- The Washington Times - Wednesday, April 13, 2005

For the first-time home buyer, the questions will crop up at some point: Should I wait to purchase? Will the home prices drop? Will they escalate more? Will interest rates change?

These are all very valid concerns, and I’m not going to wave them off or point to the historic appreciation of real estate overall and advise a buyer to just dive in.

In an escalating market, buyers are always afraid of buying now and then having the market turn, leaving them caught with a mortgage worth more than the house. It has happened in the past, it will happen in the future. It’s part of the natural ebb and flow of the real estate cycle.

Unfortunately, someone’s going to get caught between a seller’s market and a buyer’s market. It’s bound to happen.

No crystal ball is necessary. To determine whether a seller’s market is likely to continue, look at the basic structures that keep it going: job growth and the supply of houses.

If job growth is on the upswing, but the supply of housing is not matching this growth, that’s a good sign that the escalation of prices will continue. This is what is happening in the areas surrounding Washington right now.

But when you start hearing about rebates, free upgrades, and cash back from builders, the market is discontinuing its upward swing and turning to a buyer’s market.

The caprice of the market notwithstanding, there are several reasons why the ownership of real estate is a wise move.

• Building equity. In either a buyer’s market or seller’s market, homeowners will always be able to build equity through paying down their mortgage. As you move closer to the end of your mortgage, you actually have something to show for it — unlike a renter.

If consumers get caught in a declining market, historically, it’s usually for the short-term and it will recover, continuing its traditional inflationary move upward.

Those who own property for a prolonged period of time find equity growing through debt reduction and through inflation.

While homeowners might not stay in the same house and pay off the mortgage in that home, the equity buildup provides them with the funds for an even larger down payment for that final home where the mortgage will be paid off.

At some point, you will owe less than the value of the home and eventually, it could be completely paid off.

This equity makes up the lion’s share of most Americans’ financial security. It is the reason for the American dream of home ownership.

• Appreciation. Appreciation is the second reason why a home is a great place to put your monthly income. Most people have to pay some money for living somewhere. It usually is a mortgage payment or a rental payment. If you’re renting, then you’re not letting your income work for you. Instead, you’re providing income for someone else through that rental payment.

As your home appreciates, the return on your down payment and the cash you’re paying into that home each month continues to increase.

For instance, if you purchase a home for $200,000 with 10 percent down, your $20,000 down payment is now going to increase in value according to the leveraged amount of $200,000. Thus, if it grows at 3 percent per year (which is half of the national average) the cash return the first year is $6,000. That’s a 30 percent return on your $20,000 down payment.

As each year passes, the return on investment grows and grows.

• Tax benefits. A third part of the wealth-building power of real estate is through the tax savings/deductions you’ll receive for purchasing a home.

For most taxpayers, the interest and taxes paid on a home are completely deductible from your taxable income, creating a substantial reduction in your tax bill. You’ll never get that benefit from renting.

• Investment return. Finally, if you’re investing in real estate, there is another benefit. Someone else’s money is growing the above three benefits to you. The rental payment is increasing the equity, allowing the benefit of appreciation and paying the taxes and interest on the mortgage.

M. Anthony Carr has covered real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Post questions at his Web log (https://commonsenserealestate.blogspot.com).

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