Is Buying in Today's Economy a Good Idea?

Linda Chojnacki, The Plain Dealer

As a long-term investment, home- ownership is still one of the best investments for individual households, according to the National Association of Home Builders.

"What buyers need to realize is that housing markets, like all markets, inevitably have their ups and downs. And, homeownership has a track record that is virtually unmatched by any other purchase in terms of its real benefits," said the NAHB.

If you have good credit, a job and steady income, you will find that there is still plenty of mortgage credit available at good rates. For well-qualified buyers, rates are running at near historic lows.

The real value of homeownership

Dollar for dollar, homeownership is a solid stepping-stone to a future of financial security and the single largest creator of wealth for many Americans.

Over the long-term, real estate has consistently appreciated, even through periodic adjustments in local markets in response to economic conditions.

On a national level, home appreciation has historically increased five to six percent annually, according to economists at the NAHB. Five percent may not seem like much at first, but here's an example that will put it into perspective.

"Say you put 10 percent down on a $200,000 house, for an investment of $20,000. At a five percent annual appreciation rate, the $200,000 home would increase in value $10,000 during the first year. Earning $10,000 on an investment of $20,000 is an extraordinary 50-percent annual return. In contrast, putting that $20,000 down payment into the stock market and getting a five-percent gain would only yield a $1,000 profit," stated the NAHB.

Looking at it another way over a longer period of time, "if someone put $10,000 into the stock market in 1996, the average annual Standard & Poors return would make that investment worth $21,500 today, which is an increase of $11,500. The median home price in 1996 was $140,000.

Today, that same home would have gained nearly $100,000 in value," said the NAHB.

And, there is more good news. According to Standard & Poors, Cleveland has seen 16.8 percent appreciation over the last 10 years. Since most people purchase a home as a long-term investment, it's an excellent return on that investment.

Should I wait to buy until current selling prices increase?

It's always better to trade up in a buyer's market, like the one we are now in. While the value of your home may have fallen, the price of higher-end homes has also dropped.

"Say your neighbor sold his home six months ago for $300,000. In today's market, your home's value has most likely decreased 10 percent, meaning that you could only get $270,000 for the home. You might think that you'd be taking a $30,000 'loss' on your home. But, don't forget that higher priced homes have also dropped in price.

"For example, the $500,000 move-up home that you've considered buying has most likely also dropped 10 percent in value and is now selling for $450,000. If you sold your home today for $270,000 and purchased the larger house for $450,000, the difference in price would be $180,000. But if you wait to recoup the 10 percent value on your home and later sell it for $300,000, chances are that the same move-up home has also moved up in price at least 10 percent to $500,000. That's a $200,000 price difference between the two homes. So by selling today, you would actually save $20,000," according to the NAHB.

And, most likely, by jumping into the market today, your savings would be even greater because consumers have much more bargaining power when shopping for higher-end homes in a buyer's market.

What if rates go lower?

Currently, 30-year, fixed-rate mortgages are hovering around near 30-year lows. Also, home prices do not necessarily move in unison with interest rates, indicated the NAHB.

"If you decide to wait to purchase a home, and the price actually drops $10,000 from where it is today, you could still end up losing money. How? If interest rates were to move up by a half a point during this period, the savings on the reduced home price would be more than offset by the higher monthly payment you would be making. It would also be offset by the total amount you'd spend over the life of the loan. In short, the smartest and safest time to buy is now," said the NAHB.

Linda Chojnacki can be reached at lchojnacki@live.com.