Why is buying a home still a good money move even with prices and interest rates rising?

Why is buying a home still a good money move even with prices and interest rates rising?

Entering the US housing market has become more difficult, but for those who have been able to get in, the benefits have often been huge.

Investment experts have long said that one of the best reasons to buy real estate is that it retains its value more than other investments, such as stocks, when inflation rises.

This was true during the rise in inflation of the past two years. The median home value, that is, the value of a home minus loans made against it, such as mortgages, jumped 44% between 2019 and 2022, the Federal Reserve reports. The Fed only considered primary housing in this analysis.

Largely for this reason, the median net worth of US homeowners was $396,000 at the end of 2022, compared to $10,000 for renters.

The Standard & Poor’s 500 index rose by about 32% from the end of 2019 until the end of 2022, without counting the dividends paid by the index companies. This is also a strong performance. But stocks have been more volatile, in part because their performance is closely tied to factors such as corporate earnings and investors’ views about the future of the economy.

“In a low-growth, high-inflation environment, real estate is a very strong investment,” Jimmy Butmer said. He is the chief investment officer at Creative Planning, a wealth management and financial advisory firm that works with clients whose combined wealth amounts to nearly a quarter of a trillion dollars.

He adds that even under conditions like the one we are experiencing today, where growth is strong and inflation is high but not at the level it was a year ago, real estate tends to perform well compared to stocks and bonds.

The sharp increase in home values ​​also means that the housing market is becoming a larger and larger contributor to wealth inequality.

It’s such a powerful tool for creating wealth, even in tough times, that financial experts told NBC News they are advising clients to strongly consider purchasing a home even with prices at all-time highs and mortgage rates at their highest levels in two decades.

“The perception people have is that this is a bad time to buy given the level of prices as well as interest rates,” said Jason Obradovic, chief investment officer at New American Funding. But he said that’s not necessarily true. One reason is that if mortgage rates fall, rates will likely rise in response.

“We haven’t had much inflation, yet real estate prices have gone up a lot,” Obradovic said.

The annual inflation rate in 1980 was just over 14%. Mortgage interest rates in the same year exceeded 16%.

“Interest rates have been lower for about 40 years in a row, and that has obviously caused property values ​​to rise because people can afford a much larger payment.”

Obradovic says lower interest rates are inevitable because the Fed knows the U.S. economy needs them in order to achieve any kind of growth.

“When interest rates go down, you have the ability to refinance at a much lower rate,” he said.

When interest rates fall, rates are likely to rise again because it will be less expensive to get a mortgage. This means – for those who can afford it – it may be better to buy now rather than wait.

“If you rent, it will probably always go up,” he said, referring to the cost of rent.

Both Obradovic and Batmir make a similar point about the role a home can play in a person’s finances in the long term. For many people, a home becomes a kind of forced retirement savings account, both said. Every time they make a mortgage payment, they gain equity in the home, and the longer people own their homes, and the longer prices rise, the more value they can get by taking out a home equity loan or borrowing against the value of their property. a house.

“The great American dream of home ownership is still alive and well, and is a key component of what drives wealth for your average family,” Butmer said.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *