It's Still a Good Time to Buy a Home -
Opportunity is NOT a Rate of Interest
Every once in a while we have the chance to really impact and empower the lives of people by helping them reach beyond themselves and see the bigger picture. It does not matter if that goal is a better job or a bigger house. You always have to start somewhere.
In today's world, we have been lead to believe that we need to have it all now. This attitude has led people into making some poor decisions involving credit, money and borrowing. With many options on how to finance a home from pay option adjustable rates to interest only loans. Pay Option teaser rates and Interest Only loans allow borrowers to qualify for a home they most likely could not have any other way. These loans have no principal reduction and negative amortization. We have somehow come to believe that we can skip the hard work of building a solid financial base and go right to the Garden of Eden.
The Truth is that owning your own home is one of the greatest wealth building tools for the average American. Through appreciation and the paying down of a mortgage, the average homeowner creates equity. Equity upon sale can be converted to cash, which can be used to purchase a larger home and thus the wealth creation starts over.
In the past 5 years, home prices rose at historic rates, sometimes doubling the value of a home in a short period of time. While this is unlikely to continue and in some markets home prices are declining or stagnating, this presents homeownership opportunities for those that thought they were locked out. Borrowers who used zero down, minimum pay option adjustable rates, teaser rates, interest only and sub prime loans are beginning to face real financial stress and are on the verge of losing their home. These homeowners are trying to sell their homes, sometimes for less than what they paid.
When buyers are thinking about purchasing a home, while rate certainly matters, we need to be more focused on the long term net return. As an example of this, lets assume that buyer A decided not to purchase a home for $90,000.00 in 1997 when rates where at 7.0%-7.5%. That buyer in the 8 years leading up to 2005 (end of housing boom) lost over $100,000.00 in potential equity they could have used to financially position their lives to either pay off debt or purchase a bigger home. That represents a net loss of wealth of over $13,000 a year. Conversely, buyer B who did purchase a home for $90,000.00 in 1997 purchased a new home in 2005 for $300,000.00 took out a $200,000 mortgage with only a modest increase in their monthly housing cost.
To further illustrate the point, since buyer A decided not to purchase a home in 1997 and instead rented an apartment at $750.00 a month for 8 years, they would now be paying over $950.00 a month in rent for the same dwelling. Owning a home is both a hedge against inflation by controlling rent (increases in payment) and a wealth building tool.
Buyer A, being more focused on rate could have in effect locked himself out of home ownership. Buyer B, by taking moderate steps built wealth through homeownership.
So as buyers and sellers begin to think about a new home, they
need to focus on the the rate of return on investment –
not just the rates. When potential home owners and sellers are
armed with the facts, you can help them make wise choices that
leads to action that can and will impact the quality of their
life.
