Rising Home Prices Vs. Higher Home Price

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When home prices rise quickly, some buyers wait for things to level off. However, what’s more expensive – current higher home prices OR waiting for prices to stop rising so fast? Hint the answer is below next to “Double Ouch“.

Waiting To Buy A Home Can Sting

Periodically, factors combine creating home value spikes. Ultra low home loan rates are a common contributor and in fact fueled the 2020 & 2021 home price jump. Is waiting for that to stop really a good idea?

It makes sense buyers of any product dislike price increases. All that means is they could have bought sooner for less. Does it really mean they should now wait even longer? The question to ask is this – what is worse, not liking a price that has risen OR waiting for an even higher price later on?

Home Price Chart S&P

What about the massive homeownership income tax benefits sidelined buyer’s forfeit? Seems that waiting to buy impacts buyers in 2 ways: buyers likely pay more after waiting and buyers forfeit the financial benefits of owning a home while they wait. Double ouch!

Homeownership Wealth Math

Tracking historical home prices yields a zig zag line. However, traditionally home values trend up excluding the mid 2000’s crash (which saw full recovery in about half a decade anyway). The other unique thing about homes is they usually have a mortgage tied to them. This is where homeownership wealth math gets good!

For example, examine a buyer purchasing a $600,000 home with an 80% loan to value mortgage ($480,000) at a 4% rate (4.109% APR) on a 30 year fixed mortgage. That equates to a principal, interest, taxes and insurance payment (“PITI”) of $2,450/mo ($220/mo tax & $60/mo insurance included).

Assume in year 1 of owning this home there is 0% home value appreciation. In that year, roughly $1,246 of the homeowner’s $2,450 monthly mortgage payment goes toward building that homeowner’s wealth. This is without any value appreciation! These wealth building benefits come from:

  • Mortgage interest deduction on income taxes
  • Property tax deductions on income taxes
  • Equity building with each monthly payment (the principal portion)

Conversely, the renter paying $2,450/mo in rent contributes $0/mo toward their wealth. At the end of year 1 Mrs. Homeowner’s net worth exceeds Mrs. Renter’s by $14,952 (before including any home value increases). A modest 3% annual increase in home value adds another $18,000 to the homeowner’s wealth and $0 to the renters. All of this despite both having the same monthly housing payment.