“The American Dream” For generations, those three words were the ones most often associated with home ownership. That may have been the case in our parent’s time but today; the dream is more like a fantasy. In a comparison of 14 industrialized nations, the United States ranks a lowly 10th in home ownership. Blame the financial crisis back in 2008 for a big role in this dismal showing. Back then US home ownership hit almost 68%. By the end of last year, however, ownership dropped to 62%, a level not seen since 1994.
If you have been in the market to purchase a home anytime in the past eight years, you fully understand what’s going on. If your credit rating (FICO score) is below 700, you have a problem. If you are a first time buyer you need to come up with 20% or more of the purchase price. These are two of the most common reasons why people have been locked out.
Despite these difficulties people are still applying for mortgages. But does it make sense to own a home? The answer isn’t the same for everybody, but for most of us the answer is a big yes. And here are several reasons why you need to do some recalculating.
The financial crisis back in 2008 laid the foundation for the biggest building boom in rental apartments in the past 50 years. Demand has outstripped the supply to the point that the cost of rental housing is going up about 5.5% per year. That is faster than almost any other cost of our daily living. The only thing rising faster is the cost of moving and storage.
This sharp rise in demand for rental housing has driven the price of renting up above what it costs to own a home in many cities across America. Every city is different but here is one example. On the Westside of Los Angeles a 1200 square foot 2 bedroom apartment in a new condominium building rents for the princely sum of $3000 per month. The asking price to purchase the same unit is $450,000.
If purchased using a 30-year mortgage at a 3.92% interest rate and including a $400 monthly fee to the Home Owners Association, the monthly outlay becomes a much more affordable $2102 per month. In addition, about $1650 is tax deductable interest. That results in a total savings of more than $12,000 per year to own versus renting. The only thing standing in the way of turning this plan into reality is the required 20% down payment or $90,000. Ouch!
This example fits the profile of many first time homebuyers and millions of families who lost their homes to foreclosure over the last eight years. Well take heart, after years of super tight money conditions, things are beginning to loosen up.
Earlier this year, Fannie Mae created a new loan program specifically for first time homebuyers. You can qualify, if you have not owned a home for at least three years. That makes this program available to a rather broad audience and should go a long way in helping home ownership.
The key feature to the program is the down payment requirement is only 3%-5%. In our West Los Angeles example the down payment drops to as little as $13,500. This means the size of the mortgage increases resulting in total monthly cost of $2464 or an annual savings of over $6000. That is a whole lot better than pouring $3,000 a month down the drain in rent. And let’s not forget that almost $2000 of your monthly payment is tax deductable interest.
Beyond the good news from Fannie Mae, home ownership is perhaps the best way of building a sound financial base for long-term wealth creation. The US tax regulations provide more generous benefits to homeowners and real estate investors than virtually any other type of asset.
The historic low interest rates currently available make a conventional 30-year mortgage an attractive option for many first time buyers. There is a $417,000 ceiling on “conforming” Fannie Mae mortgages. However, the ceiling is quite a bit higher in areas like the Northeast and West where housing prices are well above the national average.
With the cost of rental housing rising at an annual rate of more than 5% and Fannie Mae loosening the flow of mortgage money, it is high time to polish up your FICO score. Remember, a home is more than a place to sleep; it is typically the largest asset of successful family portfolio.
Regards,
Ethan Warrick
