Rent or Buy in This Insane Market?
This is a crazy market for Buyers.
Interest rates are still low, but house prices are skyrocketing. Cash and no contingencies is the name of the game. Multiple offers, dashed hopes…it is a brutal time to buy a home.
So, should you wait out the market until prices cool, and rent instead?
Buying Still is Better
Buying real estate is one of our country’s best wealth builders.
Anyone with the necessary credit score and a sufficient tax-return-documented income can jump into the real estate market. And using real estate to build wealth is encouraged by tax benefits.
So, let’s take a look at the many ways owning real estate is financially preferable to renting.
Financial Benefits of Home Ownership
#1. Federal Income Tax Deductions.
Mortgage interest and real estate property tax payments are deductible on your federal taxes. For married couples who file jointly, there’s a standard deduction of up to $24,800 in 2020; for single filers it is $12,400.
Those deductions off your gross income spell big tax savings that could easily add up to a couple months of paying rent. There are also benefits for those who itemize their taxes.
Be sure to check with your tax professional to see which type of real estate deduction would work best for you.
#2. Tax Benefits for Capital Gains.
In very basic terms, a capital gain is the amount you make when you sell certain big assets for more than you paid. And when you have a capital gain from selling an asset such as stocks and real estate, the federal government wants you to pay taxes on that profit. But because our government supports home ownership, if you're married and filing jointly, the property is your primary residence and you’ve lived in it for two years, and the gain on your home is less than $500,000, you won't have to pay a capital gains tax on that appreciation.
Here’s an example: If you buy a house as your primary residence for $200,000 and sell it for $300,000, that $100,000 gain you made is completely untaxed.
For most people (depending on their tax bracket) that could save you 20-25% -- $20,000 or $25,000 -- just because the asset you chose to invest in is real estate. And that savings is in addition to the $100,000 gain you made on your home’s value -- incredible!
In fact, the gain you make on selling your home is untaxed until your gain (see your tax professional to help calculate what your gain is) exceeds $500,000.
#3. Inflation-Induced Debt Destruction.
Inflation destroys the value of your debt, while your asset increases in value. To better explain how this works, you can check out more here:
#4. Built-In Savings Account.
Owning a home is kind of like having a built-in savings account.
When you pay down your mortgage every month you build your equity in the home. Plus, if after a few years of appreciation and principal paydown, you need some money for other purchases, you could choose to do a cash-out refinance, which allows you to tap into your home's built-up equity tax-free.
The interest rates on refinancing your home are much lower than what you would pay with a credit card purchase or other sources of debt, for example.
Plus, unlike with credit card interest, you can deduct the interest you pay on your larger home loan. Win-win.
#5. The Market Indicates Home Values Will Go Up, Not Down
More Demand than Supply.
Data shows that there remains a nationwide supply shortfall of about four million homes due to the prior recession and builders coming back so slowly into the game. Meanwhile, the number of US households has been increasing.
Thus, the supply and demand factors show that, at least for the short-term, demand remains extremely strong and supply remains extremely tight – keeping prices high.
This is particularly true in Florida.
The fact we have great weather and no state income tax has long lured retirees. And when COVID hit, many Americans decided to make the move to Florida earlier than originally planned, creating an influx of savvy, often wealthy potential Buyers who have contributed to a rise in property values throughout Florida.
This continued demand means it is extremely unlikely that these property values will go down. Some economists predict there will continue to be a population boom in Florida for the next 3-5 years.
Our Situation is Unlike the 2008-2009 Recession.
This situation is very different from the set-up before the 2008-2009 recession. Then, there was an oversupply of houses, not a lack of supply.
Plus, prior to the recession, home loans were being given out to virtually everyone, including many who could not afford them, to speculate on properties in communities that were overbuilt with no demand.
Today, it's actually the opposite. It is difficult to get a home loan, with multiple layers of documentation required to prove financial qualification. In fact, most lenders want your documents before you even get a prequalification letter.
Big Money is Invested in Rentals.
So, the factors causing the 2008-2009 recession just are not there today.
