In years past, owning a home was seen not only as the ultimate achievement in terms of the “American Dream”, but also as a large piece of the personal finance puzzle as well as a source of large tax deductions. As the economy grew and companies “thrived” (or so we were led to believe), the population was led into a false sense of security. People felt that they needed to buy (as opposed to rent) at any cost in order to keep up with everyone else. The banks also caught wind of this attitude, and made it easier to achieve the dream by offering prospective buyers easier ways to get a loan, and, well you all know how the rest of that story goes. The resulting credit and housing crises brought forth foreclosures, abandonments, and bankruptcies the likes that have never been seen before. And with the bursting of these bubbles, came housing devaluations than look like they will change the way that people look at home ownership for the foreseeable future.
More difficult than ever
The biggest reason that owning a home was such a big part of personal finance was the theory that home values, unlike stocks or mutual funds, continually rise, and never fall. This led a large number of people to invest large sums of their money into their homes. As the race to purchase got more competitive, it became a seller’s market as the number of potential buyers outnumbered the inventories of homes available for sale. This pushed home priced higher and higher, and people started committed more of their disposable income to their mortgage payments. Then the crash happened, and all of these people were stuck in positions they couldn’t handle and the fallout led to more stringent lending practices. This new crackdown has made it more difficult as well as a longer process. Additionally, the increase in difficulty in obtaining financing may be a turn-off to many people, besides eliminating those that aren’t truly qualified.
Buh-bye tax break
A very attractive “selling point” so to speak when choosing to purchase a home used to be that you would generally be able to deduct the mortgage interest and real estate taxes. If you purchase a home these days with a moderate mortgage property-tax assessment, you may lose out on the ability to deduct the interest and tax payments on your individual tax return. Combined with your other itemized deductions, such as medical expenses and insurance premiums, charitable donations, income or sales tax payments, if you don’t have enough to exceed the standard deduction, you lose it. This especially hurts those who have paid off their mortgage and only have real estate taxes. At least in 2008 and 2009, you were given a break and were able to increase the standard deduction by up to $500 ($1,000 for married filing jointly) but that revision was not picked up for subsequent years, essentially taking away one of the biggest reasons to buy rather than rent for a good number of people. You might get lucky, though, and end up being able to take the deduction for a year or two before getting below the limit to take advantage of itemizing. In any case making a purchase just to take advantage of the deduction may not be such a wise idea, and you should always consult your tax professional before making that decision.
And then we come to everybody’s favorite housing expense–insurance. Natural disasters and the economy have taken their toll on insurers, and as such rates have skyrocketed recently. My parents saw their homeowners policy double before taking action and searching out a new underwriter. Some companies won’t even write policies in certain areas anymore, like here in South Florida it is difficult to find a company to insure your home; some people just have to deal with whatever rates they are charged since insurance is so difficult to get these days. What’s worse is the fact that insurance isn’t a write-off in any sense on an owner-occupied residence so there isn’t even the benefit of a tax deduction there. And, there is no way around it if you have a mortgage, as most lenders require a policy with specific coverages, and they could care less about the cost to you. Besides, would you really want to forego insuring your most expensive purchase and possession?
It may not be as pretty a landscape as it once way, but the real estate market is just as vulnerable as anything else to fraud, deceit and failure. Sometimes, a shake-up is what is needed for people to realize what is going on right in front of them, and to have everything set right again (hopefully). In the end, some people may change their minds and embrace renting in the future and others will view this as an opportune time to get in on some rock-bottom prices for investment properties, but one thing is certain: you really need to reassess everything after this mess.
Well, I’ve said what I’ve got to say. Now it’s your turn…do you think that the shine on home-ownership has worn off over the past couple years, or do you think that this correction in pricing will just start the cycle all over again?