Why is housing debt any different from the fight against consumer debt? Two words: appreciating asset.
This can stand at odds with larger financial goals and financial freedom. When I sit down with first-time buyers, I often try to lighten up the learning curve by joking “they don’t teach this in school,” but that’s the unfortunate truth. The concepts on how money works and how we can reach larger financial goals and financial freedom truly are not part of our standard education or upbringing.
Our current inflation economy has certainly highlighted this weakness on both a broad and individual basis. Let me explain in the context of the housing market. Post-Great Recession, we entered a very unique decade that was a perfect storm for affordability. Supply and demand conditions pushed home prices extremely low and to stimulate the economy, interest rate subsidies kept mortgage rates historically low as well. Like going from the couch to a 5K fun run, you didn’t have to really gear up for buying a home from 2010-2020.
The extreme affordability in that decade is hard to compare to what we are seeing today. While current affordability conditions make working toward homeownership feel more like a marathon than a 5K fun run, the financial and social/economic benefits of home ownership are still very much worth the effort. What I wish to explore in this month’s article is that change of perspective. While we may see some improved conditions in the near-term for housing affordability, what really needs to change is us.
Debt Accumulation vs. Wealth Accumulation
We’ve all likely heard the old adage “you’re either paying interest or making interest.” The concept is simple enough, but the practice does require some discipline. I am not a financial advisor, but it doesn’t take a licensed expert to know that debt can get expensive! I get it when consumers complain about mortgage rates over 6% but I scratch my head when I see the chart below seeing we’re at all-time high levels for national credit card balances, with average rates exceeding 21% annually.
That $6,000 vacation that took you 12 months to pay off costs $704 in interest. It’s the time cost of that decision that cuts even deeper than that $704. Do that consistently over five years and that’s $3,520. Let’s talk about the opportunity cost of that decision. I’m not saying don’t go on vacation, but let’s say you budgeted half the cost and took the other $3,000 saved plus the otherwise $704 interest cost and invested the $3,704 over the year. With an inflation adjusted 50-year average rate of return of 7.39% on the S&P 500, that would produce a total investment balance of $22,276 in just five years. That equates to only $308 per month invested and with compound interest grows into something certainly substantial. The root of this issue, I believe, is that we conflate needs and wants. This truly is a principle of delaying gratification for a great good. Getting ahead is as simple as getting a vision, creating the plan and unapologetically sticking to it.
Home Debt = Forced Savings
Why is housing debt any different from the fight against consumer debt? Two words: appreciating asset. What you don’t realize is that when you purchase the average priced home of $650K in Flagstaff with a national average of 10% down, you then get an appreciation not on the 10% you put down but on the $650K value of the home that you have yet to fully own.
Based on the 30-year average of Flagstaff appreciation of 4.3%, the net worth increase of a homeowner from a renter, based on current market interest rates and rents, is approximately $90K. That’s definitely outpacing our previous example of vacation savings. With current market rates, your monthly mortgage may be higher than a monthly rent on a similar property.
Looking at historic statistics, human behavior shows that this forced saving of investing in your home equity actually plays out to be the most effective investing tool with home equity being close to an average of 83% of the wealth in retirement currently.
Wherever you are in your current financial picture, there is likely room for improvement and room for more wealth creation with home ownership. Getting the first-time home purchase, buying that second home or rental property are all things that can be done in this market but need better habits and preparation to accomplish. Get on the path sooner than later and get your actions tracking to your dreams! FBN
By Chris Hallows
For additional information or to schedule an appointment visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W Rte 66 Suite A-3.
Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff. NMLS 306345 Ark-La-Tex Financial Services, LLC NMLS 2143 |Equal Housing Lender
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