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Buying a New Home:
A Solid Investment!
Buying a new home is one of the most important decisions you will ever make and potentially one of the smartest. The home you purchase is not just a great place to live, it can be an outstanding investment.
|A Solid Investment
Potential for consistent, reliable appreciation is a very important consideration for any investment, and on this point, a new home is a winner.
Unlike riskier investments, which can become worthless virtually overnight, homes generally increase steadily in value. Over time the return can be substantial. For example, a new house purchased for $48,800, the median for new homes in 1977, was worth approximately $150,707 two decades later in 1997. Assuming that the value continued to increase at the same rate, the house would be worth $264,844 in 2007.
**Note that this example is based on national statistics. Housing appreciation rates and economic conditions in individual housing markets may vary considerably.
Compared to other investments such as stocks a home is also a relatively stable investment. It probably will not earn the spectacular returns sometimes generated by other financial vehicles, but is also unlikely to show the dramatic declines that are often associate with other investments. Homes tend to increase in value at a steady relatively slow pace, while alternatives can be extremely volatile.
Between 1969 and 1996, average stock values increased by as much as 35 percent in one year and dropped by as much as 24 percent. The average stock values dropped in 8 of the 28 years.
During the same 28 years, home values also experienced some ups and downs in individual housing markets. However, housing price appreciation on a national basis was stable and reliable, averaging 6.5 percent annually. The greatest annual increase in prices of existing homes was 14 percent; the smallest was 2 percent.
Only For Homeowners!
Unique tax benefits that apply only to housing have also made it stand out for decades in a field crowded with alternative investments. Under the tax code changes enacted in 1997, homeownership fares even better.
Both mortgage interest and property taxes remain deductible, and profits of up to $500,000 on the sale of a principal residence are excluded from tax on capital gains. In sharp contrast, stock dividends are subject to income tax, and profits on the sale of stocks, bonds and other investments are subject to a 20% federal tax rate for most investors. Furthermore, owning a home provides a valuable place to live. No other investment can match that!
Another benefit to home ownership is leveraging. A buyer can purchase a home with a cash down-payment that is only a small fraction—some loans allowing 0%—of the total purchase price. However, the return is based on the total value of the property. This is called leveraging an investment, and it makes the rate of return on a home much greater than on an equivalent investment where the buyer must put up the entire purchase price.
For instance, if a buyer makes a down-payment of $10,000 on a $100,000 home and the home’s value increases to $105,000 during the first year of ownership, then the homeowner’s equity—the value of the home minus any mortgage debt—has increased from $10,000 to $15,000. That’s a 50% increase in equity in just one year.
Building Personal Wealth
For most Americans, home-ownership is a fundamental first step toward accumulating personal wealth, and is the primary source of a household’s net worth. In 1993 home equity accounted for 44% of the nation’s total net worth, far more than any other investments, including retirement accounts, stock and mutual fund shares, savings bonds, rental property, and other financial investments.
Fulfilling The American Dream
Despite its financial benefits, a home cannot be completely valued in monetary terms. That is because it is so much more than just an investment. Not only is homeownership a stepping stone to a future of financial security, it provides a permanent place to call home and enormous personal satisfaction. It strengthens the nation’s people and its communities. It is truly a cornerstone of the American way of life, and the foundation of the American Dream.
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