In 2006, Florida house price appreciation began to cool from its blistering rate of over 25% in 2005. Some prognosticators warned of an impending market crash, others saw a “soft landing.” It looks to be the latter.
Let’s quickly sort through some of the recent numbers to determine fact from fiction and look at housing as a long-term investment for the future. The Office of Federal Housing Enterprise Oversight (OFHEO) reported November 30 that “U.S. home prices rose in the third quarter of this year, but the rate of increase continued to slow...”
FACT: House price appreciation has slowed; however, the market has not experienced widespread price declines.
The numbers by OFHEO indicate that U.S. home prices have increased 5.0% since the beginning of the year, and slowed to an annual rate of 3.5% in quarter three of 2006. In Florida, prices have risen 8.7% since January and moderated to an annual rate of 4.6% by the third quarter. When compared to the 2006 inflation rate of 2.0%, these represent moderate to strong increases.
FACT: Prices and appreciation rates vary across locations. Tallahassee prices have been less volatile (risky) than in other areas of the state.
Although some Florida locations (e.g., Sarasota and West Palm Beach) experienced recent house price declines, most are currently rising at annual rates of 3.0 to 9.0%. In Tallahassee, price increases have been less volatile than in other areas of the state. This is likely due to Tallahassee’s stable economy and the lack of dramatic price run-ups that were fueled by speculative non-resident buyers, as experienced in South Florida.
FACT: Home ownership is a Long-Term Investment Strategy
Housing represents the single largest asset category in the net worth portfolio of most households. Because of its relative value, it plays a key role in shaping the economic condition of individuals and families. The wealth benefits resulting over time from home ownership can substantially influence a family’s ability to finance education, retirement and other needs.
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FACT: Home ownership is a Sound Wealth Building Strategy
Home ownership involves wealth building concepts. The first is the power of compounded growth. If a home increases in value at a rate of 6% per year, its value will double approximately every 12 years. Assuming the home was valued at $100,000 in 1982, it would be worth $200,000 in 1994; $400,000 in 2006; $800,000 in 2018; and $1,600,000 in 2030. This is the power of compounded growth.
A second key concept to wealth building is leverage. Leverage is the use of borrowed funds to magnify earnings. Most homes are purchased using a mortgage loan. If the loan rate is less than the total return on the investment, then the return on home owner equity is increased. On average, home owners have earned 10.5% annually since 1986 using mortgage funds costing less than 8.0%.
FACT: Home ownership is Tax Advantaged
The capital gain received from the sale of an owner-occupied home is exempt from capital gains tax if less than the IRS limits. Second, home owners do not pay tax on the “implicit rent” they receive. Implicit rent can be viewed as the savings to the home owner of not paying rent to a landlord. The home owner in effect receives tax-free rent from himself. This benefit is often missed.
Note that property taxes and mortgage interest are often cited as tax deductible expenses. While true, this is not an advantage confined to home ownership. Property taxes and mortgage interest are deductible business expenses and most likely benefit renters also.
FACT: Home ownership Serves to Diversify Investment Risk
The risk that is associated with holding an individual investment is reduced by holding a diversified portfolio of assets (e.g., stocks, bonds and real estate) that behave differently to varying market conditions. Home equity serves to diversify the risk of holding stocks and bonds.
Source: Office of Federal Housing Enterprise Oversight (OFHEO); and the FSU Center for Real Estate Education and Research. Note: (p) denotes current annual rate projected for quarters 3 and 4 of 2006.
Please look for article 6 in next week’s Sunday paper.
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