Americans are waiting longer than ever to buy their first home.
According to Zillow, Americans are now an average of 33 when they decide to buy. But is this a conscious decision or just a lingering effect of the crushing impact the 2008 economic crisis has had on this age group? Some data suggests this is perhaps part of a larger shift in homeownership trends. The Census Bureau reports that homeownership is at a 48-year low, with only 63.4 percent of Americans currently living “the American dream.”
According to a 2016 study by Bank of America, 75 percent of first-time buyers said they did not want to buy a starter home. Although historically few buyers likely wanted a starter home, they were more willing to buy a home that only met their short-term needs instead of saving for even longer in hopes of affording a “forever” home.
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The economics of the starter home. Despite the fact that Bank of America’s study revealed that 76 percent of new buyers were driven by emotional reasons, there’s also a lot of financial sense in the decision not to buy a starter home.
In 2015, the average seller lived in their home for 9 years, but those younger than 35 reported owning the home less than five years. And sellers who owned their home for one to seven years said they sold the home for $30,000 to $35,000 more than their purchase price.
To rent or buy? One of the most common questions first-time buyers ask is whether they should rent or buy. For many financial advisors, this is a red flag, as the practical answer is so often “don’t buy” while the client’s emotional response is “buy.”
Zillow’s 2015 Breakeven Horizon reports that across the U.S., it takes an average of 1.9 years to break even on buying a home. This number can vary significantly across regions and home type — as Zillow points out, many young buyers purchase condominiums, which can increase the break-even period because of condo fees.
Although the analysis can be helpful, keep in mind that it is only considering one end of the transaction — buying the home. For short-term buyers who will need to sell their home before moving on to another, the analysis looks very different.
The five-year rule. Every real estate market is very different — places like San Francisco, Seattle, Denver and Austin, Texas, are frequently in the news for staggering growth rates. Meanwhile, locations like Detroit have had a rough time.
Should you buy today to avoid continually growing prices? Or is the market already peaking and overpriced? If you believe in Detroit’s recent resurgence, should you take advantage of prices while they’re still low?
No one can know for sure, but it’s important to remember you’re not just buying a house — you’re buying into the local market, and any changes to the housing market (both good and bad) are sure to impact you.
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Using the Boston market (relatively stable with moderate growth) as an example, here’s what a five-year holding period looks like using March data from Zillow:
The median home value is currently around $387,000. The five-year annualized growth rate is 4.1 percent. Based on these figures, assume the property was purchased for around $317,000 five years ago. If the property was sold today for the current average home value, the gain would be $70,000.
Now let’s take out a typical average 10 percent of the sales price for total selling costs, which is almost $39,000. The remaining gain is around $31,000. Even if you meet the requirements to avoid federal income taxes on the gain, many sellers are surprised to learn they’re still responsible for state and local taxes. In Massachusetts, this will be almost another $2,000, resulting in a potential gain of $29,000 for five years of home ownership.
This example also doesn’t include the costs of buying the home, condo fees, and ongoing repairs, maintenance and insurance. Closing costs alone for buyers can easily be around 3 percent of the purchase price, leaving the gain in this example to around $20,000.
So is it worth it? That is really up to you. For some, the risk/reward may not be there — a major repair or changes to the local market like the loss of a major employer or sudden influx in inventory could have a drastic effect on the outcome.
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But, of course, this analysis assumes a buyer is purchasing a home for financial reasons. As studies have shown, many people realize the decision to purchase a home is really an emotional one. Whether you need the math to work for you or not, it is important for buyers to realize the high costs of selling before banking on the idea of buying for the short term.
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How Much Money Can You Make From Your Home? originally appeared on usnews.com
