This question was recently asked and so I thought I would take this opportunity to give my thoughts on this question.  Working with many first time homebuyers, this is probably one of the first questions that many of them will ask.  My answer to them is “It really does depend on a lot of things”.  So what are those “lot of things”?

• Does the time feel right to you?  Homeownership is a wonderful thing and you just don’t get the same sense of pride when you are renting an apartment or a home.  But in the end, if you are concerned about the economy and/or your job, or whether or not the house will go up or down in value, or you are really not ready to take on the those things that go into maintaining a home, then it is probably not the right time to buy that home, no matter what the pundits and the news media and the Realtor Associations all tell you to do.  So the first question you should decide on is:  is the time right for you to take the plunge into homeownership?  Homes will still be there years from now when you are ready to buy a house!

• What is the value of owning a home to you?  For many of the people I work with, there is the American Dream of homeownership!  And being a homeowner is certainly a great feeling.  But a house should be worth more to you than just what you paid for it and what it’s value will be each and every year!  Of course, you do not want to pay money for a home only to have it lose value each and every year!  And in this real estate market, that is certainly a very good concern.  However, in the Richmond area, I would tell you that, once you do decide to purchase a home, you should plan on holding onto that home for at least 5 years, if not longer!  Every year, I track the numbers on the real estate values.  We are coming up on the end of 2009, so those numbers won’t be available until sometime in January, 2010.  But when I look at each and every area of the Richmond area, including Henrico County, Hanover County, Chesterfield County and the City of Richmond, the average sales price of homes that have sold in 2008 are well above where they were in 2002.  For instance, in Area 10 of the City of Richmond (where you have a high number of foreclosures and short sales), in 2002 the average sales price of a home that sold there was $165,888; in 2008, the average price of a home sold there was $248,070.  I can go through area by area and show you the same type of results.  So even though home prices have been slipping over the past few years, it would appear that for those people that bought and held onto their homes for a longer period of time, the equity is there. 

• Interest rates continue to be at all time levels!  Today, I checked a local lender’s website and found that the current 30 year fixed rate is 4.88%.  If a home buyer were to purchase a $210,000 home, with a 5% down payment, their monthly Principal & Interest payment would be $1,059/month (this does not include taxes and insurance, which would be added to the payment).  With interest rates fluctuating all the time, it is possible that within the next few years, we will be back to around 6% level, which isn’t a bad interest rate, just not as good as it is today.  If the same house were to be purchased in a few years, when interest rates may be closer to 6%, then that payment would be $1,199, which is a difference of $140/month!  And this calculation does not take into account the tax savings you get from owning a home with the interest & tax deductions as well as the $8,000 tax credit that is currently available.

• Compare the cost of renting vs. the cost of homeownership:  I did a rent vs. own analysis.  For this analysis I used the following figures:

• Rent Assumption:  $1,000/mo
• Renters Insurance:  $15/mo
• Rent Increase:  4% per year
• Purchase Price:  $210,000
• Appreciation Rate:  1%/year
• Savings Rate:  4% per year
• Tax Rate (State & Federal):  31% of income
• You will hold onto the property for 7 years before selling
• Loan Amount:  $200,000
• Loan Term:  30 year fixed rate mortgage
• Interest Rate:  6%
• Origination Fee:  1%
• Upfront Costs:  $2200
• Property Tax:  $2500/year
• Maintenance Costs:  $1500/year
• Homeowners Insurance:  $500/year
• Selling Costs at Time of Sale:  7% of the sales price

So what did the analysis show?

• First – looking at actual payments over the 7 years, it will actually cost less money ($9,834) to continue to rent rather than own the home
• Second – over the 7 years, however, the homeowner would have tax savings of $30,226 (this does not include the $8,000 tax credit that is available)
• Third – the total maintenance costs would be $10,500 as a homeowner since maintenance is typically taken care of in the person’s rent
• Fourth – assuming the very low 1% appreciation rate per year means that the sales price will be around $225,000 in year 7 when the house is being sold.  Many people feel that prices will begin to go up after a few years once the foreclosures and short sales have begun to decrease.
• Fifth – given all these things, you will have equity into the house of $45,941
• Sixth – from the equity you have built up in the house, you need to deduct the $15,765 in selling costs.
• This means that you will have money to put down on the next home you buy, which would be more in line with your family’s needs at that time.

So does all this mean that you should buy a house now?  If you are leaning towards purchasing a house, I think that now is as good a time as any.  Interest rates are very low, you do have the $8,000 tax credit available to you, and should you decide to become a homeowner for the long term, then this can be looked at as an investment and a great savings account that you can take pride in.  Real estate always has appreciated over the long term – but you must be ready to purchase a home, and when you do make sure that the home and the neighborhood is right for you!