If you owned your home in during the boom years of the market, you might have decided to tap into its equity to fund a vacation, credit card repayment, or even the purchase of a second home for vacation or investment purposes. There was plenty of money around; homewoners, as well as banks, seemed to believe that the spiral would never end. Everyone figured it was a good idea to cash out while the money spigot was flowing.
Now, of course, the spigot has not only been turned off, it is defying gravity and sucking everything back up. As a result, according to Robert Reich, who used to be the U.S. Department of Labor Secretary under President Clinton, and who is now a professor of public policy at University of California at Berkeley , home buyers should consider the fact that housing might not be as good a future investment as it has been in the past.
While this may sound like an ominous pronouncement, every mutual fund carries the warning that past performance is not necessarily an indicator of future performance. So it’s not surprising that investing in single family houses, or condominiums, or townhouses should now fall into this category.
However, before you come to the conclusion that it no longer makes sense to purchase a home of your own, consider these salient investment accrual facts. If you had invested in an index fund early in the 20th century and simply left your money in it, the Standard & Poor 500 data series indicates that you would have received annual returns of around 7%, not counting inflation.
According to MDA DataQuick, a house that cost 30,000 in 1967, if sold during the peak of the housing boom in 2006 for $550,000, would have given you an annual rate of return of approximately 7.5%. However, if you were not fortunate enough to sell during the high times, and had to sell this year at today’s somewhat deflated rate of only $375,000, you would still have realized a 6% annual return.
In addition, when you purchase a home of your own, you discover that there are tax advantages. You get back a percentage of the mortgage interest and taxes you pay. So not only is your home a shelter from the elements, it is also a shelter from income taxes.
When you rent, you get back nothing at all on your taxes, and the value of your rented premises, in terms of what you will gain from it, is a big, fat zero. While your landlord may realize a return, because the rent you pay will increase each year, the rental property is simply a temporary shelter for you.
If you’re hoping for astronomical returns on investment, purchasing a home will not give you what you want. However, if you want a place to call our own, and an investment that usually increases in value on a par with the stock market, you will be probably be pleased with purchasing a home. And, while you’re not likely to be able to use your new home as a piggy bank in the near future, you may start to see some equity in it within five years of purchase.
Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / 561 / 213 – 6139
www.marcjablonhomes.com/
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