I was talking to a friend recently about homeownership. He has never owned a home and because of what has happened in the real estate market he was thinking it is time to buy. As we were discussing the pros and cons of homeownership, I realized that people have many misconceptions about homeownership.
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The first misconception is it provides great tax benefits. Although, there are tax benefits to owning a house, the benefits are not as great as people make them out to be. Typically, when you purchase a house, you're allowed to deduct the interest on your mortgage and your property taxes. However, it is not a dollar-for-dollar reduction. For example, if over one year you've paid $5,000 in interest and property taxes and you are in the 15 percent tax bracket, your total savings is $750. That means that $4,250 is net out of your pocket. Of course, the higher the tax bracket the greater the savings. However, keep in mind that for high income taxpayers that may be in the 28 percent tax bracket or above, it comes a point where you actually start losing your deductions for interest and property taxes.
The bottom line is no one should buy a house just for the tax benefits. We have no idea what tax laws will be in the future.
Another misconception is that since housing prices in southeast Michigan are at dramatic lows — compared to where they were a few years ago — prices have to increase in the future.
Although I believe housing prices will rise in the future, that does not mean that they will increase more than the increased cost of living. At best, I believe houses will keep up with the increased cost of living. What has happened to housing prices over the last 10 years was the aberration. Because of many things, including the easy availability of mortgages, there was an artificial bubble surrounding home prices. I do not believe we will see that same bubble anytime in the near future. After all, the requirements to obtain mortgages have changed, and justifiably so.
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In the last decade or so, it seems that anyone and everyone could obtain a mortgage no matter what their credit or financial situation. That has changed dramatically and now people with poor credit or who have overextended themselves are not going to be able to obtain a mortgage. In addition is the unfortunate situation in which many have decided to relocate. Let's also not forget that many college graduates from Michigan universities are choosing to pursue their career outside of southeast Michigan. There is no doubt that these facts will be a damper on future housing prices.
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Nevertheless, with all the foreclosures and short sales, there is no doubt that this is an excellent time to buy a home. However, the key is to make sure you buy a home with your eyes wide open. That means factoring into the equation the true cost of owning a home, including all the repairs and maintenance associated with home ownership. In addition, there are other expenses to consider. For example, saving for retirement or a child's college education. You must make sure that you factor these items into the equation when you determine how much of a house you can afford.
There are some incredible deals on the market and for many people they are very enticing. However, don't make the mistake of buying the most expensive home that you can afford.
Do the homework ahead of time and make sure you know what you're getting involved in before you sign on the dotted line.
Rick Bloom is a fee-only financial adviser. Observer & Eccentric readers can submit questions at moneymatters@hometownlife.com. For more information, visit Rick's Web site at www.bloomassetmanagement.com.
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