Confidence, Math and Inertia

Homebuyer Associates October 2010 E-Note

Homebuyer Associates           www.homebuyerassociates.com

414.254.4129                         homebuyeba@gmail.com

Michael D. Holloway/Seamus Holloway

Lynn Sarver/Paul Wollersheim

Confidence, Math and Inertia

If you own a home and plan to sell it in the next few years, make friends with some Gen Y and X’ers and treat them well.  You need them more than they need you.

Last month I wrote that until Gen Y (and X) start to again purchase homes and condominiums that residential real estate sales will remain slow.  Home sellers who want to buy their next home can’t make that move until someone buys their home and that  “someone” most often will be a Gen Y or X’er.

I interviewed a few of the Y and X crowd and found they are concerned with what it takes to buy a home, how to buy a home and how to obtain financing.  Why aren’t they buying? – Confidence, Math and Inertia.

Confidence

The confidence level of Americans as measured by Gallup remained low (47%) for September.  A recent Wall Street Journal survey found that 56% of renters didn’t think they would qualify for a mortgage.  The survey found that in 2003, 83% of those polled found a home purchase to be a safe purchase.  Today that number is 67%.

If your confidence is low, and you don’t think you can get a mortgage and are not sure that buying a home is a good investment it is clear why the housing market is slow.  Yet, the September issue of Financial Planning magazine notes, “Just as people put too much faith in the wealth-building capabilities of their homes, they will now lose sight of how valuable home ownership can be.”  Don’t lose sight, get facts.

http://www.gallup.com/poll/143249/economic-confidence-remains-steady-2010-low.aspx

Math

What does it cost to buy a $200,000 home?  You need  $7,000 for a downpayment (3.5%), $4,000 for private mortgage insurance and $1,500 for closing costs.  Let’s round the number and say $13,000.  It’s good to have “skin in the game” so you will need at least the $7,000.  The balance can be buried in the purchase price if you buy right.

If you rent and invest the $7,000 at the end of 5 years you would have $11,019.00 (using the 9.5% historic rate of return – unlikely but we’ll go with history).  The investment market will return.

http://en.wikipedia.org/wiki/S%26P_500

If you buy a $200,000 home with a $7,000 downpayment your $7,000 would be worth $31,854.31 after 5 years (using the historic housing rate of return of 3%, again, unlikely in this market).  You would have also paid down your mortgage and built equity of $12,411 for a total of $44,265 – the power of leverage and equity.  The housing market will return.

http://claritree.com/us-home-appreciation-rates

It costs money to own a home.  When you rent it’s the landlord’s problem.  If you set aside 10% of the cost of your home value, it will cost you $20,000 over a 5-year period for maintenance.  Even with maintenance the benefit is $24,265 as opposed to $11,019.

When you sell you will have sales costs.  On a home that sells for $232,000 you can expect costs of $13,000 which is about what you would have taken for tax deductions for the 5-year period.  I consider this a “wash” with sales costs offset by tax deductions.  The benefit of owning is an additional $13,246 and you get to live in a place.

Inertia

Read Drive by Daniel Pink; Nudge by Richard Thaler or Predictably Irrational by Daniel Ariely and you will find a common theme for why decisions are made for us or why we fail to make decisions: inertia.  Inertia may be the reason Gen Y and X haven’t taken the time to get financial and real estate questions answered.  If they ask the questions, get the answers and battle inertia, they will increase their long term asset position by taking advantage of today’s real estate market.

Again, from the September issue of Financial Planning, “Housing, stocks and bonds all have their day, and right now is not real estate’s day.  …when asked if housing is finished as a way to accumulate wealth Flores (Flores Capital Management) says, ‘not even close.’

I’m reminded of a friend of mine at age 28, when I purchased my first home, who said he didn’t want to buy a home because he was going to move to the east coast.  He didn’t buy a home and moved East – 25 years later.

Most successful individuals or couples are going to eventually want to own a home/condominium.  The longer you wait the longer you delay increasing your personal wealth.  We can debate the fine points but unless you are a disciplined saver you are making an error by not taking advantage of the low rates and prices in our four-county area.  Having said that know that I’m the same person who told clients not to buy and not to pay prices higher than value during the bubble years.

Thanks for reading and if you found this useful please share it with a friend.