Should You Invest In A Home In 2013?

Just like other investments, real estate has cycles. After the housing collapse, many are wondering if real estate is too risky. That’s understandable! Many are concerned that the market will collapse yet again before it gets stabilized. Here are some things to consider when trying deciding if home ownership is really for you in 2013.

Will real estate prices rise in 2013?

In order to get a clear picture, we have to look at was causes housing prices to rise. Supply and demand are the most obvious factors. When there is more supply (meaning more property listings), but there aren’t enough buyers, the price of homes typically goes down.  If there are more buyers and not enough listings, home prices go up.

What causes the situation where there are more houses for sale and not enough buyers so that home prices fall? The main factor to consider is the overall economy. If the economy is sluggish, if people aren’t finding jobs or aren’t able to qualify for a mortgage, they don’t have the means to purchase a home. It doesn’t matter how low the interest rates go, if potential buyers don’t have a steady or adequate income, they are not able to buy. In a slow economy or recession situation, more foreclosures occur, further depressing the market. We are still in recovery mode. I foresee prices rising very modestly as we try to get our economy to stabilize in 2013. So, rising home prices in 2013 should not be a serious consideration for not purchasing a home in 2013.

Your Retirement Account is a great investment, but why not makes it work harder for you?

I have assisted several buyers realize their dream of home ownership in Lehigh Acres by utilizing their IRA account or 401-K. These savvy buyers realized that when they used their retirement accounts to pay cash for highly discounted properties here, they were not taking available dollars away from another investment.  They in fact were either leaving behind a property and lifestyle that was way too expensive and that had become a burden to them, or they were replacing one housing expense (rent), for another (taxes and upkeep of a home). Rent has no potential for a return. A mortgage or home ownership does!

There is research [link to pdf1 here] that shows that over the last 30 years renting has been less expensive than owning. But, if you look closely, the data also shows that if the renter invested the entire difference between the rent payment and a mortgage payment, the renter may have done better financially. Here are two challenges to consider using this research:

Today, renting is actually more expensive than owning a home in the vast majority of our country.

History has taught us that the overall majority of renters DO NOT invest the difference between their rent payment and a mortgage payment.

Current studies show that owning a home is NOT more expensive than renting a home. But even so, history shows that owning a home creates greater wealth.

Paying a mortgage creates what financial experts call ‘forced savings’. The Joint Center for Housing Studies at Harvard University released a study in 2011 titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners by stating:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.” Click Here

This is a very interesting and in-depth study. You may download the pdf here.

It’s Tax Time. Yes there are tremendous Tax Advantages to investing in a home.

Whenever you invest in something, there is one tax that can be very pricey ~ capital gains. While other investments may be easier to sell, such as precious metals, stocks, etc., this easy liquidity can come at a high price. Capital Gains Tax is the tax you pay on any financial gain you receive from the investment after the sale. This tax doesn’t apply the same way when you sell your primary residence:

Theresa Palagonia, a CPA and the Accounting Manager for the firm G.S. Garritano & Associates, was gracious enough to explain the Home Sale Exclusion Rules for the rest of us:

“You may qualify to exclude from your income all or part of any gain from the sale of your main home.

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

You meet the ownership test.

You meet the use test.

During the 2 year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions listed above.

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements. (Special rules apply for joint returns.)

Ownership and Use Tests

During the 5 year period ending on the date of the sale, you must have:

Owned the home for at least 2 years, and

Lived in the home as your main home for at least 2 years

Certain exceptions exist in which you may qualify for the exclusion without satisfying the tests listed.”

Of course there are several other tax benefits that you may qualify for as well.

All investments have risk factors. I am not predicting that real estate will see the same levels of appreciation that we saw back in 2006. I do believe, however, that the market will rebound strongly. Just like back in the late 1990′s when people thought gold was dead as an investment, it rebounded and was once again a very profitable investment. Adam Hamilton wrote a great essay that pertains to the gold investor mindset. It can also be applied here. He stated, 展e believe there are three critical dynamics that must be examined periodically for any existing investment holding and also analyzed for any new potential investment opportunity. These dynamics include current valuation, supply and demand fundamentals, and exogenous factors.”

Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in home ownership as a sound investment will also be rewarded. What has history taught us? That perhaps the best time to buy may be when everyone else is saying not to.