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Building
Wealth
A message from Don McGlinchy
Former Federal Reserve Chairman Alan Greenspan said in a speech to a community banking group, “while home prices do on occasion decline, large declines are rare. The general experience of homeowners is a modest, but persistent rise in home values that is perceived to be largely permanent. This experience contrasts markedly from volatile and often – ephemeral gains in stock market wealth.”
What Mr. Greenspan is saying in basic terms is that buying a home is a very good deal. To draw from Greenspan’s estimates, if a typical home in the Bay Area is worth $500,000 after five years and $100,000 is due to an increase in value, then we could say that the home has appreciated 4.56% annually. While such annual price increases are commonly cited in the media, they miss the point.
Owners of our typical home did not pay the purchase price in cash. They borrowed, and so by owning they received two benefits: shelter and (usually) appreciation. If we say that monthly mortgage payments, property taxes and insurance can be seen as “rent,” then to figure our return on the investment – the down payment – we should look at how much cash was put into the property and how much value can be extracted.
For a first-time buyer – most likely the purchaser of that $400,000 home five years ago – the National Association of REALTORS® reports that in a typical case the purchaser would have put down 5% of the sale price. If we run the numbers for $20,000, our typical buyer might expect after five years: $100,000 in appreciation. On top of the $100,000 in appreciation the buyers will also reduce their income tax costs because of the mortgage interest tax deduction and the property tax deduction. Both interest on the loan and property taxes are tax deductible. Depending on your tax bracket you may see a sizable income tax benefit from owning a home.
So, by combining appreciation potential of the home, the tax deductions you gain, and the joy of owning your own home, it is no wonder that the dream of homeownership is so strong in the United States.
Will everyone do so well? No. Is it possible to lose money with real estate? Yes. Will some people do better than the example used here? Yes. Does past performance guarantee future results? No. The bottom line: Real estate is typically a far better investment than annual price increases suggest, something brokers ought to trumpet and owners ought to enjoy.
Cherry Creek Mortgage
4301 Hacienda Dr. Ste. 120
Pleasanton, CA. 94588
Phone 800-325-2062
Fax 925-520-0231
