[Note to my blog readers: This column is specifically aimed at my local real estate market, but the concept applies to any housing market - Steve]
Q: I recently read your article on whether or not to rent or buy given the tax deductions available. From what I can figure, it sounds I’m best off financially to continue to rent, but I wanted to run the numbers by you. I would like to have the luxury of having a washer and dryer, 2 car garage, etc. So here goes: I have a one-year apartment lease for = $485 per month and utilities average about $60 per month. If I bought an $80,000 house, the payments would be about $625 per month, based on various calculations that I have found on the Web. Utilities and maintenance would add another $200 per month, or so. And the tax breaks would be about $72 per month. Anyhow, I hate to say it, but financially speaking it sounds better for me to just rent for at least another year and use my extra income to pay off a student loan. Not the happiest of solutions, but it seems the numbers don’t lie.
A: In a rapidly appreciating housing market, like the one we had over the past few years in the Puget Sound region, I would typically advise you to buy a home if there were any way possible for you to afford.
But the housing market has cooled off recently, and unless I miss my guess, I am not expecting much, if any appreciation this year. In fact, we could see home prices decline for the first time in years if we get a glut of homes for sale during the Spring as we normally do in March and April. Real estate is a classic “supply and demand” market. Prices were driven up rapidly over the past few years because there were far more buyers than homes for sale. This created situations where buyers were forced into bidding wars over desirable homes.
I could be wrong, but I have been saying for quite some time that our housing market is due for a bit of correction. Traditionally, home prices in this area jump up over a two to three year period, and we have just finished about a four year run of appreciation. This is usually followed by a few years of a flat housing market, with no appreciation and even price declines in some areas. I call this a “stair step” housing market pattern, with sharp jumps up followed by extended periods of no appreciation. This contrasts with boom-bust housing markets which operate more like a roller coaster: They tend to zoom up when times and good, then come crashing back down when the market goes soft. Phoenix and Las Vegas are classic examples of roller coaster housing markets.
So what does all this have to do with whether you should buy or rent? Simply this: My guess is that you can wait a year or two to buy a home in the current housing market and you won’t have to worry about being priced out of a home. That was NOT the case a couple of years ago, when home prices in some areas jumped 30-50 percent over a two-year period.
The only caveat is that you are looking for an extremely low-priced home and they are in very short supply. I did a quick search of the multiple listing computer and I found less than 10 house in Snohomish County currently selling for less than $100,000. So unless you can afford to buy a more expensive home after paying off your student loans, you are going to be hard-pressed to find a home to buy in any housing market.
But let me end by saying that your math is correct in the sense that over the short run it is always less expensive to rent rather than buy a home. But the wildcard is appreciation. If it costs you a couple hundred dollars more per month to make mortgage payments compared to paying rent – but you gain $30,000 worth of equity in your home due to appreciation – owning a home is definitely the best way to go. So you have to decide what you think home prices are likely to do over the next couple of years. My guess is that they will be pretty flat. But as I said above, I could be wrong.
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