Nearly a decade removed from the onset of the Great Recession, the housing market appears to have finally gained the traction it so desperately needed to get back on track. Outside of a few outliers, nearly every indicator is in a better position today than it was just a few short years ago. And for what it’s worth, there may be no other demographic in a better position to take advantage of the value today’s real estate market offers than first-time homebuyers.
As far as I am concerned, there is no smarter financial decision millennials can make than buying their first home sooner rather than later. If for nothing else, the act of owning property will hedge against inflation and serve as a form of “forced” savings. However, the prospect of owning a home coincides with more benefits than those I just suggested. Here are just a few of the reasons I believe the values of homeownership are more attractive than they have ever been for first-time homebuyers:
Equity
While you could make an argument that renting is cheaper than owning over a short period of time, the same sentiment will not resonate with the same validity over anything longer than a few years. In fact, the idea of homeownership becomes much more attractive than renting the longer you live in a property. Every payment homeowners make towards their monthly premium simultaneously increases their equity share in the property and pads their savings. There is no reason millennials shouldn’t view mortgage payments as an investment in their future.
Tenants of a rental property, on the other hand, are destined to pad the savings of their respective landlords. Rent checks are distributed to the actual owner of the property every month and detract from the savings of the renter, leaving the tenant with nothing to show for their “expense” but more debt. That said, millennials are better off spending their hard earned money on their own home than on unsubstantiated, short-term expense that won’t provide value at a future date.
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What’s more, home appreciation rates have actually outpaced torrid rental increases in the most popular neighborhoods since 2012. The longer prospective first-time homebuyers wait on the sidelines, the more rental prices will rise. However, if they can afford to get into a home now, especially with interests rates being as low as they are, they will be able to capitalize on the increase in value their home is likely to experience.
Tax Incentives
If sound spending practices aren’t enough to appeal to first-time homebuyers, I am willing to bet saving money will, but not in the traditional sense. Instead of physically saving money for a rainy day, homeowners can take advantage of tax incentives not made available to renters. It is entirely possible, and encouraged for that matter, to deduct your mortgage interest from your income tax. In short, taxpayers who own their home can reduce their taxable income by the amount of interest paid on their loan. Otherwise known as the mortgage interest deduction (MID), this unique tax incentive has made owning a home much more affordable in the face of today’s rapid appreciation rates.
Consequently, the same appreciation rates making it slightly more difficult for first-time buyers to get into a home could really benefit those that take the leap. Outside of increasing equity, homeowners shouldn’t expect to pay capital gains when they go to sell the property (provided the residence hasn’t increased its value by more than $250,000 and if the owner lived in it as their primary home for more than two years). You would be hard pressed to find similar returns on just about any other investment opportunity. In the right market, there is no reason to believe appreciation wouldn’t trump the returns on an average rehab or wholesale deal.
Low Interest Rates
Any investor will tell you that cheap money can exponentially increase one’s buying power. And seeing as how low today’s interest rates are, first-time homebuyers are awarded an opportunity that wasn’t afforded to the previous generations. In fact, the interest rate on your standard 30-year fixed-rate mortgage is historically low; approximately 10% less than they were 30 years ago when Baby Boomers were buying homes. That means first-time buyers can either afford more home, or live more comfortably with smaller mortgage payments.
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Even with the Fed’s recent announcement to increase interest rates, first-time homebuyers are still in a great position to take advantage of cheap money. It would explain why 75 percent of the respondents in the National Association of Realtors’ most recent HOME Survey “believe now is a good time to buy a home.”
Truth be told, now isn’t a good time to buy a home for first-time buyers; it’s a great time. Of particular importance, however, is the speed in which first-time buyers decide to take the leap. The sooner they are able to make the transition from renter to buyer, the sooner they will be able to take advantage of the benefits I mentioned above.
