I recently read an article in Time magazine that talked about how this could be the “opportunity of a lifetime” to buy a house. As many of you are aware, the recent recession had a great impact on real estate, which on average lost a third of its value. However it appears that home values are going back up.
If you are interested in buying a home and expect to stay in it for at least a decade, there are several reason why the current housing market offers an exceptional opportunity. Consider these five factors:
1. Buying a home right now is cheaper than renting. Home prices and rental rates have risen, but rents are up more. Mortgage loan rates are at their lowest levels in more than 50 years. And given current prices and tax benefits, owning a home is cheaper than renting in almost every major U.S. housing market.
2. The mortgage interest deduction is unlikely to be eliminated. Tax reform proponents often call for curtailing the income tax deduction for mortgage interest, however the broad popularity of the deduction among homeowners greatly limits the extent to which the deduction can be modified. At most, the cap on the amount that can be deducted may be lowered, but probably not enough to affect middle-class homebuyers.
3. Home prices are very cheap but appear to be past a bottom. On a national basis, home prices are down more than 30% from their 2007 peak. Since the recession ended prices have recovered only a bit – but they aren’t getting any worse.
4. Eventual economic recovery will almost certainly boost housing prices. Following the recessions of 1973-75 and 1981-82, home prices rose by about 20% in real terms (i.e., not counting price increases from inflation) within seven years or less. The drop in home prices in the most recent recession was at least four times as large as the declines in those two previous recessions. As a result, the recovery is taking longer to get going, but the eventual rebound could be proportionately greater. Price increases resulting from inflation would be on top of those real gains.
5. A substantial amount of inflation seems likely at some point. Since 2008, Fed policies aimed at revving up the economy have more than tripled the basic money supply (including currency but excluding checking and savings accounts). In a simplistic sense, that means the potential exists for the dollar to lose up to two-thirds of its value. To prevent that, the Fed would have to drain much of money that it has added over the past three years. And that would be difficult to do quickly, because it would risk jacking up interest rates to a level high enough to cause another recession.
In short, since owning a home is typically cheaper than renting after tax benefits are considered, homebuyers would come out ahead as prices begin to rise as expected.
If you are interested in taking advantage of the market and buying a home, contact Minnesota National Bank. Our mortgage experts will help you determine how much you qualify for and what type of mortgage may fit you best. Or sign up for our rate watch so you can monitor changes in mortgage rates.