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Housing is a key driver of the economy and continues to be the most solid investment for the majority of American households. Housing provides steady returns largely unaffected by the volatile movements of the stock market.
Low mortgage interest rates and a decline in the stock market are driving Americans in record numbers to purchase a home. Over the past few years, Americans have shown a readiness to pull their money out of stocks and put it into real estate-a wise and practical move that provides not only safety for their investment and but also a place to live in.
Homeownership is the traditional starting point for American families to accumulate wealth. The NATIONAL ASSOCIATION OF REALTORS reports that the median existing-home price increased 7.1 percent in 2002 and is projected to rise 4.8 percent this year. In the same period, stock indexes varied widely and unpredictably. Since record keeping began in 1968, the national median home price has risen every year, even during recessions and periods of sales decline. Typically, home values rise at the general rate of inflation, plus one- to two-percentage points.
Buying a home should be approached as a long-term investment, providing both equity accumulation and tax benefits over time. It's important to note that most of the country has never experienced even a temporary downturn in home prices.
The sharp changes in the financial markets over the last few years underscore the stability of residential real estate as a safe choice for consumers. Although it's possible for local housing markets to experience temporary price corrections, most of the peaks and valleys in home prices that deviate from a normal, gradual increase tend to smooth themselves out during the typical period of homeownership.
Dollar for dollar, the rate of return on an individual's cash down payment on a house is very substantial. Homebuyers typically use their own money to cover only 5 percent to 20 percent of the purchase price of a home, yet the home appreciation they realize is based on the total value of the property.
According to a report from Harvard University's Joint Center for Housing Studies, there is a dramatic increase in the rate of return on housing the longer it is held. For instance, the typical homeowner who experiences an annual home appreciation rate of 5 percent and who made a cash down payment of 10 percent will generally receive a 94 percent return on that cash after owning the home only three years. After owning five years, the homeowner's rate of return on the down payment increases to 225 percent; after 10 years, the rate of return jumps to 623 percent.
While the stock market has experienced wide swings in value over the past 20 years, home values overall have continued to rise steadily. They contribute significantly to household wealth and spending patterns.
Housing is not a quick-in, quick-out investment. When purchased for the long term, housing is one of the safest investments a consumer can make. In addition to the savings accumulated through a buildup of equity and tax advantages, a home provides shelter. No paper investment provides this benefit.
The Federal Reserve 2001 Survey of Consumer Finances shows the median net wealth of homeowners is $171,700, while the median net wealth of renter households is only $4,800. Clearly, owning a home is the best way for most families to build a nest egg.
The National Association of REALTORS® (NAR) 2001 Home Wealth Effect Survey of homeownership shows that for three out of four homeowners, their home represents a large portion of wealth. Many use the value of their homes when making important financial decisions.
The NAR survey also shows that the equity people build up in their homes gives them more confidence in the economy than the equity they build up in stock investments. The survey found that 16 percent of homeowners have increased their spending behavior because of equity in their homes.
Such behavior benefits the economy. Homeowners use their home equity to get cash for emergencies as well as for the purchase of big-ticket items. In addition, the capital gain people realize from the sale of their home is a significant source of down payment funds for most repeat buyers; those funds are also used for other purposes that stimulate the economy through consumer spending
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©1997 - 2008 Rockford Area Association of Realtors©
Information is deemed to be reliable, but is not guaranteed.
©1997 - 2008 Rockford Area Association of Realtors©
Information is deemed to be reliable, but is not guaranteed.