Owning a Home: Is it Worth It?
Often, owning a home is not the investment that the real estate industry leads consumers to believe it is. The value of an average home increased 3.6% a year compounded annually over the last three decades ending in 2013, according to Freddie Mac, the Federal Home Loan Mortgage Corporation. In contrast, the compounded annual return of the S&P 500 over that same period was 11.1 according to Morningstar (the investment and research firm).
In today’s employment climate where relocation flexibility is of constant growing importance, and in some cases, absolutely essential for employees to relocate to climb the economic ladder, and the concern families have regarding job security coupled with the growing dependence on two family incomes, renting may provide a much less costly option than buying. The cost of selling a home, the time required to sell a home are serious impediments to relocation.
Hopefully housing prices will never see as significant a decline in price as they did in the recent recession, but even a small decline in home prices can cause a significant financial impact on a family. History tells us that modest declines in home prices are fairly common. In fact, at the time of writing this, the average price for a two bedroom home in the Philadelphia area has declined 5.0%, the average price for a three bedroom home has declined 3.6%, and the average price for a four bedroom home has declined 7.3% year after year.
Renting an Apartment
The cost of rent is often less than the cost to buy a home. Buying a home is not for everyone. When you rent an apartment, you are not obligated to pay, like homeowners are, property taxes, homeowners’ insurance, or the cost of maintenance. These three items cost the average homeowner 3% annually of the purchase price of a home. This is equivalent to $621.56 a month.
Additionally, even with a home mortgage interest deduction, a homeowner will still be required to pay a steep sum of interest . For instance, a mortgage amount of $198,400.00 requires a 20% down payment of $49,600.00, an interest rate of 4.667% (the interest rate published by PNC Bank as of July 21, 2014 for a 80% mortgage with zero points) results in an interest payment of $174,214.00 over the life time of the loan. Assuming the family were in the 25% tax bracket, the savings would have been $1,451.71 a year or $120.98 a month. The out of pocket interest would have cost $4,355.42 a year or $362.95 a month. You would save $43,553 over the life of the loan, and you would have paid out over $174,000.
Whereas a income to debt ratio can pile up for a family, monthly rental payments on paper are not considered a debt, but rather an expense.
Home Maintenance Costs
As stated before, the cost of maintenance of a home can be very significant. When it comes to owning a home, upkeep is a regular activity. Cleaning the gutters. Replacing your roof. The list goes on and on. Thousands of dollars can be spent for replacing your air conditioning, carpeting, landscaping, as well as appliances like a washer and dryer. You can’t write off the expense on your taxes, and while it is possible to recover the cost at the time of sale, rarely is the entire amount ever recovered.
Evaluating Mortgage Payments
Mortgage payments are very predictable under a fixed rate mortgage; however, under a variable mortgage the rates can adjust yearly. Given that we are at historic low interest rates, it is very likely interest rates will rise. Between 2011 and 2014, interest rates changed 0.0032%, from 2008 to 2014 interest rates changed 1.33%, and from 2007 to 2014 interest changed 1.79%. Add to this the fact that real estate taxes can change based on property assessments. If you owned a home in Philadelphia, you would have had an increase in your real estate taxes of approximately 19% compounded between 2010 and 2012, a period of just three years (10% in 2010, 4% in 2011 and 4% in 2012). This does not take into account that specifically under the City of Philadelphia’s AVI plan many home owners saw their annual real estate taxes increase as a result of reassessment.
Home Mortgage Interest Deduction
The home mortgage interest deduction has been around a long time, but that doesn’t mean it will be here in 5, 10, 15 or 20 years from now. A change in the mortgage deduction has been under discussion from the time of the Bush administration through the current Obama administration. In 2013, the Brookings Tax Policy Center advised Congress that “achieving a revenue neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the mortgage interest deduction or some other equally popular and wider used provisions.”
Buying or renting needs to be carefully evaluated family by family. There is no general answer to the question as the above discussion illustrates. Careful consideration based on specific individual family circumstances and finances are required before a determination can be made. In many circumstances, renting may be the most affordable alternative.