by Stacy Francis, CFP®, CDFA
My cousin had his house appraised today, and he was not happy. Of course, he’s far from the only one feeling this way. With the US real estate markets free falling like rocks dumped from skyscrapers, an increasing number of people are growing wary. Very wary.
For years, everyone I’d meet would urge me to buy, buy, buy. Few investments were performing better, and what could possibly beat an investment that you can live in and enjoy while it makes you money?
Today, it’s a different picture altogether. In San Diego county, for example, the median house price dropped from right below $500,000 to the current $390,000 (more than 20%), in only a year. We are all familiar with the market in Detroit (my husband and I just purchased two houses there for a total of $30,000), and overall it is not hard to see why people are nervous. Still, while a nightmare for many, this market presents excellent opportunities for those who have been waiting to buy. But apart from timing and prices, what factors should be considered when faced with this decision?
First of all, there is the issue of fixed vs. variable expenses. While many landlords insist on one-year leases, some will go month to month as well. This is a good option if your income situation is shaky, or if you may be relocating shortly. If, on the other hand, you have a steady income and are set on staying where you are, it might be more beneficial to invest in a house rather than dumping a considerable amount of money into rent each month. After all, the real estate markets are going to turn around sooner or later, and when they do, your investment will start to pay off.
It is also worth mentioning that houses are some of the most marginable investments out there. If you are a knowledgeable investor and tend to score high returns on your investments, it might work to your advantage to buy a house, get a mortgage, and invest the money. As long as the yield from your chosen investment is higher than the 5-6-7% you pay for the mortgage, you can walk away with the difference — and a sunny smile.