Rising house values prove real estate can be a smart investment

August 23, 2017
by Erik Martin of The Mortgage Report

Homeownership continues to prove good long term wealth building strategy.

House values matter

It’s not easy being a buyer in a seller’s market. With house values rising and selling prices soaring, it can be hard to find and afford a home today.

The good news for house hunters is that owning provides more than a roof over your head. You also stand to profit from this purchase when it’s time to sell. In fact, new research shows that investing in real estate can be a wise move with big rewards if you sell when the market is hot.

Of course, it’s tricky trying to time the market. But with interest rates remaining low, now can be an ideal time to buy if you have the means. Later, if you’re willing to be patient and let equity build over the years, you may just be able to cash in and pocket a high return on your purchase.

What the research found

Per new data by ATTOM Data Solutions, the second quarter of 2017 proved to be windfall season for most home sellers. They saw an average price gain of $51,000 since the time they purchased.

That equates to a 26 percent return on investment over an average ownership period of 8.05 years. This also was the highest average price gain for sellers in 10 years, when that sum was $57,000. Eight years is also the longest average homeownership tenure since 2000.

The markets with the highest average seller returns were San Jose (75 percent); San Francisco (65 percent); Seattle (63 percent); Modesto, Calif. (62 percent); and Denver, Colorado (62 percent).

Not a get rich quick scheme…

The key takeaways here are notable, says Daren Blomquist, senior vice president for ATTOM Data Solutions.

“Homeowners are staying in their homes longer and building up more equity before selling than they were prior to the Great Recession,” he says. “This indicates there has been a major shift in how Americans view home ownership in this housing boom compared to the last one.”

Put another way, homeownership now is less of a get-rich-quick scheme than it was during the 2001 to 2008 housing boom. Instead, it’s more of a long-term wealth-building strategy akin to what it has been throughout history.

Also, “Homeowners who are choosing to sell in this market are realizing sizable profits thanks to the rapid run-up in home prices over the last few years,” Blomquist says. “They are staying in their homes longer before selling—an average of eight years compared to an average of about 4.25 years prior to the Great Recession. This patience is paying off in the form of higher price gains.”

Owning is a smart strategy

The bottom line? Owning a home is still a solid wealth-building strategy, especially over the long term and in fundamentally sound but supply-constrained markets like New York City, Los Angeles and Seattle.

“It may not be as good of a wealth-building strategy in more static, supply-rich markets—places like Kansas City, Memphis and Cleveland. But in those markets, buying properties as rentals can be a great strategy for generating monthly cash flow,” he notes.

Blomquist adds that now remains a good time to buy overall for several reasons.

“Everyone needs a place to live,” he says. “If you have a stable job and plan to live in an area for at least five years, the chance to share in the equity gain that your home realizes over that time is one to take advantage of, if possible.”

To illustrate the plusses of ownership, Blomquist provides a tech-topical scenario.

“Imagine Apple giving away 10 shares of its stock when you buy an iPhone. You would enjoy the benefits of a great product. Plus, you could build long-term wealth over time,” says Blomquist. “Of course there is always the chance the stock value could go down. And the same is true of home prices, but that is not likely over the long term.”

Your mileage may vary

Blomquist cautions that there will likely be a home price correction of some sort over the next eight years. In other words, the gains we’ve seen in home prices over the last eight years will likely not be repeated over the next eight years.

“Over the past 17 years, the average home seller price gain has been more along the lines of 15 percent rather than the 26 percent we saw in the second quarter,” he says. “I would expect something along those lines going forward. But the longer you remain in your home, in general the better return you will realize when you sell.”

Still, your mileage may vary. Home prices don’t always go up. There’s a risk that prices could be lower when you choose to sell. This can be especially true if you’re in a hurry to sell due to a job loss or job relocation.

Tips for best success

“To avoid the risks that come with ownership, try to purchase a home you can comfortably afford. This way, if some unforeseen event hits, like a job loss, you will not be forced to sell at a bad time in the housing market cycle,” says Blomquist.

Buying an affordable home also provides you with a Plan B investment strategy if you had to move suddenly: renting out your home for more than you spend on your mortgage, taxes, maintenance and other expenses.

But Blomquist advises not buying unless you expect to stay in the area for at least five years.

“Otherwise, the potential gain in home equity over that time is probably not enough to offset the upfront costs and risks of home ownership,” he says.

Lastly, it’s important to research the area carefully before buying.

“You want to make sure the home has good prospects for increasing in value over the long term,” Blomquist says. “This means studying location at the regional and county level, city and zip code level, and neighborhood and street level.”

What are today’s mortgage rates?

One factor that goes a long way toward pumping up your return on investment is a low mortgage interest rate. And today’s are some of the lowest in months. one thing that’s not the lowest in months, however, is home pricing. Now is probably the best chance for profiting, before things get expensive again.

This article was originally published on TheMortgageReports.