4,000 of wealth. In contrast, the average homeowner accumulated $184,400. (See his presentation on "Marketing to Gen Next" slide 47 on Realtor.org.) To account for the difference of $180,400 of wealth accumulation, a $300,000 house would have to decline by 60 percent.

What many people fail to consider is that homeowners accumulate wealth by paying down their mortgage, even if their house does not increase in value. Renters lose additional wealth as their rental payments increase over time, whereas a homeowner with a fixed-rate loan has locked in his or her mortgage amount for the next 30 years.

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Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of "Waging War on Real Estate's Discounters" and "Who's the Best Person to Sell My House?" Both are available online. She can be reached at bernice@realestatecoach.com or visit her blog at www.LuxuryClues.com.