Homeownership used to be considered the American Dream. Most baby boomers grew up with a goal of owning their own home. Now, many members of the younger generation question whether it is a good idea to buy real estate.
No wonder -– having watched the housing market collapse five years ago, combined with a difficult job market, buying a house or condo may not be a wise move anymore. Homeownership has been steadily falling from its high of 69.2 percent in 2004 to a current rate of 65 percent, according to the U.S. Department of Housing and Urban Development. So, is it a good idea to buy a house or condominium? To be clear, this is a question about purchasing real estate as a residence, not as an investment. When considering whether to buy, there are three major issues to consider: liquidity, return on investment and the personal use value.
Liquidity is the first issue to consider. Buying or selling real estate is timely and costly. It is generally not a good idea to make a purchase unless the property is expected to be owned for a long enough time period to recoup expenses and not result in a fire sale if circumstances require moving. For example, it may not be a good decision to buy a one-bedroom condominium if you expect to have a child in the next few years or to commit to a house if a pending job change may require you to relocate to another city. Obviously, if there is the possibility of buying a new house without selling the first, the illiquidity of real estate is not a problem. However, most people don't have enough liquid cash reserves to invest in multiple houses and wait out the market for an opportune time to sell.
A second issue is the return on real estate. Real estate has not seen the same capital growth as the stock market over the past quarter century. Nonetheless, real estate provides diversification to a portfolio and returns can be amplified by leveraging the purchase with a mortgage. For example, an individual buying a house for $100,000 with a $20,000 down payment will realize appreciation on the full $100,000 from the date of purchase. Although the rate of return on housing does not change, the gain on the investment is significantly higher.
Finally, it is important to consider the personal-use aspect of housing when making a purchase. This concept can actually work in two directions. When purchased as a residence, houses are providing personal use as well as an investment return. This means a homeowner can live in the house and avoid paying rent while also experiencing gain on the house through appreciation. Yet that appreciation is locked in because the homeowner cannot tap into it without selling the house and losing the place to live.
The personal use of a house is very important. An initial comparison between renting and buying might compare rent to combined costs of mortgage, maintenance, insurance and taxes. However, this does not take into consideration particular attributes of mortgage payments, which is that they are fixed and finite. The principal and interest portion of a fixed mortgage will remain the same over time (although taxes and insurance might rise) whereas rental costs will increase. In addition, the mortgage should eventually be paid off, providing the homeowner with a rent-free place to live. This can be a great planning technique for retirement -– if the mortgage is paid off at the time of retirement, there will be a reduction in expenses at the same time income falls.
Although the personal-use aspect of a house brings benefits to the homeowner, this also means the investment return is difficult to access for other uses. If a family downsizes its house as children leave home and less space is needed, then cash can be pulled out. Other ways cash can be taken out come from using a home equity loan or a reverse mortgage. However, many people are reluctant to use reverse mortgages to tap into the investment value of their house. Reasons for this hesitation include high closing costs, reduced inheritance left to family, continued responsibility for maintenance, tax and insurance and the need to pay off the loan if the house is sold.
The bottom line is that owning your residence can be a good decision financially, provided it does not cause liquidity problems and provided there are separate sources of retirement income. However, each individual or family is unique and will have to evaluate their options based on their specific circumstances.
Should Homeownship Be Part of Your Retirement Plan?
With a low personal income tax rate that tops out at 4.54 percent, and exempt Social Security benefits, Arizona is a great place to retire, according to Kiplinger's.
Homeowners age 70 and up can apply to defer their property taxes if they meet certain residency requirements. That's extra money that can go toward hiking equipment.
This two-bedroom end unit townhome on a corner lot in Prescott features a great room with fireplace, a kitchen with pass-thru to the dining area. There is two car garage and a bonus side-entry golf-cart garage. It's priced at $249.900.
