By Patrick Barta
Special to RealEstateJournal.com
Question: My husband and I are relocating to the Boston area and we are a little nervous about buying a home due to talk about a real-estate bubble. Should we wait to see if home prices come down while we rent, or should we just go ahead and take the plunge?
-- Ann, Greenville, S.C.
Ann: The answer -- no matter where you live -- depends on how long you intend to own the house. Generally speaking, financial planners say it's best to own a home for at least three to five years to reduce the risk of losing money. That's because the longer you own a home, the more likely you are to ride out any ups and downs in your local market. If you're particularly worried about your area -- and it might make sense to be cautious in Boston, where home prices have risen dramatically in recent years -- you might want to plan to hold on to your house even longer.
A scenario constructed by Bankrate.com, a consumer-finance Web site based in North Palm Beach, Fla., helps illustrate the risks of short-term ownership. Say you buy a $200,000 house with a 3% down payment, but only plan to stay two years. By Bankrate.com estimates, you might expect to pay $5,000 or more in fees to finance the purchase. You'll also have to pay a real-estate agent when you sell the home; based on the traditional commission of 6%, that could be as much as $12,000. All that adds up to $17,000 in fees just to buy and sell the home.
On the plus side, you'll build up $5,000 in equity through your monthly payments, helping offset your loss from fees. You'll also get a sizable tax deduction for the interest you're paying, depending on your tax situation. But once any additional costs are factored in, including maintenance and movers, it's highly possible you could lose money even if home prices don't decline. Making matters worse, you tied up capital that could have been invested elsewhere.
Moreover, there's always the chance prices could go down in the short term. Most economists don't expect that to happen in most cities. But there is evidence home-price appreciation has slowed in recent months, and the risks of a market correction appear to be greater than before. In its most recent report of price data, the Office of Federal Housing Enterprise Oversight in Washington found that prices were falling in 33 of the 185 metropolitan statistical areas studied, up from 22 earlier in the year.
In the long run, home prices almost always come back, though, assuming your hometown doesn't slip into a prolonged depression. According to research by the Joint Center for Housing Studies at Harvard University, only 14 of the country's 39 largest metro areas experienced price declines of 5% or more over a three-year period between 1975 and 1998. "Unless you really overpaid walking in, if you're prepared to live there through a cycle, you're probably not going to lose money" over the long haul, says Nicolas Retsinas, the director of the Harvard center.
There are also ways to boost your chances of strong appreciation, like buying in a city that has constraints on new housing supply, like New York. If you're still worried, you might want to check the price-appreciation forecasts for many large cities that are compiled by Fiserv CSW Inc., a home-price forecasting outfit in Cambridge, Mass. What do they foresee in Boston this year? Good news -- for now: 9% price appreciation, thanks in part to continued strong demand.
