Buying a Home - Is it a Wise Investment?

Buying a Home - Is it a Wise Investment?

Throughout the years, homeownership was synonymous with American Dream. A home was considered to be a borrower's greatest asset, a place to raise a family and a vehicle to build greater wealth. But given the way the housing bubble formed and burst in 2008, many buyers have been left wondering: is buying a home still a wise investment? The answer is, it depends.

Buying a Home - The Good News

After several years of recession, the housing market appears to be on the recovery – hooray! In fact, the National Association of Realtors (NAR) recently stated that the total U.S. home sales rose to 4.65 million, up from 4.25 million in 2011. That marks the highest upward growth since 2007.

Additionally, Fiserv Case-Shiller has forecasted that existing home prices will continue to rise a steady 3.3% year over year through 2017. This means an increase in real estate activity and most importantly – a better return on investment for current and future homeowners.

But before you begin closing on that dream home, make sure you are motivated by all the right reasons – not just the hope that you can cash in on home appreciation.

How Long Will I Live in This Home?

In order to reap the full benefits of investing in homeownership, mortgage professionals suggest that a borrower lives in a house for at least six years before relocating. The reason: closing costs are significant and staying in a home for a longer period of time spreads those costs out, essentially providing more value for the dollars spent.

Another reason is that mortgage payments typically become less costly than a rent bill after a given period of time. Remember, rent costs rise with inflation. Payments on a fixed-rate mortgage loan, however, do not. Principal and interest rates will remain frozen for the duration of the loan, unless refinanced.

Buyers who remain in their homes beyond the break-even point of six years will also feel the rewards of appreciation. Keep in mind, home values tend to increase by 4% a year on average. In fact, the median home price in the U.S. rose from $7,354 in 1950 to $149,300 in 2012, according Zillow.com.

But, What About That Pesky Inflation?

Of course, you can't count your home appreciation chickens without inflation hatching. And while inflation fluctuates, it's generally averaged at about 3% annually over the last century. That means your effective appreciation is around 1% over most years and almost zero under the current forecast for the next few years -- not exactly stellar returns.

In Summary

There are pockets and cycles that make it very possible to see a significant return on a home as an investment. However, it's challenging to time the market, and most people do not have the flexibility to buy and sell their primary residences at whim.

But buying a home still makes great financial sense – as long as you're purchasing it for the right reasons!

Keep in mind, regardless of appreciation, one of the greatest benefits of remaining in a home is the opportunity to build equity. Remember, the longer a borrower lives in a home, the more equity they build – and the closer they becomes to owning the home free and clear. Plus, that home equity is a form of savings that could not be obtained by renting.

So, to recap:

  • Traditionally, homes that are a primary residence should not be looked at as investment purchases because the historical performance, adjusted for inflation, is low relative to other investments.
  • Buying a home is still a good financial decision in most cases – but you need to look at the comparative cost of renting to make a decision; if it's close, you should probably buy.
  • When you do buy, stay in your home at least 6-7 years to reap the most benefits from your upfront costs.

If you have questions about the home buying process, we're here to help.