For most people growing up, the idea of owning your own home someday
was a given. It was a symbol of the American dream. In fact, federal
housing policy was designed to encourage homeownership for everyone. Tax laws were written to give tax breaks to homeowners. The Federal Housing Administration underwrote riskier loans with low down payments so more people could qualify for mortgages. The Community Reinvestment Act of 1977 encouraged lenders to extend credit to lower-income
individuals to further expand homeownership. These policies worked, and homeownership rates were at near-record highs by 2006. In no time, the housing bubble burst in a catastrophic way, leaving the U.S. housing market in shambles. Potential homebuyers—quite reasonably—were reluctant to jump into a market in decline.
From 2006 to 2012, apartment and home values plunged by nearly a third, and nearly a quarter of all homeowners found themselves underwater on their mortgages. Fortunately, since 2012, apartment and home prices have risen steadily and economists project that the market may finally stabilize. Home builders and developers are responding to the market improvements by building new apartments and homes, and more homeowners have recovered their property values, making it possible to sell existing apartments and homes again, and some of the record prices. While credit is still tighter than it was in 2006, well-qualified buyers have no trouble securing mortgages at favorable terms. With that said, is it time to buy your first apartment or home?
RENT OR BUY: WHICH IS CHEAPER?
The answer to this question hinges greatly on geographical location; although, certain variables like interest rates and inflation are calculated at a national level. A 2014 report indicates that on average, buying is 38 percent cheaper than renting. In the New York City area, purchase costs are higher than average, but buying is still 22 percent cheaper than renting. In fact, New York City rents have skyrocketed in the past decade; between 2000 and 2012, median rents rose over 75 percent while real median income dropped about 5 percent. Currently, median rents for a one-bedroom apartment range from $1,950 in Long Island City to $3,200 in Midtown – and that goes all the way up to $4,300 in Tribeca.
Is it possible that rental costs will become cheaper than buying? In cities like Honolulu and San Francisco, where home prices are rising rapidly, the tipping point could come sooner. The calculus rests on mortgage interest rates, which are historically low and—of course—will eventually rise. Experts say that for regions where buying is 10 percent less expensive than renting, the tipping point will come when interest rates hit 5 percent. In the New York City market, interest rates would have to rise to approximately 6.5 percent before renting will be less expensive than buying, according to industry estimates. Given these encouraging economic factors, it may be time to buy your first apartment or home.
A LOOK AT THE NEW YORK HOUSING MARKET
According to CoreLogic Case-Schiller’s 2014 forecast, the New York metro area is the hottest housing market nationwide. Across the city, condo prices climbed five percent in 2013, and they’re expected to rise another 7.4 percent in 2014. Co-op prices, by comparison, were down by five percent during this time, and the average price of a 1-3 family dwelling rose by five percent. While gains in Manhattan were modest, prices in the outer boroughs like Queens and Brooklyn grew by double digits.
What does this mean for a first-time homebuyer? Historically, the New York real estate market has been more resilient than other parts of the country; for the most part, it has completely recovered from the effects of the crash. As a home buyer, it’s always more advantageous to get in at the lower end of a rising market, and it appears that New York’s gradual rise is a trend that’ll continue well into the future. The combination of historically low interest rates and steadily rising apartment and home prices are a good indication this may be the right time for first-time homebuyers to enter the market.
WHAT TO EXPECT IN THE FUTURE
Buyer’s agents note that housing inventory will continue to be limited; however, new developments should expand into 2015, especially with new construction in Brooklyn and Manhattan. Although newly constructed real estate oftentimes enters the market at a higher price than re-sales, increasing prices across the board, overdevelopment and a slowing market contribute to controlling spiked prices. This kind of movement in the market benefits buyers the most. Experts predict that low inventory and high demand in Manhattan will make Brooklyn and Queens a very attractive alternative to buyers. Bushwick and Bedford-Stuyvesant are also expected to see double-digit price growth. Capitalizing on its easy access to Manhattan, Long Island City is experiencing tremendous development, too. Prices increased dramatically to more than $1,000 per square foot in 2014 from $600 in 2009. Most financial analysts expect that mortgage interest rates will begin a slow but steady rise in the coming months and years. Combined with the steady growth in home prices in New York, now may be an ideal time to get into a new apartment or home.
