Parents and child smiling in front of their home

Is Buying a Home a Good Investment?

Carlos Miramontez, Vice President Mortgage Lending at Orange County’s Credit Union, offers insights to the many questions surrounding today’s housing market.

1. Is buying a house a wealth-building move?

Owning a home is how most Americans build wealth. A portion of every housing payment made by a homeowner is applied toward paying down the home loan balance (principal payment), which increases the equity in the home and helps to build a homeowner’s net worth.

In addition to the equity growth created by the principal payment, a home’s value can also appreciate as comparable homes in the neighborhood sell for a higher price than what the homeowner purchased their home for. The property’s increase in value also builds a homeowner’s net worth.

Unlike other investments, many homeowners avoid paying capital gain taxes when selling their primary/principal home. There are some stipulations, but if a homeowner has lived in the home for at least two of the last five years and the sales profit does not exceed the exemption amounts – $250,000 for single tax filers or $500,000 for joint/married tax filers – that sales income can be exempt from income taxes.

Lastly and according to the U.S. Census Bureau report and detailed tables on household wealth in 2015, Homeowners' median net worth is 80 times larger than renters' median net worth.

2. When does buying a house make financial sense?

A consumer should have sufficient funds saved for a down payment and closing costs, as well as the ability to pay the monthly mortgage payment and expenses related to the home (utilities, HOA dues, home repairs, etc.). Buying a house makes financial sense when a consumer can lock in their payment and successfully manage the total cost of owning a home… this can protect a consumer against the periodic/annual increases typically found with rent payments.

The need to have 20% of the purchase price saved for the down payment is no longer an obstacle as there are many home loan options where a consumer can put down as little as 3% to 5% - there are even 0% down-payment home loan options, such as Orange County’s Credit Union’s Zero Down Adjustable-Rate Mortgage offering.

Buying a home also makes financial sense when a consumer plans to live in the home for a minimum of three years and ideally five or more years. The longer a homeowner stays in their home, the more opportunity they have to build equity.

Owning a home also creates stability. Homeowners won’t have to face moving as a renter may when their lease term is up.

3. When does it NOT make financial sense?

It does not make financial sense to buy a home when the total housing payment (Principal, Interest, Property Taxes, and Insurance) exceeds the consumer’s financial ability to successfully manage the monthly house payments. For reference, mortgage lenders typically use a maximum range of 43% to 45% of the consumer’s total debt-to-income ratio to identify their ability to successfully manage their total debt.

Additionally, it does not make financial sense to buy a home if a consumer does not have sufficient liquid reserves to manage unexpected repairs for the home. This is of even greater importance when purchasing a pre-owned home that is older in age. One way to mitigate this repair expense risk is to consider purchasing a home warranty plan, which can insure the cost of repairs for major appliances such as water heaters, stoves, and refrigerators. It may also include systems such as HVAC, swimming pool, plumbing, and electrical.

4. Should buyers always consider the five-year rule before buying (i.e. they plan to live in the house for at least five years in order to recoup closing costs)?

Not always. In some situations, three years may be sufficient. The time period may vary by geography (closing cost variance by location), it is typically in the homeowner’s financial benefit to purchase a home they intend to live in for at least three to five years. It should be long enough to recoup the costs associated with purchasing the home. I.e. closing costs and moving expenses. When a consumer is going to buy their next home, they will have the added expense of selling their existing home (i.e. real estate agent commission) as well as the closing costs and moving expense for the new home. 

Due to these additional financial expenses, homeowners have less flexibility to pick up and move to another home than renters do. For this reason, it’s very important for a consumer to conduct research on the home they want to purchase, including:

  • The condition of the home. A home inspection report, although not typically required by a mortgage lender, can provide a consumer important information about items that require immediate maintenance or repair which may not be apparent by a typical consumer.
  • Does the home provide the consumer room for growth over the next few years? Consider plans to expand the family, space for working from home may be needed or desired, etc.
  • The distance/commute time from home to work.
  • The location of the home to schools as well as the schools’
  • The location of the home to shopping centers and other services a consumer would need to frequent.
  • The condition of the neighborhood, such as access to parks, street lighting, ample parking, the home’s proximity to what could be a noise nuisance, etc.

4. What market factors should buyers consider when trying to assess if it's a good/bad time to buy?

A good time to buy a home is when there is sufficient housing inventory supply to serve the market demand. When the housing inventory is less than the market demand this is typically called a sellers’ market. During a sellers’ market, the ability for a home buyer to negotiate on the home’s sale price is typically not an option, as it is common for sellers to receive multiple offers on a home and having a home sell for over the asking price is not atypical. One visible sign of a sellers’ market is seeing very few homes in the neighborhood with “for sale” signs and if the signs are taken down in less than 45 days. 

When the housing inventory is more than the market demand this typically is referred to as a buyers’ market. In a buyers’ market, a home buyer can often negotiate on the home’s sale price as well as ask the seller to pay for some or all of the buyer’s closing costs.  As such, a buyers’ market can be an exceptionally good time to purchase a home. One visible indication of a buyers’ market is when there are a large number of “for sale signs” in the neighborhood and when those signs stay on the home for 120 days or longer.

5. What are alternative investments to real estate that could build more or equal wealth?

The most common investments used by Americans to build wealth other than homeownership are retirement accounts. According to the U.S. Census Bureau reports and detailed tables on household wealth, home equity and retirement accounts accounted for 62.9% of households’ net worth in 2015. That being said, owning a home is the only investment that a consumer can live in while building their net worth via the equity growth in a home.

Ready to take the next step in home ownership? Have questions you need answered? Contact an Orange County’s Credit Union Home Loan expert at:

(800) 506-5070

Mon-Fri: 8:00 am - 6:00 pm

Sat: 9:00 am - 2:00 pm