Buying a home in a slow market

Nation's Business, April, 1990 by Paul N. Strassels

Buying A Home In A Slow Market

More fortunes have been made in real estate than in any other investment. At least that's what the real-estate pundits say. The tax breaks alone make real estate an important investment consideration. Chances are that a large percentage of your personal wealth is tied up in the equity you have built up in your home.

The question is, is investing in residential real estate a smart move in today's market? To decide, you must consider the elements one by one.

The interest you pay on your home mortgage is fully tax-deductible as long as you hold the mortgage to $1 million or less.

The real-estate taxes are deductible, too.

And, best of all, the appreciation in the value of your home is tax-free until you sell. You may avoid taxes even then, if you purchase a more expensive home within two years or you qualify for the $125,000 exclusion for homeowners over age 55.

But what if you are living in a market where real-estate values are not increasing at a rate that exceeds the rate of inflation?

Currently, there are more markets in the country where appreciation is almost zero than there are markets where real estate is booming at double-digit rates.

In those slow markets, it may be to your advantage to rent.

In making your decision, consider the following:

* How much would it cost to rent each month?

* How much would it cost to buy, taking into account your down payment and closing costs? Getting into a house isn't free. Even when you are using Veterans Administration financing, there are some costs.

* How much does your monthly mortgage payment come to after taxes? The easy way to calculate that figure is to add your loan interest and tax payments and then multiply the result by your tax bracket.

If your monthly mortgage payment (including principal, interest, taxes, and insurance) comes to $1,500 - with $900 of it going for interest and real-estate taxes - your after-tax payment comes to $1,248. (The process: Multiply the $900 by the tax-bracket figure of 28 percent; the result is $252 and is subtracted from your mortgage payment.)

* How long do you intend to stay in the house? It rarely makes sense to buy when you expect to move within a year or two, especially if housing is not appreciating rapidly.

* How quickly does housing turn over? You won't want to buy if there is little appreciation, or if you plan to stay in the area for no longer than three years, or if it takes six to nine months for a home to sell after it goes on the market.

* How do prices this year compare with those of the past three years? The answer should give you a pretty good idea of the rate of appreciation.

If you are renting, you may want to stay put.

If you own, you may find you are better off where you are and should delay moving to a fancier place until market conditions improve.

If you must sell your home because you're moving to another city or for other reasons, you have to weigh income-tax considerations when deciding whether to buy or rent a new place. Of course, you have two years to decide.

To buy or not to buy? Only your calculator knows for sure.

PHOTO : Rent or buy? To come up with the right answer, you must get out your calculator and weigh a host of factors.