Financial planner's thoughts...
When homebuyer's can't agree...
FINANCIAL PLANNER’S THOUGHTS ON BUYING A HOME
Financial planners are ambivalent on whether making a major investment in housing will prove a prudent choice as the baby-boom generation, born between 1946 and 1964, begins to approach retirement. "I’m concerned about who is going to buy my big house in 15 years," says one, herself a boomer.
Yet, at the same time, another certified financial planner (CFP), says, "I love real estate as an investment." He contends that given the vigor of the U.S. economy and the earning power of many young Americans, there will be a rising future demand for such homes. And that should mean rising long-term values, too, he predicts.
Granted, the post-boomer generation is a smaller group than their parent’s generation. But some argue that many young people with college degrees and good jobs will have both the means and the ambition for upward mobility in housing. "Their parents have spoiled them rotten," one jokes.
One financial planner on the CFP board of governors advises a middle course on housing purchases. "I’m in favor of being a visionary when you buy a home, but I’m not suggesting that you do it at all costs. I don’t think you should put yourself in a position where you can’t breathe financially," she says. Still, experienced financial planners are nearly universal in their preference for owning a home rather than renting.
"Renting gives you no tax breaks and no equity build-up," one points out. Not only is most mortgage interest deductible on your annual tax return, the new tax law - effective in May 1997 - also allows a couple to avoid capital gains taxes on as much as $500,000 worth of profits from a home they’ve occupied (or $250,000 for a single person).
The debate among financial planners is not over whether you should own your own home, but on how much of your resources should be tied up in housing. Given the uncertainties of the securities markets, some like the diversifying effect of owning both real estate, which provides a hedge against inflation, and traditional investments such as mutual funds. "There has to be some balance," according to one CFP, who predicts that housing values could soar in many communities due to the new tax laws and "newfound wealth" from the stock market.(up)
Are you unsure how much of your own financial resources should be devoted to housing? Then these pointers could prove of worth:
First, make an "emergency fund" your first priority. Those with no savings should build up a nest-egg big enough to cover at least three months worth of living costs before buying a first home in any price range. Otherwise you’re too vulnerable to financial emergencies, which can erupt unexpectedly due to temporary unemployment, ill health or other factors. As one financial planner urges, "If you can budget in such a way that you don’t deplete your emergency fund and can realistically manage the debt, I would much rather see you buy a home at any age than rent."
Next, consider making a bigger home purchase in an area of rising prices. The truth is there is no single answer, but a hundred answers, to the question "How much house should I buy?" Now as much as ever, questions of home value and appreciation are specific to a particular neighborhood where you may elect to live. If you’re moving into a booming area, why wait if you can afford to buy now?
Finally, don’t believe anyone claiming to know the future on investments. The reality is that gurus in the real estate field can’t agree among themselves on the future appreciation potential of U.S. housing markets. Furthermore, the new tax law has added a wild card to the deck that some experts think will weaken property values, especially for high-end housing, while others think it will strengthen them across-the-board.
Meanwhile, many agree that the stock market may be at a crossroads of late, but few can decide whether it will be heading north or south. In the wake of so much uncertainty, one tax attorney suggests you focus primarily on your housing wants and needs and secondarily on the investment potential of a property. "Have a life - live in your house. But don’t sit around worrying about its value everyday. Use it and enjoy it," he says. (up)
Smart Moves by Ellen James Martin. Copyright 1998 Universal Press Syndicate. Reprinted with permission. All rights reserve. Copyright 1998 Norwest Mortgage, Inc. All rights reserved. This material may not be reproduced in any format without written permission. Norwest Mortgage and design is a registered service mark of Norwest Corporation. Information subject to change without notice. 8A0126
