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Is Now a Good Time for 'You' to Buy a Home?

http://www.cambridge-credit.org -- Transcription: When it comes to homeownership, we often find ourselves asking, “Is now a good time to buy?” Perhaps the better question would be, “Is now a good time for me to buy?” Although interest rates are at historic lows and home values have receded to their ‘pre-boom’ levels, this doesn’t mean that homeownership is for everyone. There are many factors that must be weighed, so it’s important to maintain a broad view of how being a homeowner will affect your life. So what is it: rent or buy? In order to accurately answer that question we first have to answer some specific questions about our own circumstances. One of the first questions prospective homeowners should ask themselves is how long they will be in the home. A recent analysis by Barry Ritholtz of www.ritholtz.com examined the short-term costs associated with buying versus renting. His findings may make you rethink your homeownership goals. Using sources such as Kiplinger and the NY Times, Mr. Ritholtz evaluated the costs associated with buying and renting over the first five years of occupancy. The comparison was based on a home valued at $223,000 and a rental unit costing $1,500 a month. In the scenario, the homeowner made a 10% down payment and mortgaged $200,700. The analysis examines the purchase or rental costs, the yearly costs, lost opportunity costs, and selling or leaving your rental costs on a cumulative basis for the first five years. Initially, renting is far cheaper than homeownership. The purchase costs versus the initial rental costs paint a stark contrast. The down payment and closing costs totaled $31,220, while the rental deposit is just $1,500. The yearly costs are where things get interesting. Homeowners have a host of costs associated with ownership. Among these are the mortgage payments themselves, principle and interest costs, property taxes, utilities, renovation and maintenance, and homeowners insurance. The price tag after five years -- $181,110. Renters over the same period would pay $95,564 in rent, and $1,261 for renters insurance. The analysis also examines the lost opportunity costs associated with each housing option. If you were to invest a dollar, it grows over time. A dollar that is paid out loses the opportunity to grow, so the amount it could have grown had it been used to create wealth is a lost opportunity cost. For the homeownership option, the lost opportunity costs are $12,201, while the option of renting presents a loss of $6,880 over five years. Looking at this example, the option of homeownership is not the best option if you were to remain in the home for less than five years. However, if you were going to remain in the house for five or more years, homeownership would be the better option. The comparison concludes with a six-year total for each option. Considering all the factors discussed, the six-year totals for renting would be $103,706; however, for homeownership the total is nearly as much: $102,060. The comparison is not perfect. Critics have noted that some items often associated with homeownership were left out of the comparison. For instance, one commenter pointed out that some important homeownership costs were omitted. Among those items was a new roof every 15 to 20 years, new paint every 8 to 12 years, a new furnace, and other expenses in the years beyond those reviewed in the comparison. Also absent were the tax benefits of homeownership, which are a great relief to many homeowners each Spring. The comparison is useful in planning your short-term needs, however. One of the best ways to assess if homeownership is right for you is to sit with a counselor from a HUD-certified housing counseling agency such as Cambridge Credit Counseling. To find an agency near you, please visit HUD.gov. Well, that’s it for this edition. As always, we welcome your feedback and ask for your thoughts and suggestions by e-mailing us at yourmoney2@cambridgecredit.org. Thank you for watching. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.