Thursday, September 23, 2010

Buying a Home Now Makes Sense

By Karl Case, professor emeritus of economics at Wellesley University & co-creator of Standard's & Poor's Case-Schiller housing index:



For people with a realistic version of the American Dream, buying a house now can make a lot of sense. Think of it as an investment.




  • The return on that investment comes in two forms. First, you live in the home and so it provides you with a real flow of valuable services. The 2nd part of the yield on investment is the capital gain you receive if the home appreciates and you sell. Gains are excluded from taxation if the property is a primary residence and the gain is less than $250,000 for a single filer or $500,000 for a married couple filing jointly.



  • Do the math. Four years ago, the monthly payment on a $300,000 house with 20% down and a mortgage rate of about 6.6% was $1,533. Today that $300,000 house would sell for $213,000 and a 30 year fixed rate mortgage with 20% down would carry a rate of aboput 4.2% and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000.

Even if home prices have not fallen 25-30% in the area you want to live, interest rates are as low as they were when Dwight Eisenhower was President. Less interest is less monthly payment and thousands of dollars less in interest over the course of the loan. AND, no matter where you want to live, home prices have fallen.