Posted October 12 2011, 4:39 AM PDT by Windermere Guest Author

Then and Now, Comparing Home Ownership Costs

Posted in Buying, Selling, and Market News by Windermere Guest Author

HouseMoneyIn recent years, real estate has become something of a polarizing topic; there are those who argue that it’s still a worthy long-term investment with tangible benefits; and others who don’t see the value of owning a home, financial or otherwise. Regardless of which side of the argument you come out on, housing is a major part of our national economy. Furthermore, people are always going to need a place to live, so it’s a worthy discussion to be had.

There are a number of catch phrases that have become quite popular amongst real estate agents and media alike, such as “now is the time to buy” and “it’s a buyer’s market”. For some people, right now is a great time to buy a home, but for others, it’s not. The point is that buying a home is a personal decision based on each buyer’s unique circumstances. There’s no “one size fits all” model when it comes to real estate, so the best you can do is arm yourself with the right information so you can make the best decision for you.

With this in mind, we thought it might be interesting to compare today’s real estate market with that of 2006 when housing was at its peak. Five years ago, home values were soaring, sales were frenzied, and home ownership was at an all-time high. Inventory levels simply could not keep up with demand, so bidding wars were commonplace and homes flew off the market in record time.

Today’s market is very different. It’s important to remember that all real estate is local, so markets can vary greatly – even within a single city – but there are some general trends that we’re seeing across the board. The first is home prices; very few areas were spared from the effects of declining prices. Inventory levels in recent years have also been higher than they were in 2006 and the average amount of time that it takes to sell a home is longer. All of this points towards this being a buyer’s market. Other buyer advantages include historically low interest rates and strong affordability. With this in mind, here are some interesting stats to consider:


  • The average interest rate on a 30-year-mortgage today is 4.13%(2) and in September 2006 it was 6.41%(2)



  • A $400,000 house today would have cost $642,650 in September 2006(1) which is a difference of $242,650. *The following scenarios assume these home prices.



  • Using the above home prices and interest rates, the monthly payment today would be $1,939.76 and in September 2006 it would have been $4,024.02 – a difference of $2,084.26 per month.



  • The $2,084.26 per month savings adds up to a total of $750,333 when multiplied over the term of a 30-year loan.



  • If today’s buyer took out a 30-year-loan at the current interest rate (4.13%), but made the same monthly payments as the buyer in 2006 ($4,024.02), the loan would be paid off in just over 10 years – the buyer in 2006 would still have almost 15 more years of payments.


1) calculated using FHFA figures for the West Coast in September 2011

 

2) from FHLMC website for September 2011

The math above is compelling, especially when you consider how much money is saved on compound interest over the life of a 30-year loan for the same home. But regardless of what the numbers show, buying a home is much more than a financial decision, it is one that is personal and should be reflective of each individual’s needs and circumstances. Unfortunately, we don’t have a crystal ball and cannot predict what interest rates are going to do or how the market is going to grow and change, but we do know people will always need a place to call home – and as long as that is the case – we will be here to help them.

By Dan Givens

Dan Givens is the designated broker for the Windermere Northwest group of six offices in Seattle. He has worked in real estate for the past 17 years, following a 25-year-career in the apparel industry. Dan's love of numbers is not a treatable condition so he has chosen to just accept that spreadsheets are a part of his life.


7 Comments

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  • Great points Leanne!
    I completely agree. Owning a home for many is a very emotional as well as financially motivated decision.
    We will continue to do our best to provide education and information for people making the important leap toward home ownership.

    Yours,
    Tara

    Posted March 09 2012, 1:55 AM by Tara Sharp

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  • Dan and Jim, I keep meeting people this year who HAVE NOT refinanced their homes, and can.

    I think people have been so overwhelmed by the economic conditions, that they haven't realized they could actually refinance and save money each month. A good mortgage person can help to evaluate those situations. Far too many people are sitting on a mortgage of 5.5%, or even higher, that can qualify for a better interest rate, at little or no cost! There are also programs available for many people who owe more than their property is worth.

    Posted March 09 2012, 12:43 AM by Leanne Finlay

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  • Dan, good points. I think this is truly a time capsule statement of recent years: "In recent years, real estate has become something of a polarizing topic; there are those who argue that it’s still a worthy long-term investment with tangible benefits; and others who don’t see the value of owning a home, financial or otherwise. "

    No one could suggest that there hasn't been strong reason to agree that the financial impacts of homeownership have been hurt in the last several years, but an individual drive to own a home as "more" than a place to live, is nearly as strong a drive as the human drive to breathe, to eat.

    Shelter to many, is more than just a safe place to live. It is also something that has as many different meanings as there are people.

    Something you own, even if paid for over time, is something different than renting and paying for flexibility. To many, that difference is important.

    What has happened in our society that so many arguments are happening over things that are very personal choices? Education and information is important, but polarizing arguing? No, that is just destructive.

    Posted March 09 2012, 12:34 AM by Leanne Finlay

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  • Thanks for the post. This wasn't a case study, rather just an observation of the difference a few years can make in the cost of home ownership. Like you, I would assume that everyone who could qualify would have refinanced by now. Unfortunately there are a whole bunch of folks who weren't so fortunate. I don't give any financial advice (if you could see my portfolio you would understand) but I would encourage anyone buying today to take advantage of the fifteen year rates. It's almost like free money! Thanks again for the reminder about the power of compound interest.

    Posted January 20 2012, 8:00 AM by Dan Givens

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  • Dan, nice analysis. Sounds like the 2006 buyer couldn't refinance. Tough. Your 2011 buyer pays $750,000 less for his identical home. Does he just pocket the $2000/mo savings to devalue for 30 years at the 1-3% annual rate of inflation rate? Some would. Many buyers would consume some and invest some. Investing leads to a more substantial 30-year difference in wealth outcome for the two buyers than just their costs for home equity and mortgage interest. Taking the scenario a next step, the 2011 buyer invests in whatever way -- improving the property or funding her retirement -- and achieves a 2% return with her savings, she ends the 30 year period with just over $1 million on hand 30 years later, 33% more than she saved compared to 2006.

    Posted January 17 2012, 2:45 AM by jimbilbao@gmail.com

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    • Thanks for this useful information. excellent post with great resources! This is by far one of the most comprehensive posts i've seen here and look forward to more.

      Posted June 09 2013, 2:13 AM by intrix media

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  • Thanks Dan for bringing good solid information to the table! Love the comparisions and arming people with solid informtion to make educated decisions that will lead us on the continued path of recovery.

    Posted October 12 2011, 6:05 AM by Starla Shaulis

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