After the housing market collapse of 2008, many consumers have been afraid of purchasing a house. Home prices peaked in 2006, and after this , the Case-Shiller home price index experienced its largest price drop of all time. Historically, homes have been considered practically fool-proof investments; so long as you kept up with maintenance, you could count on the value of your asset growing indefinitely. The United States housing bubble introduced doubt to this premise; what if another collapse occurs in the future
However, there are several reasons why buying and owning a home is still a wise financial decision.
Availability of Home Loans
First, consider how easy it is to get a home loan, and how affordable those loans can be. The average person can buy a home with as little as 5 percent of the home’s value saved as a down payment. In some special circumstances, you may even be able to buy with a down payment of just 3 percent of that home’s value. In other words, if you’re buying a $100,000 house, you’ll only need $5,000 to make the initial investment. While mortgage rates vary by location and change somewhat frequently, you can currently count on an annual interest rate close to 4 percent. That’s extremely reasonable, considering the potential return on your investment you can get from a standard investment portfolio.
Owning vs. Renting
It’s also important to consider that you’re going to have to pay for a place to live, no matter what. If you’re not mooching off a relative or friend, you’ll need to either rent an apartment or buy a home of your own (or some variation of these strategies). Either way, you’re probably going to have to spend several hundred to a few thousand dollars a month, depending on your area. When paying a mortgage, you’ll be paying for insurance and interest, but you’ll also be paying down your principal, which means a portion of your monthly payment is going to be converted into home equity. In other words, you’ll gain a greater percentage of ownership in this asset.
Compare that to paying rent. Unless you have some kind of special arrangement, your money won’t go toward "owning" anything. Instead, it’s going to go to the actual owner of the building. For this reason alone, buying a house is almost always a better choice than renting when the monthly costs would be nearly the same. The only exception is the extra expenses you may face as a homeowner, including maintenance and repairs.
Home Price Trajectories
It’s true that home prices significantly declined after 2006, and for several years, but there are two important details to keep in mind before writing off a home as a secure investment. First, home prices are always fluctuating. Even in healthy market conditions, there are going to be years when home prices fall, but for the most part, home prices will continue to rise indefinitely, thanks to the finite nature of property. If you can maintain control of your property through the down times, eventually your prices will come back up.
Second, the housing bubble did not spread across the United States evenly. Some areas, like San Francisco, suffered from extremely over-inflated prices, and accordingly, plummeted harder when the bubble burst. Other areas had more consistently reasonable prices, and were barely affected by the recession. If you consider the price to value ratio of the properties on your radar, you can avoid suffering the worst of such a future event.
Compared to Other Investments
There’s one other important thing to keep in mind about the value of a home as an investment; its relationship to other investments. In general, stocks and index funds can oftentimes give you a higher return than residential real estate, but they also tend to be riskier.
Bonds tend to be more conservative and have a smaller return. Depending on your investment goals, a home may not be the best possible investment, but if you have the funds, it’s a valuable addition to your portfolio, no matter what. That’s because diversification is one of the most important principles of investing; you need to spread your wealth across many asset types if you want to protect yourself against unexpected drops and changes.
If you’ve been reluctant to buy a house because you’re afraid of a precipitous drop in home prices, or because you believe it’s not a good investment, you might reconsider your position. So long as the home prices in your area are reasonable compared to their value, and compared to the costs of renting, buying a home is almost always favorable. Just make sure you’re working with an agent if you don’t understand the ins and outs of real estate investing.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant.Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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