Why Buying a Home Is the Best Option
A GOOD CHUNK OF the U.S. population refuses to give up renting. We're not sure how many renters are stubborn hold-outs (the U.S. census doesn't measure in terms of obstinacy, although we do know that the majority of Americans — about 69% — own their own home). For many, the American Dream is simply out of reach for financial reasons.
But, for others, it's not the money, it's the....well, we've come up with five reasons why people don't want to buy real estate. Perhaps you've used these excuses yourself — or know a colleague, a family member or a friend who has. We've enlisted the aid of experts — Stacy Francis and Nancy Flint-Budde, certified financial planners in New York City and Salem, N.Y., respectively, and Mark Schussel, a spokesman for Chubb Group Of Insurance Companies in Warren, N.J. — to counter these excuses and knock some sense into the real-estate challenged.
EXCUSE #1: "Everyone is way too insane about real estate."Count this as the "protest" renter — the person who perpetually rents, who thinks they're too cool for school and doesn't want to be one of those people who talks about renovation projects at a cocktail party. (The true "protest" renter also protests cocktail parties.) These people might also fear growing up, becoming their parents, owning guest towels, etc.
Counter: Well, owning your own home IS a responsibility — and if you're not ready for it, then don't do it. Of course, you'll miss out on nice tax breaks for mortgage interest and property taxes, which make owning a compelling proposition for many. Not to mention, you're not exactly building equity when you split the rent with the roomies (but, hey, it does help with the cable bill).
"I look at renting as writing a check and throwing it out in the garbage," says Francis, who often advises clients on buying apartments in Manhattan. For many people, buying a home is their first crack at building their net worth over the long term, she says. The traditional way to ease into home ownership is to buy something like a condominium or townhouse, so your weekends aren't spent at the home-improvement store picking up weedwhackers. But be careful: You might feel like a real adult once you own. "You are no longer at the whims of your landlord to raise your rent, or sell your building," Francis says. "It really gives you stability."
EXCUSE #2: "Renting is a good deal."Truth be told, there is some logic to that. After all, if something breaks in your rental apartment, you just call your landlord. You don't spend money on pricey renovations. Heck, you don't have to pay property taxes. And if you've got enough money for a down payment, why dump that cash into an expensive home, when you could use it to buy something like stocks instead?
Counter: Many people consider their home an investment. "We call it a 'use asset,'" says Flint-Budde. "It's an asset that you own, and you hope it will appreciate, but you are using it along the way." That means even if your home doesn't appreciate as much as your favorite stock or exchange-trade fund, you still gain because it doubles (hopefully) as a nice place to live. And homes historically appreciate over time — so if you are able to hold onto your abode for a minimum of five years, you'll likely see a significant increase in value, Flint-Budde says. In its latest report, the National Association of Realtors said typical sellers are still experiencing healthy gains on the value of their home over the last five years, even in areas where prices have fallen. The group estimates that the median five-year price gain is 41.8%.
Still rather build your securities portfolio than buy a house? "If you have to turn around and pay $1,000 a month to rent somewhere, you may have less available to put into stocks," Flint-Budde points out. "And at the end of the day, if you put some into stocks and some into real estate, you would have diversified your portfolio more."
Oh, and for those averse to paying taxes? Don't fool yourself. Even renters pay property taxes. That's often what most of your rent check goes to pay, and your landlord — not you — gets the tax deduction.
OK, so we hear this one a lot from women. Well, interestingly enough, research has found that single women are leaping into real estate. In 2006, they accounted for 21% of home buyers, up from 14% in 1995, and well ahead of single men, who made up only 9%, according to NAR research. Yet, many women confess they are hesitant to buy a home on their own. Shouldn't they be waiting for Mr. Wonderful to come along and sweep them off their feet?
