Up until the recent slowdown, homeowners in many parts of the country saw the value of their homes rise rapidly. Home prices, in many areas, seemed to move in just one direction: up.
A combination of record-low interest rates and rapid price appreciation turned many homeowners into serial refinancers. When interest rates dropped, one mortgage was exchanged for another, sometimes several times within one year.
As home values rose, cash-out refinances allowed homeowners to pull equity out of their homes to remodel, send children to college, take vacations and buy new cars. It was good for the economy while wiping out billions of dollars of homeowner equity.
Tapping into home equity seemed like a great idea until the housing market softened. Now there are millions of homeowners around the country who can’t sell their home for enough to pay off the loans secured against the property.
HOUSE HUNTING TIP: Buying a home is still a good investment if you can afford it, if you are ready to put down roots in a community, and if you want to invest in your personal happiness. Profit potential shouldn’t be your only reason for buying a home, even though in most cases your home will appreciate in value if you maintain it and if you own it long enough.
The housing market, like any economic market, is cyclical. There are periods of robust activity followed by periods of sluggishness. Prices can go down as well as up. Now that the market has softened in most areas, it’s time to look at owning your home as a way to gain control over your personal domain — not as a source of quick cash.
In the areas that were previously hot, we are unlikely to see such significant home-price appreciation in the near future. So, if you’re considering buying in one of these areas, think in terms of buying for the long term. If your future is uncertain, it might make more sense to rent.
Some niche markets in South Carolina, Idaho, Washington, Texas and Utah are experiencing double-digit home-price appreciation while the country on a whole is suffering a slowdown. If you are buying in such a market, take a lesson from the numerous homeowners who bought using risky mortgages and extinguished their equity through successive refinances.
Pay careful attention to how you finance your home purchase. The cheapest loan possible may be not be the best loan if it requires you to refinance or sell within the next few years. If the market slows and you are no longer earning appreciation on your home, refinancing could be a problem. If the market is soft then, you could have difficulty selling.
One of the best investment strategies is to buy when the market is soft, not when it’s racing forward perhaps toward a peak. It’s also a time when you’ll find the least competition from other buyers, most of whom will wait to buy until the market has already turned.
Don’t forget to consider the tax advantages of home ownership when considering whether home ownership makes sense for you. Generally, property taxes and interest paid on mortgages up to $1 million on your primary residence can be deducted for income-tax purposes. Restrictions apply, so consult your tax adviser before making a move.
The tax advantage of home ownership should not be your sole reason for buying. Owning your own home is a big commitment financially as well as in terms of the time and energy you will spend maintaining and improving your property.
THE CLOSING: In some countries, such as Australia, there is no tax break for owning a home. Nevertheless, people still buy houses there.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.