With no state or local sales tax, Delaware can be a haven for retirees. Taxpayers age 60 and older can exclude $12,500 of investment and qualified pension income from state income taxes, reports Kiplinger. Whereas older homeowners may qualify for a property tax credit, up to $500.
Located close to the beach, this 1,350-square-foot condo with garage is in a gated community inRehoboth Beach. The home, listed at $334,900, has access to a bike path into town for dining and shopping and the boardwalk. The community features a pool with wading area and a hot tub.
There's no inheritance tax or state tax in Florida and retirement income is not taxed. Some 65 and older long-time residents of certain Florida cities and counties can receive an extra homestead exemption up to $50,000 and/or an exemption equal to the assessed value of the property, as long as the real estate has a fair market value of less than $250,000, reports Kiplinger's.
Walton Beach is a perfect place to retire. This luxury Gulfside condo with two bedrooms plus a bunk room comes furnished and is listed at $335,000. The Destin West community has a heated swimming pool, a "lazy river" pool, and large heated hot tub. There is also an elevator assisted sky bridge. The listing boasts that it is "seaside luxury with a toes in the sand location."
Up to $35,000 of most types of retirement income, as well as social security income, are exempt from taxes in Georgia, unless you're older than 65, in which case the 2013 exemption is $65,000 per taxpayer, reports Kiplinger's.
This rustic lodge-style townhome in Peachtree City, priced at $169,900 boasts a "panaromic view of the lake and babbling creek." The master bedroom has sliding door access to a private deck, where you can get one of the best views of the fireworks in Peachtree City.
Social Security, military, civil-service, and state and local government pensions are exempt from Louisiana's state income taxes. People 65 or older may exclude up to $6,000 of annual retirement income from their taxable income, reports Kiplinger's. Homeowners who are 65 or older with an adjusted gross income of less than $65,891 in 2013 can benefit from freezing the assessed value of their homestead for as long as the applicant owns and resides in the home.
This three-bedroom townhome in Shreveport sits right on the lake. Built in 1987, it has floor-to-ceilings windows with amazing views. Jessica Simpson, Nicholas Cage, and Ed Harris are just some of the celebrities who reportedly have stayed in this lakefront home, listed at $369,000.
Mississippi is home to some of the lowest property taxes in the nation, according to Kiplinger's. Residential property is taxed at 10 percent of its assessed value, and seniors qualify for a homestead exemption on the first $75,000 of value. Also, prescription drugs, residential utilities, motor fuel, and health care services are tax-exempt. In addition, qualified retirement income is exempt from state income tax.
Although there are no property tax breaks for seniors in Nevada, the good news is that there's no state income tax, no inheritance tax and no estate tax.
With a master suite on the main level, a walk-in closet, and vaulted ceilings, this 1,278-square-foot townhome -- priced at $125,000 -- in Carson City also has a laundry area and office space inside the garage.
For homeowners 65 and older who were legal residents for at least a full 12 months of the tax year, South Carolina's homestead exemption allows the first $50,000 of a property's fair market value to be exempt from local property taxes, reports Kiplinger. Senior homeowners are also exempt from school taxes on their properties.
This 2002-built condo on Golfview Lane in Summerville is on the 10th Fairway of the Legend Golf Course. With a screened porch and crown molding, the listing says this unit has only been occupied about six months of the year since it was purchased by the last owners. It's listed at $139,000.
Wyoming, one of the least populous states, has no state income tax. Prescription medications are also not taxed, nor is retirement income and social security benefits, according to Kiplinger's.
With fewer than 600,000 residents, Wyoming is perfect for the active adults over age 55 who love the outdoors. There's skiing, hiking, river sports and, of course, Yellowstone. And when you feel the urge to be a part of a larger metro-area, Denver is only 100 miles away from Cheyenne.
This 2013-built twin home in Cheyenne has a main floor master bed room with walk-in shower and walk-in closet. There's an upstairs loft and the dining area and open-concept kitchen is large enough for entertaining. It's listed at $235,000.