Raleigh,Cary, Wake County Blog and Relocation Information

Cary, North Carolina

Welcome to my blog on Raleigh-Cary and the Triangle area of NC Real Estate. Here you can read current information on the Triangle area including neighborhood profiles, school information, taxes, market conditions, and even find things to do in the Triangle.

Favorite Links

• North Carolina Government

• Best Places to Live in 2006

• Wake County School Rankings

• #1 Town For Job Growth By Forbes

• RTP Information

• Cary Chamber of Commerce

• Raleigh Chamber of Commerce

• First Time Homebuyer Information

• 2007 Best of the Triangle

• June 2007 Article on Cary

• Koka Booth Apmphitheatre

• National Geographic Article on Cary

• Pullen Park Carousel

• Dowtown Raleigh Information

• Downtown Raleigh Alliance

• Umstead State Park

• North Carolina Museum of Art

RealTown Blogs

Blogs Homepage

Featured Entries

Site Feed

RSS Feed

Raleigh,Cary, Wake County Blog and Relocation Information

Buy vs. Rent...Why Homeownership is the way to go...

Sep. 15, 2006

Categorized in: For Buyers

Tagged with: buy vs rent, buying a home in cary, buying a home in raleigh, cary real estate, first time home buyer, home ownership, raleigh real estate, triangle homes

Yup, the cliché is true: Buying a home is one of the smartest financial decisions most people will ever make.

Don’t take my word for it. What do I know? Take the Federal Reserve’s. Its Survey of Consumer Finances has consistently found a huge gap between the wealth piled up by homeowners and that accumulated by renters.

Average net worth of homeowners vs. renters

Annual income	Owners	Renters
$80,000 and up	$451,200	$87,400
$50,000 to $79,999	$194,610	$25,000
$30,000 to $49,999	$126,500	$10,600
$16,000 to $29,999	$112,600	$4,240
Under $16,000	$73,000	$500

Source: VIP Forum, Federal Reserve Board

Home ownership builds wealth in two ways: through the “forced savings” of paying down a mortgage, and through appreciation -- the rise in the home’s value over time.

The earlier you get in the game, the quicker you can get that appreciation working for you. The longer you wait … well, the consequences can be stiff.

’You’ll always be poor’
“If you rent, you’ll always be poor,” declares real-estate cheerleader and bestselling author David Bach, author of “Smart Women Finish Rich” and the upcoming “The Automatic Millionaire Homeowner.” “The longer you rent, the less likely you are to buy. You fall further and further behind.”

Those who wait for the current housing boom to crash may be waiting a long time. Prices even in the most overheated markets could plateau or just rise more slowly in the future, maybe even returning to the 6% average annual gain the National Association of Realtors says is the norm nationally. In the Triangle market we've been experiencing very slow and steady gains at 3.75% and only recently have seen 10%+ appreciation in the summer of 2006.

Bach acknowledges buying a home isn’t always the best choice. Sometimes you’re smarter to hold off and rent, postponing the day when you graduate to the ranks of homeowner.

But how do you decide if you’re being prudent or chicken? Don’t expect most “Buy vs. Rent” calculators you find on the Internet to be much help. Outlays for maintenance, repairs, insurance and utilities almost invariably will be greater for a homeowner than a renter, yet many calculators fail to consider the full impact of these expenses. And some expect you to predict events -- like future appreciation or how much your down payment would earn if invested in stocks instead -- that you can’t possibly know.

It’s a crapshoot
When I bought my first house, for example, North Carolina was experiencing its worst-ever real-estate slump. The property lost about 10% of its value in my initial years of ownership, then recovered to post a 20% price gain.

Not bad, huh? Except after considering all my outlays for maintenance, repairs and insurance, and factoring in the tax benefits, I determined that I had barely broken even when compared with the rent I would have paid during those six years.

Had I invested my down payment in an index fund that matched the Standard & Poor’s 500 instead, I could have tripled my money in the same period.

The case has been almost exactly reversed with our current house: The stock market has basically been treading water for the past five years. But our home has steadily appreciated over the past six years in the Cary, North Carolina market.

Tax benefits help, but not for long
Besides asking for the impossible, many “Buy vs. Rent” calculations -- and most discussions of home ownership benefits in general -- exaggerate the potential tax benefit.

Here’s a dose of reality:

At least half of the nation’s homeowners get no tax break. Some own their homes outright, but many don’t pay enough mortgage interest and/or property tax to be able to itemize.

If you do get a tax break, it’s probably less than you think. What matters isn't the total amount you pay in interest but whether all your deductions added together exceed the standard deduction amount.

The standard deduction in 2005, for instance, gives married couples who file a joint tax return $10,000 in "free" deductions, even for those who don't pay a penny in mortgage interest. If you’re a homeowner with mortgage interest and other deductions totaling $11,000 last year, the only advantage you would have over a renter who paid zero interest is an extra $1,000 in deductions. If you're in the 25% tax bracket, the $11,000 you spent garnered you a tax break worth just $250 -- so your write-off is worth about 2% of what you paid.

Even if you get a decent deduction now, that tax benefit will tend to shrink over time. Most mortgages are front-loaded so that you pay less interest, and more principal, with each passing year. At the same time, the standard deduction keeps getting adjusted upward, squeezing your tax break from both directions.

4 keys to profitable home ownership
You’re most likely to win by owning, rather than renting, if the following are true:

· You plan to stay put at least three years and preferably more. In most markets, it can take three to six years for a home to appreciate enough to offset the costs of selling and moving. (Bach thinks anyone who knows he or she won’t be moving in the next year should roll the dice and buy; I’m a little more cautious, particularly in overheated markets where you may need to stay put even longer than five years to ride out a real downturn.)

· You’re psychologically prepared. Home ownership means dealing with whatever comes up -- from noisy neighbors to clogged plumbing. You can’t just call the landlord for help or pack up and move as easily as when you were renting.

· You have some extra savings. Home buyers who spend every dime they have buying a house inevitably are blindsided by repairs, maintenance and all the other costs of owning a home. Then they go into debt trying to keep up their current lifestyle. Smart home buyers make sure they have an amount in savings at least equal to two mortgage payments after the deal closes, and preferably much more.

· You manage your money pretty well. That “forced savings” aspect I discussed above works only if you can keep your hands out of the cookie jar. Otherwise, it’s too easy to drain away your wealth with home equity loans and lines of credit. If you’re the kind of person who lives on credit cards and doesn’t know where the money goes, you’d be smart to clean up your financial act long before you go hunting for a house.

Permanent Link | Comments (0) | Write a Comment | Send Link

Raleigh,Cary, Wake County Blog and Relocation Information

Categories

Subscribe

Recent Comments

Archive

Favorite Links

RealTown Blogs

Site Feed

Raleigh,Cary, Wake County Blog and Relocation Information

Buy vs. Rent...Why Homeownership is the way to go...