When Alan Greenspan speaks, Wall Street and Main Street both listen, so catch this: "Over the past five years, the average capital gain on the sale of an existing home net of transaction costs was more than $25,000, almost a fifth of the average purchase price."
Greenspan chairs the Federal Reserve, an independent federal agency that both oversees most banks and strongly influences interest rates. A Greenspan comment can easily cause the Dow Jones average to rise or fall several hundred points, depending on what the good chairman says.
"While home prices do on occasion decline," said Greenspan in a speech to a community banking group, "large declines are rare; the general experience of homeowners is a modest, but persistent, rise in home values that is perceived to be largely permanent. This experience contrasts markedly from volatile and often-ephemeral gains in stock market wealth."
Greenspan estimates that 40 percent of new mortgage debt comes from refinancing, a device used by homeowners to stay where they are while taking cash out of their properties.
What does it all mean?
In basic terms, buying a home is a very good deal. To draw from Greenspan's estimates, if a typical home is worth $125,000 after five years, and $25,000 is due to an increase in value, then we could say that the home has appreciated 4.56 percent annually.
And while such annual price increases are commonly cited in the media, they miss the point.
Owners of our typical home did not pay the purchase price in cash. They borrowed, and so by owning they received two benefits: shelter and (usually) appreciation.
If we say that monthly mortgage payments, property taxes and insurance can be seen as "rent," then to figure our return on the investment -- the down payment -- we should look at how much cash was put into the property and how much value can be extracted.
For a first-time buyer -- most likely the purchaser of that $100,000 home five years ago -- the National Association of Realtors reports that in a typical case the purchaser would have put down 9 percent of the sale price . If we run the numbers, for $9,000 our typical buyer might expect after five years:
$25,000 in appreciation
NAR says that a typical first-time buyer has a $6,800 down payment (the rest of that 9 percent in cash paid up front went for closing costs). So, if we take the $100,000 purchase price and subtract $6,800, we are left with a mortgage of $93,200. At 7.5 percent interest, this loan has a monthly cost for principle and interest of $651.67 per month. At the end of five years, because of amortization, the remaining loan balance would be $88,183.45. In effect, the owner's wealth increased by $5,016.55 ($93,200 less $88,183.45).
Interest on the loan is tax deductible. In the first five years, the interest bill would total $34,063. If our buyer is in the 15 percent federal tax bracket, then tax costs would be reduced by $5,110. There would also be a tax deduction in most states, but not all.
Property taxes are also deductible. If we figure an annual tax of $1,000, then the total tax would be $5,000. Over five years, the owner would save $750 (15 percent) in federal tax payments.
Let's see: We invested $9,000. At the end of five years we have $6,800 in home equity from our down payment, $25,000 in appreciation, $5,016 in amortization, $5,110 in interest-related tax savings, and $750 in reduced federal taxes because of local property tax payments. The grand total: $42,676 -- not counting state tax deductions.
Over five years, the buyer who put in $9,000 would have benefits worth $42,676 -- a 36.5 percent annualized rate of return.
Will everyone do so well? No. Is it possible to lose money with real estate? Yes. Will some people do better than the example used here? Yes. Does past performance guarantee future results? No.
The bottom line: Real estate is typically a far better investment than annual price increases suggest, something brokers ought to trumpet and owners ought to enjoy.
The Common-Sense Mortgage
The latest edition of The Common-Sense Mortgage is now available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, previous editions have been described as "virtually in a class by itself" (The Philadephia Inquirer) and as "one of the best available guidebooks to the realty financing jungle," (The Los Angeles Times).
Whether financing or re-financing, whether you're a borrower, broker, or loan officer, this money saving, easy-to-read and well-organized guide is a necessity for anyone in the real estate marketplace. For additional information, press here.
Question Of The Week
Q: We listed our home with a local broker, but because a job offer has fallen through we have decided that we no longer wish to sell. What's our next step?
A: Before taking any steps, review the terms of your listing arrangement. Is there a provision which allows early termination? If yes, under what conditions?
A listing agreement is a contract which must be honored by both brokers and sellers. From the broker's perspective, time, services, facilities, and cash are required to market a home whether it sells or not. An early termination reduces the broker's ability to re-coup his or her investment, a situation which suggests that the broker is entitled to some level of compensation, especially for actual costs.
Most brokers -- though not all -- would quickly honor an early termination request that includes fair compensation. The broker's goal is to have a continuing stream of business (and income) in the community, prospects not enhanced by a messy contract dispute with a consumer.
Bottom line: Review your agreement and speak with the broker. The usual result should be acceptable to both parties.
Weekly Resource
According to NAR, nearly 30 percent of its 730,000 members have individual web pages -- that's more than 200,000 different ways to market realty services online.
In many cases, realty pros not only have web pages, they also design them. Such design requires a careful use of HTML, something where an errant backslash or incomplete symbol can cause a page to look like pop art.
There are several good HTML validation sites online -- WebSiteGarage.com and NetMechanic.com are both excellent. But an alternative -- one that will save a huge amount of time and irritation -- is to have a validation program on your computer.
The best I've seen is HTML Power Tools by Tali.Com. The program works wonderfully, it's easy to use, and the company has actual people who promptly read and answer e-mail. This is the way products should be sold online, and it's refreshing to find a site that offers responsive customer service.
Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.
There Are Big Profits In Real Estate, Says Fed
