The Sky is Falling- Or, Is it?

Why buy now? This is the most common question I hear from customers these days. The biggest concern floating around is if I buy a house now, the value may be lower next year. Here are my thoughts on this topic. Why Buy Real Estate in the first place? Real estate should be a long term investment. The costs of selling are high and the tax consequences of short term gains are bad. Therefore, if you think you may sell in a short period of time, my advice is to not buy. If you plan on retaining the property for 10 or 20 years, then a small deviation in price between this year or the next will, in the end, be of no consequence. Unless you are buying rental property, the issue of value should be secondary to the issue of having a home for your family. The real purpose of the purchase is

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to provide a place of security, familiarity and safety for your family. Interest Rates, rent and tax deductions Interest rates are near their 50 year lows in America. They are artificially low now because being low stimulates the economy. Interests are usually much higher then they are now. As the economy recovers, they will rise. The Federal Reserve, America’s central bank, is stopping its program of lowering rates at the end of June. Most economists predict that rates will be higher by the end of the year. A 0.5% increase on a $200,000 30 year mortgage raises the monthly costs by $60.00 per month. Second, waiting means renting. Rent is pure financial waste. When you rent, you pay somebody else’s mortgage. Third, renting means not utilizing the largest single tax deduction for most people, the mortgage interest deduction. Nobody can predict the future Many people bought homes in the past under the assumption that the values would march straight up without pause or decline. They were wrong. Nobody can predict the future. Guessing where home values will be in a year or two is futile. In the 1700s in England there was a very rich banker named Baron Rothschild. Mr. Rothschild said “the time to buy is when there is blood in the streets.” This concept is the basis for contrarian investing. Contrarian investing means that opportunities are the best when things are at their worst. Like now. There is blood in the streets now, so to speak. It takes courage to buy when things are bad. But, you may be rewarded for acting with courage. Expecting to makes lots of money when things are great and everyone is jumping on the same wagon leads to what just occurred with people buying at the high point in the market and losing money. No courage=no return. My prediction is that people who buy now will look back in a few years and pat themselves on the back for their wisdom. Dollar Cost Averaging This concept is geared to real estate investors. This concept comes from the sister financial arena of stock purchasing. If you bought property in the last few years you probably purchased when values were higher than they are now. Purchasing now allows you to average downward, bringing your past purchases down. Let’s use a friendly watermelon as an example to understand this concept. Let’s say you bought a watermelon last week for $4.50. Now, this week you can buy one for $3.75. You could complain and be unhappy about paying too much last week. But, mathematically, you have now purchased two watermelons for $8.25, which is $4.13 each. Macro-Economics If you do not believe that Portland is a good place to live then you should not buy real estate here. However, if you believe that Portland is a desirable place to live, then you must believe that people will continue to move here. As people continue to move here, demand will rise and supply will shrink, pressuring real estate values upwards. Additionally, as Oregon creates more jobs, more people will be empowered to buy and this too will stabilize home values. A loss is not a loss There is a concept from tax law called “realization”. Here is an example of this concept. You buy a stock today for $80.00 per share. Six months later the stock is worth $100.00. You think you have made 20.00. This is true, but only if you sell the stock. Until you sell, you have an unrealized gain. The same is true in reverse. If the value of your home goes down, it is an “unrealized” loss unless you sell. If you don’t plan selling for years, then there is no effect of the loss. It really doesn’t matter. Conclusion: It is easy to buy real estate or stocks when their prices are going up. But, doing so is not the best idea because a.) you are paying a high price and b.) the cycle might end and leave you with a loss. It takes courage to buy when things are bad but doing so is a good idea because you buy low and will probably be rewarded for your courage. Real estate is supposed to be a long term investment and for most of us real estate should be about providing a place to raise our families.

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