ADDITIONAL COSTS OF HOME OWNERSHIP
Monthly mortgage payments are just one of many costs associated with owning an apartment or home. New York City property taxes are some of the highest in the country, and because they’re set at the local level, they can vary widely from neighborhood to neighborhood. Politics also affect property tax rates; government officials understand that raising tax rates is an easy way to fund preferred programs and projects. This is especially true in New York City, so new homebuyers should be prepared for fluctuations in annual property tax payments. There’s also homeowner’s insurance, which varies greatly by neighborhood, type of assets, and other variables. If you purchase your home with less than a 20 percent down payment, most lenders require private mortgage insurance (PMI), which further adds to your monthly payment. If your new apartment or home is a condominium or co-op, you’ll pay common charges or maintenance fees that often are quite substantial to cover the services your building provides. You may also be subject to occasional assessments for unexpected expenses associated with building maintenance and repair. In a single-family home, owners need to have an emergency fund to pay for maintenance, repairs, landscaping, and any renovations the home may require. Many new homebuyers make the mistake of assuming that if a monthly rent payment is about the same as their principal and interest payment on a mortgage, they can afford to buy a home. It’s important to remember that these monthly costs are just a small part of the price of homeownership.
YOUR HOME AS AN INVESTMENT
In the literal sense of the word, the house you live in isn’t a true “investment.” That runs contrary to conventional wisdom, but here’s why it’s true:
- Apartment and home prices have grown only slightly more than inflation for more than a century. What this means is that if you bought an apartment or house in 1980, paid off the mortgage, and sold it in 2010, you’d have the same buying power as you did at the start.
- The real estate market is a lot like the stock exchange. As a general rule, it tends to increase over time, but trying to gauge the perfect time to buy and sell is an imprecise science. When you want to sell your home sometime in the future, if you’re lucky, it won’t stay on the market longer than a year. No one can guarantee that’ll happen, though, leaving you unable to access your capital. It ‘s hard to predict what will happen to your neighborhood, development, or market in five or ten years down the road.
- Just like stocks, you have to sell your apartment or house when you want to use the profit your investment generated. However, unlike stocks, when you sell your apartment or house, you’re selling the roof over your head.
Some of the wealthiest people in the USA build their wealth by owning homes and real estate. Even if you aren’t generating a high rental yield, buying the right property nonetheless can be an excellent investment. Owning a home is building wealth; it gives savvy buyers years to compound that wealth and accumulate more property. For example, if someone had bought a home in NYC 30 years ago, that person’s net worth would have inflated by approximately 1000%. More than three quarters of investors worth $1 million+ own real estate, according to a study conducted by Morgan Stanley. Directly owning private and commercial property was cited as being the number 1 alternative investment choice, with 33% of the surveyed millionaires saying they planned to buy within the next 12 months.
Owning your own apartment or home can be a beautiful thing. It’s a shelter and a source of pride for you and your family. It often provides a cheaper overall housing alternative to renting. But it is not a guaranteed investment. Don’t think of the apartment or home you and your family live in as an investment; it could cloud your thinking and lead you to make buying decisions that aren’t optimal for you. Buy an apartment or house because you and your family love living in it, it meets the needs of your family, the schools are great, and you enjoy being part of the community—not because you think it’ll be a great investment.
PLANNING FOR THE FUTURE WHEN YOU PURCHASE A HOME
Buying an apartment or house makes sense if you plan to live in it at least five to ten years; any less, and you may wind up losing money in the transaction. The seller in a real estate transaction can easily expect to pay up to 10 percent of the sales price of the home in closing costs, allowances, commissions, necessary repairs, and other negotiated expenses. In addition, sellers rarely get the full asking price for their apartment or home, unless the housing market has a shortage of inventory. It’s also possible to get a full asking price if a home has been well-renovated, is in a great location, or if it features distinctive and appealing architectural detail.
What does that mean for the first-time apartment or homebuyer?
It means trying to predict the future. In the next seven years or longer, do you plan to start or grow your family?
Is there a possibility your employer will transfer you to a location in another part of the country?
Do you have an ailing or aging parent who may need to move in with you?
Predicting the future also means buying only as much apartment or house as you think you’ll need, but not much more. In the past, the trend in first-time apartment or home buying was to purchase a smaller, more affordable “starter apartment or home,” and then sell it in a couple of years when the family (and the household income) grew. Given the variables in the real estate market, that no longer seems like the best strategy. Today, you’re better off buying the apartment or home you think you’ll need for your family for the next ten years. Apartments and homes with multipurpose rooms, like a dining room that can be converted to an office, or an attic that can be transformed into a bedroom, make sense as you try to arrange your home to meet your family’s changing needs. Resist the temptation to buy too much house. The additional taxes, utility payments, and maintenance and repair costs restrict your ability to save for other family necessities. As the saying goes, no matter how big your apartment or house is, you can only sit in one chair at a time.
