In all the doom and gloom promulgated by the national media, we tend to forget the very real value of our homes. Owning a home is still the primary path to savings for most Americans. In fact, for the majority of home-owning Americans, their home represents 60% of their total assets.
How does this happen? Most people put 10% or less down when they purchase a property. Recently, many have been able to buy for 5% or even 0% down. Where else can you put down $30,000 and control a property worth $300,000? That, my friends, is the power of leverage. But, wait, it gets better.
In most markets, homes appreciate gradually year by year. The recent California experience when home values exploded in value 25% to 30% per year for 4 years is hardly usual. No, the “normal” appreciation is about 5% to 7% per year. Considering that 10% down scenario on a property, by year 3, appreciating at 5% per year, that home has returned 94% on your investment. By year 5, that’s 225% and by year 10, that’s 623%!
Of course, these figures are the return on your original investment and do not take into consideration that you are making mortgage payments, maintaining the property and perhaps even making costly improvements. Just imagine if you were renting out that home. Then, the renters are paying your mortgage, and you are still earning those phenomenal returns.
So, is buying that home still a good idea? You betcha. And for those who have already purchased and may be worried about market fluctuations, remember that your investment is leveraged. Over the long run, you are earning awesome returns.