Leverage Yielding Home Buyers Big Financial Benefits
In the most recent edition of NAHB HouseKeys, NAHB’s online publication for consumers, national real estate columnist Ken Harney provides information that builders can use to bolster their ‘buy now’ campaigns when he explains how prospective first-time home buyers can use leveraging to their financial advantage.
“There’s no question that buying a house — especially your first — can be a perplexing, even scary, matter,” Harney writes. “I remember buying my own first house years ago, toward the end of a boom period in prices and sales.”
Harney and his wife were concerned that after years of high appreciation their timing might not be the best and they really didn’t expect to see much gain in the value of their home for a long time.
The couple went ahead with the purchase anyway. The market was flat during their first year in the home, perked up a little in the second year but started moving ahead by the third year “and we knew we had done the right thing financially,” he said.
“One small downpayment had allowed us to purchase a relatively large asset — a three-bedroom house on a quarter-of-an-acre lot,” said Harney. “Even when the property gained only 2% or 3% a year, that turned out to be quite a log of gain in dollar terms, thanks to the ‘leverage’ or multiplier power of home real estate.”
Harney points out that leverage is one of the key financial differences between buying a house and buying stocks and bonds. In the example of a $250,000 house purchased with a 5% downpayment of $12,500, just one year of 5% appreciation — which has been roughly the annual appreciation rate in the U.S. since the 1970s — increases the home’s value by $12,500, providing a net $25,000 in equity.
If the home continues appreciating at the historical 5% average, its value grows to $275,625 at the end of year three, $289,406 at the end of year four and $303,876 at the end of year five.
Over that period, the initial $12,500 investment would have quadrupled to $66,376, he explains. By comparison, a bank account with 5% annually compounding interest would grow to just $15,194 by the end of year-five, for a gain of $2,694.
“Do I sound like I am enthusiastic about owning a home?” Harney asks. “I should be. I’ve owned a number of them, and have never regretted the then-scary decision my wife and I made to ignore the short-term discouraging conditions in our local real estate market, and to take the longer view and put our scarce dollars into a modest house.”
Harney also advises his readers that flat or down markets may well be the best time for buying a first house. “Prices tend to be lower and more affordable. Home builders and sellers tend to be more willing to negotiate, and mortgage rates — like today’s — often are lower than during high-inflation periods.”
To read the entire Harney article and other stories in the current issue of NAHB HouseKeys, or to subscribe, click here.
For more information, e-mail Niki Clark at NAHB, or call her at 800-368-5242 x8061.