CONSIDERING OPPORTUNITY COSTS
Opportunity costs are defined as the loss of profit or value from something that is given up to acquire or achieve something else. For example, if you’re cashing in an investment like a stock that has consistently returned ten percent a year in order to cover the down payment on your apartment or home, you’re potentially missing out on all the earnings of those stocks. For younger investors who have 20, 30, or more years for investment growth, the lost earnings could add up to a sizeable amount. This is why some financial advisers recommend that truly disciplined savers who invest wisely are better off renting than buying. What does this mean for the first-time homebuyer? If you’re financing your down payment with a second mortgage, or part of it is a gift from family, your opportunity costs are very low. On the other hand, if you’re raiding your 401(k) or another brokerage account for a down payment, be conservative in deciding how many homes you can afford. A lower purchase price means a smaller down payment, which means more of your money can remain in long-term investment accounts. This is another reason to buy only as much apartment or house as you think you’ll need in the next seven to ten years; you’ll lower your opportunity costs by maintaining a larger percentage of your other investment accounts.
NEW OR RESALE, WHICH IS RIGHT FOR YOU?
In many instances, a resale is the only choice, especially if you have your heart set on a particular neighborhood or love the idea of restoring a beautiful space in a Pre-War building. However, for many first-time buyers, new construction is the better choice. For example:
- Energy-efficient appliances and “green buildings” are becoming standard in today’s newly constructed apartments and homes. Efficiency standards have tightened considerably from 2010 to 2014, so energy costs are usually much lower in new construction. While it’s possible to retrofit older homes with more energy-efficient appliances, it’s expensive and rarely results in the savings available in new apartments and homes.
- Most newly constructed apartments and homes come with fire-retardant floor covering and insulation, making them much safer in the event of a fire. Also, many builders hardwire carbon monoxide and smoke detectors into their buildings, which are more reliable and convenient than battery-operated models.
- New buildings usually have sophisticated wiring capable of handling high-tech electronics, entertainment and security systems, and high-speed communications equipment. Customized wiring isn’t always possible in older apartments and homes.
- You’ll save on replacement costs with a newly constructed apartment or home. Most major components have a lifespan of seven to ten years, and it’s possible for many to be covered warranties that can be extended beyond the first year. With older apartments and homes, it’s possible you’ll need to replace major appliances soon after you move in.
- Many builders have mortgage banking affiliates that can customize financing, including down payments and interest rates, to meet your particular situation. They’re often able to defray some of the closing costs, too. However, the current market isn’t favorable for that unless the property is either in a bad location or grossly overpriced. While a seller of a resale home has some flexibility to contribute to settlement costs, they don’t have nearly the flexibility of a builder’s affiliated mortgage company.
ARE YOU READY TO BUY YOUR FIRST NEW YORK CITY HOME?
You may be wondering if you’re willing to purchase your first home. The answer depends on, in part, on your answer to the following questions:
- Are you prepared to maintain and repair an apartment or home?
- Are you willing to stay in the same apartment or home for at least five to ten years?
- Do you have a realistic idea of the type of apartment or home and amount of space you’ll need for the next five to ten years?
- Are you relatively sure your financial situation will remain stable or improve over the next several years?
- Are you a disciplined saver who can build up an account for emergency repairs?
The financial and real estate markets are in harmony, making home ownership less risky and more affordable since 2008. Most economists predict that home prices will continue their steady, and in some neighborhoods spectacular, rise, and low-interest rates mean mortgage payments are more affordable. Interest rates are sure to climb, lowering the amount of apartment or house you can afford later on. Purchasing an apartment or home is still cheaper than renting in New York, but as interest rates climb, this phenomenon is likely to change; waiting too long may push home ownership out of reach. Buying an apartment or home is an exciting and often overwhelming experience; to help you understand the process and get the best possible outcome with your home purchase, we’ve prepared a Home buyer’s Handbook to help you get started. The information it contains, along with useful tips and recommendations, will give you a good understanding of apartment or home buying process, and how to avoid costly mistakes.