Counter: Tsk, tsk, says Francis, who hosts "Savvy Ladies" seminars to counsel women on personal-finance decisions. She's heard this excuse hundreds of times from female clients. "I call it the 'Prince Charming' syndrome," she says. "They put their life on hold until they find that Prince Charming. What it really comes down to is that women are just as capable as men at doing things on their own, and starting to live their life for now." One thing she reminds women — regardless of their marital status — is that they're more apt to live longer and need more money in retirement. A home is a perfect way to begin building wealth, she says. Women in general are hesitant when it comes to not only buying a home but investing, looking for a new job or asking for a raise. Accept that you are not going to be comfortable with the process, but do what you can to prepare for it, such as reading books on real estate, or doing research on the Internet, she says. Buying a home is a smart decision, in many ways. "Women who have actually purchased homes tend to have more equitable relationships," she says. "They are choosier and decide to be with men who they want to be with for emotional reasons, not financial reasons."
EXCUSE #4: "I'm afraid of commitment."Funny, we hear this excuse more from men. But seriously, there are some meaty issues here. Many people aren't sure they want to commit to a certain city, especially if they are building a career and possibly switching jobs. And despite the fact that we're a nation of debtors, some people perish the thought of taking on an enormous mortgage. Others are worried about the possibility of outgrowing their home, perhaps because they're considering starting a family or having more children.
Counter: As excuses go, this one isn't bad. Most experts recommend that you stay in your house at least three to five years, to recoup costs associated with closing and to see an increase in the home's value. Plus, you need time to weather the ups and down, such as shifts in interest rates that can quickly turn a healthy seller's market into one where the buyer calls the shots. In addition, from a tax perspective, you need to own your home for at least one year to qualify for the 15% capital-gains tax rate on profits; own it for more than two years and there's no tax on the proceeds from a sale (up to $250,000 for singles, and $500,000 for married couples). Flint-Budde says she tells clients — especially first -time home buyers — to purchase a home only if they plan to live there at least five years.
Research has shown that home buyers put thousands of dollars on credit cards upon moving into a home "because they need so many things; they never needed a garden hose before," she says. "There are some real cost issues with moving into a house."
Francis says she tells clients to put buying on hold "if you've had some traumatic thing happen in your life — maybe it's the loss of a spouse, or a divorce, or a job change," she says. "Sometimes it's good to just sit for a few months so when you do go out there and purchase a home, it suits your needs." She also recommends that home buyers have enough for a 25% down payment, and a stable job. If you don't, then "it may not be the time," she says.
EXCUSE #5: "I'm worried about disaster striking."No doubt about it — this is a valid concern. In recent years, a Category 5 hurricane, a terrorist attack and a documentary about the certainties of global warming have struck fear in the hearts of many potential home buyers. But should it stop you from buying a home?
Counter: Nope. Historically speaking, property values bounce back, especially if the disaster happens in a desirable area. Real estate in Manhattan, for instance, has soared in value since the 2001 attacks. And despite mudslides, earthquakes and even smog, property along the California coastline is still the most sought-after in the country. What to do if you're really worried? Before you buy, call in a loss-prevention specialist, who can analyze the individual home's design and construction to see how likely it could survive a catastrophe, says Chubb's Schussel. Then, if you really want a peace of mind, beef up your insurance. For starters, people who are investing in expensive homes (in vulnerable areas) should make sure their policies include guaranteed-replacement-cost coverage, which will protect you during rebuilding if the prices of labor and material surge, he says. Make sure your policy covers debris removal, rebuilding to code, and additional living expense coverage, in case it takes you months or even over a year to rebuild, he adds. There's a good chance you might not want to rebuild if disaster strikes, so check to see if your policy provides an optional cash settlement so you can decide, "I'm taking the money and running," he says.
In places where flooding is a concern, many homeowners get basic coverage through the National Flood Insurance Program. Upscale customers may want to buy excess flood coverage (offered by private insurers) to supplement that, he says.
CONCLUSION:We like real estate. If you've got a down payment, a stable job and an area you're comfortable living in for years to come, we can't figure out why you don't.