The following is a guest post by Jennifer Riner, Account Manager/Writer at Zillow
The median home value in the United States is now $178,500, up from $175,600 in the October 2014 market update post. Homes values continue to appreciate, and many factors have played a role. For instance, Zillow research shows homes located near Starbucks – within a quarter mile, to be exact – increased in value by 96 percent between 1997 and 2014. Alternatively, all other homes only increased in value by 65 percent, based on the Zillow Home Value Index. Cities including Boston, Philadelphia, Baltimore, Chicago and Washington, D.C. all see the biggest “Starbucks effect” compared to other major metros nationwide.
Aside from these recent findings, many other influencers affect U.S. residents’ decisions about renting versus buying.
With 770,000 new renters across the U.S. last year, it’s not shocking that the cumulative amount paid in rent in 2014 was $441 billion nationwide. Cities in northern California and southern California, including Los Angeles and San Diego, as well as Washington, D.C., are the most expensive metros in terms of median monthly rent payments. Unfortunately for long-term renters, these prices are expected to remain astronomical for the next few years. Due to high demand and low supply, renting is half as affordable as buying in more than half of U.S. cities, with many leaseholders forced to spend 30 percent (or more) of their incomes on housing.
Although owning is twice as affordable as renting, you can’t rely on monthly payments alone to decide your housing path. Homeownership is risky, especially for those whose take-home pay is around the national minimum wage of $7.25 per hour. No matter your financial class, you’re at risk of defaulting on your mortgage if you encounter an expensive medical emergency or lose your current job and income.
Homeowners sometimes erroneously include their tax benefits in their projected savings from owning. Homeowners must itemize their deductions, and even then the highest benefits are only during the first few years when interest exceeds principal.
Also, keep in mind that renters typically avoid maintenance costs of 3 to 5 percent of the property’s value every year (i.e. $6,000 – $10,000 for a $200,000 home). Homeowners, on the other hand, are advised to save at least 1 percent of the purchase price of their homes (i.e. $2,000 for a $200,000 home) as an emergency maintenance fund each year. Each of these incidentals adds up over time and contributes toward the decision to rent instead of buy – even though a lease is often more expensive than a comparable home’s monthly mortgage.
Buying and Selling
Owning a home might lend to extra, sometimes unanticipated costs, but is also an investment and historical rite of passage in the U.S. Many aim to achieve the sought-after “American Dream,” or at least the modern interpretation of this historical financial milestone. It doesn’t hurt that homebuyers only spend 15 percent of their income on housing, and mortgage rates are still at a record low at 3.7 percent, according to Zillow’s March mortgage report.
If you’re considering buying, you’re not alone. More than 80 percent of young adult renters between 18 and 34 say they are “confident” or “somewhat confident” in eventually purchasing homes. More than a third said they expect to buy a home in the next year and more than half expect to buy in the next five years at the most. This data was pulled from the Zillow Housing Confidence Index, which conducts more than 10,000 interviews across the top 20 metros in the country.
For sellers, home values are expected to rise to pre-recession peak levels in May of 2017, so now is a great time to invest in properties likely to present strong returns in a few years’ time. Home values are predicted to rise 19.3 percent through 2019, even though the rate of appreciation is expected to slow down to 3.1 percent over the next five years. Although home value gains will be slower than in recent years, they’re still projected to climb back to their peak prices recorded before the market crashed. The total of all home values is currently at $27.5 trillion – that’s up 6.7 percent year-over-year. Houston, Atlanta and San Jose all saw home value increases above 10 percent, showing rapid investment potential for recent or new homebuyers.
While the numbers speak for themselves, personal lifestyle choices can trump what is considered financially smart. Keep your needs in mind before making any large investment or housing-related decision.
By: Jennifer Riner
Account Manager/Writer at Zillow