To Buy or Not to Buy? That is the Question
Generations past have propagated what is essentially a cult of homeownership. The conception of homeownership as both a lucrative investment and a christening of true adulthood has continued to prevail in spite of substantial changes in the nature of real estate. In certain circumstances, buying a home truly qualifies as an investment and yields several monetary and lifestyle benefits. In today’s world, however, renting is a more financially suitable option for most individuals. The question is: should you buy homes for sale on the Big Island or continue to rent?
Buying and Selling Homes: The Hidden Factor of Inflation
Traditional wisdom dictates that to buy homes for sale on the Big Island would qualify as investing. The reason being is that the value of real estate purportedly increases over time. Indeed, many of our parents bought houses during the 60’s and 70’s that have quintupled in value. In theory, it’s just easy math: if you purchase a house for $100,000 and sell it years later for $600,000 that’s a whopping $500,000 profit, right?
Not necessarily. Historically speaking, real estate indeed appreciates in value over time. What many people fail to account for, however, is the rate of inflation. On average, houses appreciate at a rate that only exceeds the inflation rate by a tiny margin. For example: the average value of housing appreciated 4.5% since 1975. However, when you account for inflation, the appreciation rate was only a hair above 0%. Indeed, true real estate values increased by less than 1% over the course of the entire 20th century! Thus, to buy homes for sale on the Big Island would be unlikely to produce any sort of substantial inflation-adjusted profit.
Does Buying a House Trump Buying Stock?
There are a few key arguments that experts typically leverage in vouching for the integrity of homeownership. Many contend that purchasing a house essentially yields a dividend in that it allows you to live on a property rent-free. According to this logic, to buy homes for sale on the Big Island must be just as beneficial as investing in stocks.
In order for buying homes for sale on the Big Island to equate to buying stocks, it must save you 7% of the value of the house per year, or $21,000 a year on a $300,000 home. At $1,750 in savings a month, buying a house might prove the more financially sound decision, especially in areas where rent is prohibitively expensive—at least according to this simple logic.
However, none of these calculations effectively account for the value lost in purchasing and maintaining a home. If you buy homes for sale on the Big Island, expect to pay a 6% commission to your real estate agent in addition to land transfer taxes and lawyer fees. Account for multiple, inevitable housing repairs, housing taxes, insurance, water bills, electricity, and other carrying costs, and there is very little chance that buying homes for sale on the Big Island will save you 7% of the value of your home annually. Seeing as the average return on stocks has reached 9.8%, you would be much wiser to purchase stock if your objective is to generate a return on your investment.
The Issue of Necessity
Furthermore, to buy homes for sale on the Big Island is not truly investing if you are going to live in them. That’s because houses provide a basic need—shelter. When dealing in stocks, you are able to purchase and sell at strategic intervals in order to generate a profit. But because you live in your house, it’s unlikely that you’ll plan to sell just because the market is favorable. Rather, you’re more likely to decide to sell when it’s convenient or necessary—say, to live closer to work or downsize when the kids leave for college. The housing bubble of 2008 made clear just how unwise it is to treat a home as an investment; homeowners were forced to sell their homes due to foreclosure even though market conditions were anything but favorable, resulting in major losses for millions of people.
Concerning Equity
Another common argument for the sake of homeownership is the ability to accumulate equity. In real estate, equity is defined as the difference between the value of your home and your mortgage debt. In theory, the value of your home will increase over time as your mortgage debt decreases, resulting in a gradual increase in equity. For example: once you make a 20% down payment on your home and the value increases by 3%, you generate a 15% increase in equity.
However, as we have already examined, the net value of the average home barely increases over time. Furthermore, housing markets are often unstable. It is not uncommon that a house drastically declines in value, resulting in acute equity losses. Even when national conditions are favorable, local real estate bubbles can result in major equity losses. While a home is indeed an asset, it is one that is subject to unpredictable fluctuations in value. If you are looking to profitably invest, you are better off purchasing a property that generates cash flow, such as a rental property.
So Who Should Buy a Home?
With a better understanding of the profitability of homeownership, we can approach the question of who should own a home with a more informed perspective. Because homes are not truly an investment—at least not inherently—they are not a dependable way to generate profit for everyone.
However, to buy homes for sale on the Big Island could be incredibly beneficial for some. The first factor to consider when determining whether to buy a home is your stability. Do you have to move for work a lot? A good rule of thumb is to forego buying if you are not planning owning for over five years. Fixed costs such as realtor and closing fees are far less significant distributed over several years. However, they are quite costly in the short term. On the flip side, buying a house is not an investment if you plan to keep it forever. It will only yield profit if you later sell and downsize to a smaller home or a rental.
Is your income sufficient, stable, and reliable? If your income is volatile and you can’t consistently make your mortgage payments, you may face foreclosure. A good way to get a better gauge on your financial viability is to experiment with paying the monthly mortgage and utilities on a home. Calculate the difference between your currently monthly rent and what you expect to pay monthly for a home, and put that value into savings for a year. If you find yourself strapped for cash, homeownership is not yet within the realm of your abilities. Owning a house permits more freedom in design and decoration, but it is not a way to make money. You must possess adequate reserves before purchasing a home.