Buy Or Rent? Addressing Our Need For Housing
The last five years have provided consumers with every possible positive and negative element of the real estate market. Amazingly, each of these elements has been both extremely positive and extremely negative during those five years. Real estate values, mortgage rates, closing costs, loan requirements, real estate taxes, and employment status have each grabbed the headlines regularly prior to and during the current economic downturn. Those who purchased homes right before the collapse of the economy were undoubtedly dealt the worst blow. Most continue to grapple with mortgages that are underwater, while many others faced foreclosure. Immediately into the start of the recession, property prices began to plummet. Then the vicious cycle of slipping property values and increasing foreclosures took hold. It is not coincidental that at that time the lowest numbers of Americans were setting aside savings, leaving many homeowners totally unprepared to weather the storm.
As a result, the rental market began to heat up about one year into the recession. Some people were forced to rent, having lost their homes or finding themselves "unqualified" when applying for a mortgage. Others chose to rent rather than buy in order to give the market time to settle and avoid losing value in their newly purchased home. Following the initial resulting surge in rent prices, larger urban cities such as Chicago later saw rent rates begin to decline as many condominiums came onto the market as rentals, since they were unable to be sold.
At this point in time, we seem to have found equilibrium; at least temporarily. Housing prices have begun to stabilize, with some neighborhoods faring better than others. However, the market continues to maintain a very cautious tone.
Many are now at the point of determining whether to rent or buy their housing needs. For reasons ranging from growth of family size, travel distance to work, lowest real estate prices in a decade, to unbelievable interest rates and slightly more relaxed credit requirements, more and more people are once again thinking long and hard about the decision to buy a home.
Can I afford to buy a home?
If you're considering buying a home, you need to be certain that you can realistically afford it. You don't want to find yourself without a penny to spare for anything else or overextend yourself to the point where you can't afford to keep up with your mortgage payments and risk losing your home. The first logical step in determining this is to analyze your current expenses. From that total, you can deduct your current rent costs and begin to add back the cost of homeownership.
The obvious costs associated with buying a home are the initial purchase price (resultant monthly mortgage principal and interest payments), a down payment (as much as 20% of the purchase price to secure the best mortgage terms), real estate taxes, and closing costs. In addition, you must have insurance coverage and be able to handle any "immediate" expenses such as necessary repairs or maintenance needed to inhabit the property. Once you have "the number" calculated to cover the initial purchase, it is imperative to look beyond the first year and fully consider the additional, ongoing expenses of owning a home.
First-time homebuyers often are surprised by the high cost of basic upkeep, unexpected repairs, maintenance, and other ongoing costs such as utilities (gas, electric, water). The true picture of what can realistically be expected is often best estimated by talking to friends and family. For the best experience in owning your own home, provide for an adequate reserve of savings to deal with these costs before you buy.
Should I continue to rent?
There are some clear benefits to renting a home, the most obvious of which are flexibility and lack of responsibility. The flexibility of renting is important if you dont plan to stay in your home for at least 5-7 years. Even with the income tax advantages of mortgage interest deductibility, as a home owner, you won't recover the impact of your initial cash outflows for some time. Additionally, since the future direction of home prices is still not known with any real certainty, it is important to allow time for any possibility of a continuing depression of home prices. Lack of responsibility refers to the diminished liability for repairs and maintenance required while you are renting a home. As a tenant, you are not responsible for repairing or replacing roofs, furnaces, air conditioners, or any structural needs of the property; as an owner, all of those needs will have to be met by you.
Traditionally, Americans have purchased real estate not only for a place to live, but as an investment; a means to accumulate wealth over the years of servicing the debt and seeing the property value appreciate at least at the rate of inflation, frequently a much greater rate. Although recent economic times have called these traditional expectations into question, there does still seem to be a quest for the American Dream which has home ownership at its roots.
Ultimately, the decision to buy or rent" largely depends on your level of financial preparedness. Sufficient cash on hand for the initial first-year costs, adequate savings for inevitable unexpected expenses and an approach built upon the expectation to make the new house your home for a period of at least 5-7 years, all go a long way toward insuring you are a successful homeowner. With all of those factors in place, coupled with some of the most favorable mortgage terms in history, purchasing a home in todays market can still prove to be a positive experience.
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©Patrick J. Catania 2012
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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