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| May '07 |
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Mixed Messages for Real Estate Buyers |
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"It's a great time to buy," says the National Association of Realtors (NAR). Alternatively, says NAR, existing home prices in February 2007 were down 1.3 percent when compared with a year earlier.
So can this really be a great time to buy if home values are falling? The answer is yes.
Increased real estate ownership is a national goal which has produced helpful and useful national policies. For instance, we encourage homeownership by tilting the tax system to favor owners. As a property owner you can write off property taxes, you can deduct mortgage interest in most cases and when you sell you can shelter profits of up to $500,000 if married and $250,000 if single from federal taxes.
We do these things because we believe that ownership gives people a greater stake in local communities and because owning a home affords individuals a certain ego, status and financial standing. We also encourage ownership for a very simple reason: Money. In addition to all the good qualities associated with ownership, each real estate transaction generates substantial transfer taxes, brokerage commissions, loan fees, insurance charges and legal fees.
As to renting, not so much. There are no transfer taxes to be paid when someone leases, no closings, no new mortgages, few if any legal fees and only small real estate commissions.
And yet as a society we need renters and we recognize that not everyone benefits from homeownership. We need renters because without 'em investment real estate would make little sense. Also, not everyone should buy, especially individuals who will be short-term residents in a given community; those with small, declining or uncertain incomes and, often, individuals who live in areas where both jobs and people are leaving.
Real estate ownership is not a good short-term option because of the costs to acquire and sell property, but it routinely makes sense for those who expect to hold for a lengthy period, say eight to ten years.
NAR says it's a great time to buy or sell because interest rates are near historic lows, "prices overall have stabilized," there's a positive outlook according to Alan Greenspan and during the past decade real estate has been a great investment.
"The national median price of homes bought ten years ago has increased 88 percent. The number of US households is expected to increase 15 percent during the next decade, creating a continued high demand for housing," says NAR.
The points made by NAR are all true -- and each deserves to be examined with some care.
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Interest rates are near historic lows and that means borrowers should grab fixed-rate loans rather than elastic ARMs, a form of financing where rates can rise and the advantage of low monthly costs can be lost.
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To say that prices have "stabilized" is a good example of creative wordsmithing. This is a cute expression, but irrelevant. The important issue to check real estate trends with local brokers because some communities are seeing price increases, some are seeing declines and what happens nationwide may not reflect local market activity.
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Alan Greenspan, the former chairman of the Federal Reserve, is quoted by NAR as saying that "most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter." The thoughts of the Chairman Greenspan are no doubt interesting, but quarterly results are for Wall Street and not homeowners. The real question is where local values are headed in five or ten years, something unknown.
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Price increases during the past decade have plainly benefited most owners in most communities. However, as they say on Wall Street, past performance does not guarantee future results. What happened before does not tell us what will happen tomorrow. One way or another, we just do not know.
The view here, for whatever it's worth, is a little different: People ought to buy real estate because it's an investment that provides shelter, tax breaks, amortizing loans, the potential for appreciation and encourages the joy of individualism, having something of your own to shape and develop as you wish -- an option unavailable to tenants.
Written by Peter G. Miller
Realty Times
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