For many people, buying a first home is a rite of passage. It's a foot firmly planted in independence and on the path to success, a true part of the American dream. But as many first-time buyers are coming to realize, it's more than just the end-goal of a journey toward financial independence. Buying a home, particularly your first home, just makes good plain sense, now more than ever.
Potential first-time buyers may be intimidated by today's changing housing market. Isn't it just better to "play it safe" and keep renting in case home prices fall? If you buy now, will you be paying too much?
First, these are valid considerations. Even those who have bought and sold many homes ask similar questions. But the truth is that today's economic environment makes it an excellent time to buy. Interest rates are low by historical standards, there are lots of choices, and sellers are offering incentives.
Perhaps, as a first-time buyer, you want to wait until prices drop lower. Actually, if you continue to wait, you may never be able to afford to get into the housing market. The truth is, even a small uptick in interest rates can wipe out any gains from falling prices.
Consider this example: If you decide to wait to purchase a home and the price were to drop $10,000 from where it is today, you could still end up losing money. How? If interest rates were to move up half a point during this period, the savings on the reduced home price would be more than offset by the higher monthly payment you would be making over the life of the loan.
Interest rates currently stand at about 6.5 percent and are extremely favorable for buyers. In fact, they are hovering near 30-year lows. But waiting to time the market is a dangerous — and losing — game. Even those who follow the market for a living can't figure out when interest rates will bottom out. If they could, they would all be multimillionaires. Because interest rates are near historic lows, it is much more likely that they will head higher in the future as opposed to moving even lower.
Now consider the current rental market. During the past few years, many rental units have been converted to condos, resulting in fewer rentals on the market. Less supply, higher prices. Each year, your rent can easily go up 5 to 10 percent. Where is the economic security in that? When you buy a home, you're also locking in price stability, knowing that you will pay the same monthly payment for the life of your 30-year fixed-rate mortgage. Plus, renting doesn't get you the investment or tax benefits of homeownership.
The best way to build household wealth is to own a home. Once you do, you are able to take advantage of generous tax deductions, and your equity begins to build. Your home will appreciate in value over the years, and eventually you can use those gains to sell your starter home and afford to move into a bigger house. Remember, it's called a starter home for a reason. With so many homes on the market to choose from, your best strategy may be to scale back expectations for your dream home. After a few years, you will be able to leverage this investment and buy a larger house.
The truth is, buying your first home just makes good sense. Housing is always a smart investment, and it is by far the best way to use a small amount of money for a big return. Interest rates are historically low, and the selection of homes on the market is plentiful. Do your research and you'll come to this conclusion: In today's market, the real risk isn't in buying a home, it's sitting on the fence.
Keith Grant is president of the Memphis Area Home Builders Association.