March 24th, 2011 5:37 PM by BILL WILBANKS
Do you own a home or thought about it; have you felt like you're being brainwashed into the doom and gloom mind set about the real estate market the media wants to emphasize at every possible turn? Unless you're setting up home in your car and the cigarette lighter won't power up the TV, assuming you have a car (NY/Chicago), you either own a home now, rent or sleep somewhere every day. Ongoing report updates like the well known Case-Shiller Survey seem to reinforce what has been a pretty negative real estate market for several years now. This article from the Mortgage News Daily is a case in point, no pun intended. Apparently it expects real estate values to continue to trend downward until sometime in late 2012. Read it now. http://www.mortgagenewsdaily.com/03242011_housing_prices.asp
Ok, let's concede that possibility. Isn't there some sunshine in all this? I think there is a pretty strong and yes even traditional argument supporting the ongoing value homeownership represents and why, when we consider what some of the latest harebrained ideas that are being pushed out of DC seem to foretell, why you may not want to let any dust settle on your plans.
First, congressman like Barney from Mass pushed and pushed to open up home ownership for those that had not been able to get their piece of "the dream" and pushed Fannie and Freddie into finding ways to bump the average homeownership level from what had been 63-65% of the base to nearly 70% (it's back to 67% now thanks in large part to foreclosures). Let's move on...so now those entities are "the bad guys" right? Well a bill was just introduced that would seriously diminish what they may be able to provide to home owners in the way of being a conduit for lenders to sell through to in the future. So, fewer loans out there. If they go away or are drastically cut off at the knees, the open market will immediately raise pricing to you and me because they don't have them to backstop the market. Next DC is bantering around just how much "you, me, we" should be forced to put down on a home in the future to reduce the lenders risk. You've heard it...20%, 15%, 10% or who knows. How many first time buyers have found it hard to come up with the now 3.5% down FHA purchase? There must be a dump truck load of buyers with 20% down right? Right. After all, look how much they can put away today out of payroll, or how much they cleared on the home they wanted to sell (if they weren't upside down). Does this make sense to you. The old mom and pop fixed rate loans and downpayment guidelines worked very well since the 1930's. But 2005-today should emasculate the entire market? Is ANYONE as fed up with these DC idiots as I am? Moving on...I think I said that already.
So, let me ask you to consider the article above once again. If you concede that real estate will go north sooner or later, let's just look at these guys forecasted numbers. They came up with an eventual cumulative increase in value of 9.64% by 2015. Ok, now let us assume that you have $7,500 to invest somewhere today. There are many ways to do it. I want you to consider two for this analysis.
You can buy a home today for 5% or less down in most markets. So if this $7,500 represents a 5% downpayment on a home, the purchase price in this example would of course be $150,000 ($7,550 divided by 5 x 100). If the panel on the Case-Shiller Survey are correct that home would be worth 9.64% more after 5 years or $164,460. That's an appreciation of $14,460. Remember you will have a place to live that you can call your own (assumes you are paying to live somewhere anyway), and currently you can write off the interest and taxes unless DC robs the homeowner interest deduction as some in both parties would like to do (good luck with that one).
Or next, you could take that same $7,500 to your local investment center (whatever that might be) and earn interest on it for 5 years. Do you know the rate of return you would need even with a monthly compounding of the interest? I do, you'd have to get a 12.65% return on your money. Hey, when's the last time you saw anything even near 4 or 5%? Your typical CD or passbook savings account pays what? Check it out yourself. This is called leverage. You are using a small amount of money ($7,500) to get the use of a much larger asset and any appreciation is based on each assets base. This premise worked for our grandfolks. It all comes down to how long you hang in there. Last, I just heard they weren't making any more dirt. The half full glass is...you have the opportunity to buy a home at sub-bargain-basement prices for the first time in most of our lives.
So even with a market like the one we have today. How wrong can you go folks? We need some perspective everybody. Unless you bought at the pinnacle in 2006-07 you're probably doing alright...let's all get real!