The following is the same advice I gave my son four years ago when he purchased his first home and the same my dad gave me over 30 years ago when I purchased my first home. I still thank my dad for having done this and Bob still thanks me as well. I am fairly certain you would do the same in four and in 30 years.
You really want to stretch yourself a bit when you purchase your first, second, or third home. It requires some minor sacrifices from a personal lifestyle perspective, but will pay huge dividends in the long run. On average, home prices increase by about 10 percent per year. Since the end of WWII, we have repeatedly seen peaks and valleys in the housing market. We have also seen that, on average, home prices have doubled every ten years. The recent downturn really was not much worse than some of the previoues drops. In fact, there have been worse, particularly following the Savings and Loan crisis of the late 1980’s. More importantly, right now we are in the midst of the most affordable home market in almost 30 years. I would venture say that we are likely to see gains in home values (in our region) more to the tune of about 15 percent per year for the next few years. Even using the more conservative 10 percent average, if you purchase a $250,000 home, you will see a gain of more than $25,000 per year. A home purchased for $450,000 will see a gain of $45,000 per year, etc.
Using current mortgage interest rates of about 5 percent, your mortgage payments plus taxes and insurance (referred to at PITI) will cost about $55 per month per $10,000. (This factors in the savings that you will have on your state and federal taxes based on a 25 percent tax bracket.) Your annual in costs will be roughly $625 per year for every $10,000 increase in price. If historical trends continue to play out, your increased costs of $625 per $10,000 will result in an increase in equity of $1,000. A $50,000 increase in mortgage would cost about $3125 per year with a $5000 potential increase in equity. At the same time, you will be living in a considerably more comfortable home than your current home.
I don’t know nor need to know your income level, but an average couple in this region earns a minimum of somewhere around $100,000+ per year. Assuming an annual cost of living increase of about two percent, this income increase by about $2,000 per year. It might be worth thinking about cutting back on some of your entertainment expenses for a year or two to broaden the selection of homes available and imrpove your ability to see increased gains in the long run.
Of course, this is simply a suggestion. I am certainly happy to show you homes in the whatever price range you’d like, but am certain you will thank me profusely in three to five years if you decide to look at the next higher tier of homes.
A recent Wall Street Journal article, entitled “A Toe in the Water” written by Dave Kansas gives a very good perspective on what it happening in the marketplace. Dave is located in London and would presumably suggest diving into the local Northern Virginia market based on our current trends.
Last week I sent a total of 22 listings in Arlington for one of my clients to review. When we got together yesterday to look at these homes, 10 were already off the market. They are looking in the $650,000 to $750,000 price range. This is probably above the typical first time homebuyer range and is not likely affected by the $8,000 tax credit. I also went out with another couple on Saturday looking in the $200,000 range. We had a list of about ten homes to see which I had check for availability Friday night. From this list, only two were available by Saturday afternoon and they were complete wrecks.
To learn more about your home as an investment, I suggest reading “The Automatic Millionaire Homeowner” by David Bach.
Let me know when you are ready to take advantage of this incredible market.
