I’ve been getting asked this question a lot lately. With the market apparently on the mend and prices even rising in most markets, the change has led many would be buyers to the inevitable question, “Should I buy now?” After waiting and saving while the prices seemed to do nothing but drop, buyers wake up today to find multiple offers and a scarcity of available properties. Where once buying seemed like catching a falling knife, now buyer’s worry that buying now is a bit of a sucker’s bet; tight inventory and low rates lure unsuspecting buyers to buy, only to have a flood of foreclosures of some other event cause prices to deteriorate further. What’s a buyer to do?
To answer the question, let me get out my crystal ball…
As I gaze into the future, I see clouds, but wait! It’s coming clearer… yes I see it now… you should definitely…
OK, I don’t have a crystal ball and I can’t predict the future, but I can say that interest rates are crazy low and that makes borrowing money is essentially free. Free? Yes, free and in fact better than free because the Government is going to pay you to borrow for a home. Consider inflation. The Federal Government’s stated target rate for inflation is 2% annually. Interest rates are approximately 3.75% so the cost of money is 1.75% right? (the difference between inflation and the rate you are borrowing) Wrong. Core inflation is 2% but core inflation excludes what economists like to call “volatile food and energy.” Last time I went to the market, I didn’t get to exclude rising food costs from my budget and food is more expensive now than ever, don’t you agree? And every time I fill up my tank it costs me $4 a gallon or more so I can’t exclude energy either. No, real inflation is probably running around 4%. That .25% spread between the interest rate and real inflation is money in your pocket.
“But Tim, what if rates rise just a bit, then your argument is out the window isn’t it?” No. Here’s why: the home mortgage interest deduction. Because property taxes and mortgage interest are tax deductible, when you pay your taxes you will reduce your income by the amount you pay for those two things. Since that expense comes off the top of your taxable income, which is taxed at the highest rate you’ll pay, you will reduce your tax obligation by that amount times whatever tax bracket you are in. So for example, if you are paying $15,000 in interest and property taxes and you would normally pay 28% on that money if you didn’t pay the $15K towards interest and taxes. Therefore, you would pay an additional $4,200 in taxes ($15,000 x .28). So not only are you borrowing at or around the inflation rate, you are also saving by reducing your taxable income.
“That sound good Tim, but out of curiosity are there any other benefits?” Sure! By virtue of now having a substantial tax write off, you are going to stop using the 1040 Easy form when you pay your taxes, which limits you to taking the standard deduction. This means you will use the standard 1040 form and you will have many other deduction possibilities to further reduce your tax burden. For example, all your charitable donations, both cash, like to The American Heart Association and non cash like clothes to the Salvation Army, are potentially deductible. The same is also true for the miles you drove for the Girl Scouts or delivering food to the needy… this is where a good accountant can help you tax plan, but it’s all made possible by having a large enough write off to begin with, and the home mortgage interest deduction is the ticket into better tax planning.
“But what if prices do drop more?” Look, anything is possible, but even in a worst case scenario and prices were to drop further, owning will have fixed your housing expense so you can budget accordingly. Rents on the other hand, will continue to rise. Who really thinks that rents are the same today as they were 10 years ago or they will be 10 years from now? So you want a prediction? here’s a prediction for you: your 30 year fixed rate mortgage being just that, fixed, and that will allow you to know exactly how much you will be paying 10 years from now for housing because it will be the same as you would pay in your first month of homeownership. There is security in that, wouldn’t you agree?. And this is all just talk about money. There’s the whole other discussion about planting roots, a man’s home is his castle and finding a good school for my kids, etc., etc.
There’s really no way anyone of us can predict the future and prices could drop, but you would be hard pressed to make a compelling argument that with the low prices and low interest rates of today, even if prices are rising, it’s never been a better time to buy than now.