But even if there was somehow an influx of shadow inventory from COVID that suddenly hit the market to outpace the insane demand we experiencing, the impact would not be the same.
Why?
Because large institutional hedge funds have, over the past 5-7 years, commoditized the single-family home rental space.
So, if there was a drop in prices, hedge funds likely would come in at some point, and put a floor on prices by buying. And, funny thing, hedge funds are still acquiring single family home rentals at one of the fastest paces in history.
That means Big Money is still very much in the game, primarily because they expect inflation to go up, and real estate is a wonderful hedge against inflation.
Rebuild Value.
Let's look at this another way: rebuild value.
Today, it is more expensive to build a home than it is to buy an existing home.
Materials costs are sky high -- have you seen what's going on just with lumber prices?
So, existing home prices should remain high as long as it is more expensive to build than to buy. You should become hyperaware of prices when it is cheaper to build than to buy.
It Takes Time to Fulfill Demand.
The statistics show that there is currently an over- demand from 2 million homeowners for larger homes that can accommodate home offices.
At our current pace and supply, builders won’t be able to fulfill the demand for that type of housing for 4 to 5 years.
All while the data shows us that prices will continue moving up.
Bottom line: Unlike pre-recession, there is no housing bubble now, especially not in Florida.
Builders aren’t even buying enough developable land to catch up with our existing lack of supply. Data shows that house prices will continue to rise for the near future.
Downside of Renting
It’s understandable that Buyers are frustrated by today’s market, but deciding to wait for prices to come down, and rent instead, means losing out on the many advantages of home ownership. Frankly, it’s a big mistake.
When you rent, you are paying down your landlord’s mortgage so they can enjoy all those financial benefits. And while it’s nice that your landlord often has to pay for fixing something that breaks, that hardly makes up for the benefits you lose by putting off buying.
Plus, there are other downsides from deciding to rent:
#1. Missing Out on Low Interest Rates
Regardless of recent fluctuations, we are still enjoying some of the lowest interest rates in history. By not locking them in now, you may be missing out on the wealth-building opportunity of a lifetime. (Just ask my parents, who paid 12% interest on their mortgage to buy our family home in the 80s!)
Every 1% increase in interest rates impacts your purchasing power by 10%. So, if rates increase from 3% to 4%, your purchasing power for the exact same house falls from $300,000 to $270,000. That's $30,000 in lost purchasing power. Ouch.
Frankly, it's likely that, over the next 5-6 years, interest rates will significantly rise due to the Federal Reserve increasing the money supply by 40%+ in 2020, and the economy reopening.
But when you own a home with a fixed mortgage rate, you don't have to worry about that market fluctuation because you are locked in.
#2. No Control over Rent Increases.
As real estate prices rise, so do property taxes. And your landlord who owns those properties passes those tax increases on to you, their tenant, in the form of rent increases.
Further, if you're in an area with extremely low housing inventory, like Florida, increasing population growth alone will be enough to justify rents jumping annually.
It’s all about supply and demand. And that’s why so many folks get an annual notice that their rent has gone up $100 or more.
When you rent, you have no control over the cost of your housing. When you own, your monthly payment stays the same. You are in control.
#3. Not Building Your Own Wealth.
You know whose wealth you are building when you rent: Not yours. Your landlord’s.
Hang in There.
I have to be blunt. If you choose to rent in today's market, I believe you are literally throwing your money away.
Sure, it’s possible prices could go down, but that is highly unlikely to happen in the near future.
Demand is high, and supply continues to be low.
It will probably take years for demand to be satisfied. That would mean years of rising rents and failing to take advantage of the financial benefits of home ownership.
If you are a weary potential Buyer, the best thing you can do is get in touch with a top real estate agent, someone who is knowledgeable about how to compete in today’s crazy market.
Be aware that not all agents know how to do that, so you have some due diligence research to do before committing to one.
Then, once you have found the right agent, have them walk you through what it takes to succeed, and chart a new course. Do it now. Don't get discouraged. Commit to your long-term goals. The benefits are enormous.
If you need help, shoot me an email @ jon@jonkbrooks.com, and I can connect you to a top agent in your city.