Q: I was wondering what your thoughts were in regards to buying a home today. What is your outlook for the housing market? We have seen prices jump recently and I was wondering if you think this will be a trend in 2013. Do you really think it is safe to buy a home as a good investment? - Ana, Morgan Hill, CA
A: Ana, no one knows exactly what will happen in the future, but with some solid research, you can make a fairly sound prediction.
For several years, after the housing crisis began, I announced numerous times, in my radio programs and articles, that buying a home was not a sound investment. At the time, there was no end in sight for declining property values.
However, I also predicted that in late 2011 and 2012 the market would settle down and possibly hit bottom and become a good time to consider buying again.
What we have at this moment is the “basketball effect.” Take a basketball and hold it up high, then drop it. That first bounce is the basketball's fastest upward bounce. During that first bounce, it begins to travel slower the higher it rises.
The real estate market has reached the bottom and you are seeing the initial bounce in property values. I see this upward trend in values continuing, but the market cannot sustain such rapid appreciation acceleration. Just as the basketball begins to slow after that initial bounce, so will appreciation .
Right now, there should be a rapid push upward in prices through late spring and maybe even into mid- to late summer of 2013. Once the ball's bounce begins to slow, expect a healthy 2 percent to 3 percent annual home value appreciation rate over the next few years in most areas.
Real estate is local. Some areas will do better than others, some not so much. Also, housing markets in some areas have yet to hit bottom.
To determine how your market will fare, you need to consider what your area offers in terms of jobs, rents and other economic factors.
Rent vs. buy
If you buy a $400,000 home with a Federal Housing Administration (FHA), 30-year, fixed rate mortgage (FRM) with a 3.5 percent interest rate and put $14,000 down, it will cost you approximately $1,733 a month in principal and interest.
In California, add about $416 a month in property taxes, $90 for homeowner's insurance and $402 for plus FHA mortgage insurance for a total payment of about $2,640 per month.
Your monthly homeownership payment would be about $150 to $200 more than the cost of renting.
For the purpose of this analysis, let's assume that you could rent the property for $2,400, which would mean renting the same property would be about $240 less than your monthly mortgage.
However, homeownership also comes with a tax deduction for the mortgage interest and property tax.
On this property, you would be able to deduct about $5,000 for property taxes and another $13,500 or so for interest for a total of $18,500 in tax deductions. Tax deductions reduce the income against which your tax is figured, not the tax owed.
Depending on your tax bracket, the tax deductions could save about $300 every month, which makes the buy-vs-rent cost a wash with both being nearly equal. A certified public accountant, enrolled agent or other tax professional can pinpoint your tax savings to the dollar.
However, you must also consider that your fixed mortgage payment for the next 30 years will actually drop once your home equity reaches a point where you can drop the mortgage insurance . That's a $400-a-month savings.
If you rent, unless you are renting from your parents or some other benevolent landlord , your rent will rise virtually every year and before long you'll be paying much more to rent than you'll pay to own your home.
If property values rise by 2.5 percent a year, you'll gain about $10,000 each year in home equity.
Consider your equity growth a nest egg for retirement, your kids' education or as a piggy bank of savings to offset your mortgage payment. Your expected equity growth will offset your mortgage payment to the tune of about $800 a month.
Do the math
So let's take your mortgage payment of $2,640, minus the tax break of approximately $300, minus the $800 in monthly appreciation and you have an effective payment that's little more than about $1,500.
Just try to rent the same house for that amount.
Now skip ahead 10 years. At a conservative 2.5 percent annual rate of appreciation, the home you purchased for $400,000 will be worth more than $512,000.
If you've made all your mortgage payments on time, your loan balance will be about $298,000 and you will have $213,000 in equity.
Rent the same home at $2,400 per month with a conservative annual 5 percent increase in rent and you'll be paying more than $3,700 by year 10.
Understand that you should consider real estate a long-term investment. Go to Las Vegas if you want to gamble by the minute.
Buying a home comes with closing costs. Selling a home comes with selling costs. If you buy a home now that you plan to sell in two to five years, those costs can offset your gains.
Unless you are a speculator, a Young Turk planning frequent career moves or someone who, for some reason, prefers to gamble don't buy real estate for the short term. Give the goose 10 to 15 years or more to lay the golden egg.