Is Homeownership For Everyone?

Several decades ago (and earlier) home buyers would wait to purchase a home until they had at least 20% of the purchase price saved up in their bank account, and they would only buy if they were going to stay in the same home and town for many years.  At the time, the percentage of homes that were owner-occupied hovered between 40% and 50% (U.S. Census Bureau).

Just a few short years ago, home buyers were buying with no down payment at all (or less), even if they planned to stay in the house for only a year or two.  This led to an ever increasing homeownership rate, which peaked at 69.2% of families owning their home in the early 2000’s (U.S. Census Bureau).

Why the sudden change of pace?  And what is a buyer to do today?

Many of today’s first time buyers are still buying with a very small down payment, and that can be o.k.  Many loan programs are available with a small down payment, such as the FHA loan program which only requires a 3.5% down payment.  The risk here is that a buyer doesn’t have too much built-in equity in case they need to sell sooner than they think.  Purchasing a $100,000 house with a 96.5% FHA loan results in a $96,500 loan, which has only been paid down to $95,000 one year later.  With such a small down payment, it can be difficult to re-sell the home in a short time frame without bringing cash to closing.

As becomes evident, the down payment and the length of ownership are quite intertwined.   As shown above, a small down payment with a small length of ownership can be financially difficult.  A small down payment with a longer length of ownership can work just fine.  Conversely, a larger down payment provides security and makes even a small length of ownership feasible.

What may become clear here is that homeownership is not for everyone.  Even if a buyer is making great money in their current job, if there is a strong chance they will need or want to leave the area in 12 or so months, it may not make sense for them to buy.  But for those with good credit, a down payment of some sort, and a solid job that will keep them employed and in the same geographic area for the next 3, 4, 5, 6, 7 years – homeownership may be a very exciting option right now.  With low interest rates, lots of homes on the market, and many sellers ready to negotiate, this can be a most opportune time for buyers to act.

Owning a home is a passive savings account of sorts, with money accruing as the principal of the mortgage is paid down each month.  Owning a home also provides the ability to establish oneself in a neighborhood that may be a buyer’s home for years to come.  Finally, owning a home provides the ability to invest time, energy and money into the place that you live that will provide a future resale benefit – as opposed to painting, re-modeling or otherwise improving a property when leasing it.

Now being excited about buying and thus owning a home, many might look around and realize that most local real estate markets aren’t booming right now.  Is it wise to invest in real estate when the market, and prices are down?  Many think that it is wise, given that buyers can fix their housing costs when prices are potentially the lowest that they’ll ever be, and when interest rates are potentially the lowest that they’ll ever be.  In many ways, housing costs compared to what a buyer is purchasing couldn’t be much lower than they are right now.

Buying a home isn’t for everyone, but excellent housing opportunities abound for those who plan to stay in the same geographic area for the years to come.

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8 Responses to Is Homeownership For Everyone?

  1. Jim Duncan says:

    Thanks for writing this, Scott. Very well said.

  2. Scott,

    You know, that I agree with your thesis completely. Our firm is a Sales firm as well as a Property Management firm with over 300 + rentals under management. And as someone who owns rental properties, I tend to focus on higher-end acquisitions in neighborhoods that tend to have young professionals who move every few years. They are not ready for homeownership, BUT they want and will pay a premium for high quality housing. The REALTOR community should pay attention to this growing trend, it will only grow as the Echo Boom generation reaches critical mass. In fact, our role in the economy have not always been just about Sales either. 100 years ago, most real estate firms in Richmond were rental firms, who assisted people in finding a home, just not one they owned. And here is an interesting fact, at the turn of the century in Richmond, there was a “Moving Day” custom in which all Leases would end and start in the same two week period!! How crazy is that?

  3. Ed Urbaniak says:

    When buying a home, people should always do a cost benefit analysis.

    Basically, you need to understand your cost of purchase (purchase price plus closing costs) and your total proceeds (sales price MINUS costs of sale–closing costs). If you take your estimated total proceeds in the future and subtract your cost of purchase and come up with a negative number, you probably shouldn’t be purchasing that home.

    Yes, the down payment can pad that, but you are still losing money.

    This was a painless exercise in the early part of this decade with rapidly increasing home prices.

    The example in the article of a $100,000 purchase is grossly misstated. With an FHA loan there is a 2.25% up-fornt MIP. So, essentially, these home buyers are only putting 1.25% down. At the end of one year, you still owe $97,157.

    Making some basic assumptions of 3% purchase closing costs, 6% sales commission, $1000 in other sale closing costs and 3% increasing market, this is how it works out:

    Purchase Price $100,000
    Closing costs $5,750 (3% closing costs and 2.25% upfront MIP)
    Total cost of Purchase $105,750

    At the assumed 3% increase per year… 5 years down the road…

    Sale Price $115,000
    cost of sale $7,900 (6% + $1000)
    Total Proceeds $107,100

    Net for transaction +$1,350

    So, if the annual increase had been a little less or this person stayed for only 4 years, the number would have been negative.

    Ahh, many people will say that I forgot about the principle accumulated and tax benefits, HOA costs, maintenance… Let’s face it, you have to live someplace. You can rent or purchase. The monthly outlay after accounting for all of that stuff will be just about equal if you rent or purchase.

  4. Ron Courtney says:

    Something many home buyers don’t consider is that, in addition to a mortgage, absent a housing boom or general inflation in the economy, a home is a depreciating asset, requiring maintenance, upkeep, taxes, insurance, etc. If you can’t afford all this plus a reasonable down payment, you have no business buying a home. If people had paid attention to this fact over the last decade, we wouldn’t be in a housing depression.

  5. I think this still goes on, at least in the areas around VCU. If I recall correctly, around the first of the month is the best time to hit the alleyways for some great used furniture!

  6. JohnG says:

    I personally have a hard time paying rent when I know I could be investing in property. At least when you are paying off a mortgage, you are essentially making an investment. Your money isn’t disappearing; it still has value. I agree, with Ron. Its because of depreciating assets, maintenance costs, upkeep, insurance, etc. why I stay away from attempting to buy a home. I know that there are a lot more costs than a mortgage, something that a lot of people don’t consider.

  7. I tend to think it’s a combination of cold feet and bad credit that are keeping folks from buying. With an exponential increase in foreclosures the past couple of years, there are plenty of bargains, often for much less per month than rent would be.

  8. In the recent times home owner ship is a fate that can be achieved by most people and not by only people with huge financial muscles. However, it is clear that home ownership is not for everybody but excellent housing opportunities abound those who stay in the geographical area for long. A great article giving insights on how one can own a home, thanks.

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