Is Now a Good Time to Buy a Home?

With interest rates still near historic lows, it's time to weigh your options.

If you don't already own a home, chances are you've been fending off friends and family urging you to take the plunge now. It's still a rate-friendly environment, after all, and you don't want to miss out on one of the best investments money can buy.

So goes conventional wisdom. The truth is, however, buying a home isn't always wise. There are plenty of occasions when renting can cost you less in the long run.

"There are many advantages to owning your home -- but we do think that sometimes the advantages to renting are overlooked. Neither owning nor renting is the right choice for everybody at all points in their life," said Mark Obrinsky, chief economist at the National Multi Housing Council (NMHC), an industry group that advocates rental housing.

Deciding whether you should rent or buy the roof over your head depends on your finances. It also depends on how flexible you are and how long you plan to stay in the home.
Honey, I'm home

Housing expenses include both shelter costs and investment costs.

Renters pay only shelter costs, while owners pay both. Renters also have greater flexibility to move and more predictable payments; they won't have to shell out cash for leaky pipes or refinishing the floors. But owners reap the benefits of tax breaks and property value appreciation.

The greatest financial advantage to renting: avoiding hefty upfront fees like a down payment and closing costs, which are facts of life for the buyer. Down payments, remember, are typically 5 to 20 percent of the purchase price.

"When you buy, you'll put down a large chunk of your savings upfront, which is also money you now can't invest anywhere else," NMHC's Obrinsky said.

If you don't plan to stay in your house for a minimum of five years, you may not want to pay those transaction costs. If your job is likely to send you to London next year, for example, chances are your home won't have appreciated enough to offset closing costs.

"If you can find a place to rent that's close in quality to something you'd buy, the cost of renting tends to be slightly less," said Obrinsky.

As such, if your only criterion is quality of housing, and especially if you don't plan to stay long, go ahead and sign that lease. You'll avoid transaction costs and you can allocate your investment dollars into something more liquid, like stocks or mutual funds.
Trading up

For many renters, buying their first home means a reduction in lifestyle, moving to a smaller place and perhaps a less expensive neighborhood. If you're stuck on a particular neighborhood, but can't afford to buy a place, you may want to rent there until you've saved enough to buy.

But you also could buy your almost-dream house somewhere less glam and trade up in a few years. The key consideration, again, is how long you plan to stay. Renting indefinitely isn't the most financially savvy move. And real estate professionals say if you're planning to stay somewhere for five years or more, think hard about buying.

Unlike renting, buying a home provides a savings vehicle. Besides the built-in piggy bank, your down payment is an investment. If you put $40,000 down on a $200,000 house and its value rises to $260,000 over a 10-year period, you'll not only get back your $40,000 when you sell it, but you'll also receive the $60,000 it has appreciated.

Yes, some homes do depreciate -- but that's the exception, rather than the rule. According to the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie Mae and Freddie Mac, single-family home prices appreciated nationwide at an average 13.4 percent rate, from the second quarter of 2004 to the second quarter of 2005. OFHEO has tracked the nationwide average since 1976, and the figure has always been positive.
Taking the plunge now

Today's economy doesn't turn the tide entirely in favor of renting or buying. While interest rates have stayed low, the job market is fragile in some regions, so think twice before you make a financial commitment like a mortgage.

There are also tax considerations. Mortgage interest and property taxes are 100 percent deductible on your federal income tax return, and many homeowners save thousands of dollars each year.

Double-check, though, before you assume you'll get extra money back. Those deductions benefit only homeowners whose total itemized deductions exceed their standard deduction. For the 2005 tax year, that figure rose to $5,000 for singles and $10,00 for married couples filing jointly.

It's also worth noting that homeowners who sell their property pay no capital gains tax on the profit, as long as they lived there for two years out of the last five. Before 1997, homeowners paid capital gains tax on any profits from selling their home, unless the money was used to upgrade into a larger home. One caveat: You will still pay capital gains tax if you're single and make more than $250,000 on the sale, or married filing jointly and make more than $500,000.


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