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We all know that in the long run, owning a home is typically a sound investment. But, with home prices rising does it make sense to buy now? I started contemplating this question after a recent conversation with a friend. She and her husband purchased their three bedroom, two bathroom home in 2005, then sold it by short sale in 2010. They moved into a more spacious four bedroom, three bathroom rental in a nearby town. It had everything they wanted; lots of living space, a great school district, fantastic neighborhood, and an awesome location close to the city’s downtown.

Difficult Choices to Make

rent vs buy grapnicMy friend and her family would love to buy the home they are renting, but with home values close to $1 million in their neighborhood, this is not a realistic option. So now what? Do they stay in their dream home and continue paying rent because it’s affordable and conducive to their desired quality of life? What if rent increases or the owners decide to put the home on the market? Should they downsize and sink their savings into a smaller home to gain more stability and start accumulating equity? Though it’s important to consider financial factors, personal and professional goals, in the long run, I think it’s better to buy and here’s why.

History Repeats Itself

In 1955 my grandparents bought a three bedroom 1.5 bathroom home in Berkeley for $13,000. My grandmother owned the home for 58 years before selling it in 2014 for $800,000. In that time the home value appreciated an average rate of 7.17% per year.

In 1978 when my parents bought their first home for $35,000,when interest rates were at about 14% (yikes). Today, according to Zillow.com, the home is worth about $356,000. In 36 years their home value appreciated an average rate of 6.56% per year.

Let’s look at something more recent and a shorter time frame. If you bought a home in 2004 for $550,000, the value today is probably around $720,000. In the past 10 years, even with the housing market crash, the home value would have appreciated an average of 2.66% per year.

Apartment Rental Options

According to just-released data from the RealPage® MPF Research Division Report, U.S. quarterly apartment rental rates are at a 14-year high, increasing 1.9 percent during the second quarter of 2014. In the Bay Area market, rents are up an average of 3-4 percent in the second quarter. The unpredictability and inevitability of rental rate increases continue to be a financial challenge.

There’s no guarantee of course, but homes have consistently proven to be a worthwhile long term investment.

Worth the Sacrifice?

Homeownership has historically provided a means for Americans to build equity and plan for the future. Tax incentives and the ability to set a fixed monthly payment add to the financial appeal. But, there are other reasons that homeownership continues to define the American Dream. Pride of ownership. Independence. Freedom. Emotional connection. Setting down roots. In the hearts and minds of most, homeownership will continue to be worth the financial and lifestyle sacrifices. The trick is to determine what amount of sacrifice is possible and what level of financial commitment is reasonable. A mortgage professional can help guide you through an evaluation of your financial profile so you can plan for the future, and the American Dream, with confidence.

photo lisa shaffer

 

Written by Lisa Shaffer. Lisa is a loan officer at RPM Mortgage Inc. in Alamo, CA.