The Reason Most People Buy Homes: Has It Been Forgotten?

Posted by: John Badalamenti on August 15th, 2008

People buy things for its “utility”, the pleasure or service received from a product or service, be it food, clothing, house cleaning, a car, a wide-screen TV, a computer, a hair cut, a manicure, and …a home.

I can attest first hand to the fact that when I show potential homebuyers a home, I don’t hear: “Oh look honey, we can make $15,000 on this kitchen when we go to sell it in 7 years”, or, “Wow, this wonderful back yard will net us $50K in 2015. People generally don’t think like that. They are looking at a home for its potential use and pleasure, its utility.

This doesn’t mean the homebuyer shouldn’t be prudent with their money. Most people should eventually buy a home, but not everyone and not at every point in their lives.

Obviously, responsible lending practices, coupled with a true understanding of what one can afford in a home are omnipotent. And the time to determine what one can afford is not in the kitchen of that “dream home” that was just viewed, but in advance with your lender and REALTOR®.

There are those that argue that a home’s future appreciation is extremely important in making a purchasing decision. I certainly don’t advocate purchasing a home to experience negative equity! But are we talking short term, or long term?

Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10 percent rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5 percent would return nearly 5 times the stock market return, at $100,300. (1) In addition, 60% of a homeowner’s wealth is from their home’s equity. (2)

Then there are those who are completely frozen to do anything in fear of home prices falling. Unfortunately they are missing out on taking advantage of the currently low mortgage rates, good inventory, sellers who are willing to negotiate, the opportunity to become a new homeowner, and will continue to live in a place they’d rather not be. This phenomenon is fed by a media who continues to report on housing issues at a national level; all real estate is local!

It is prudent to consult with a Realtor who is familiar with the local market and do one’s own research.

Those looking to purchase a home for its income potential and/or as an investment have a completely different set of goals. The main concern for purchasers for these types of properties are capitalization rates, gross annual incomes, gross rent multipliers, and return on investment. Not what room or back yard they are going to relax in at the end of a long day.

Ask a potential homebuyer the reason they are looking to purchase and a good majority of the time their answer will most often be “utility” in nature:

“We need more space.”
“I need to find a home closer to work.”
“I am relocating to the area and need to find a home that will suite my family’s lifestyle.”
“We have one child and one on the way and we need at least 3 bedrooms with a back yard.”
“I am looking for a single family with a home office.”

To sum it all up, a home pays an annual dividend: A roof over your head and the personal enjoyment that the real estate provides.

Isn’t that the real reason people buy homes? I hope this basic fundamental principle hasn’t been lost.

John Badalamenti is a REALTOR with Weichert, Realtors® in Collegeville, Pennsylvania

(1) The National Association of REALTORS® Wants You To Know, February, 2008
(2) HUD,Homeownership and Its Benefits, Urban Policy Brief #2, August, 1995
Disclaimer: The above should be considered reliable, but not guaranteed.
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Comments

3 Comments on “The Reason Most People Buy Homes: Has It Been Forgotten?”

George O Neill

I agree, some forget this basic principle. Most people I know buy their home because they need a place to live and enjoy, with the benefit of expected appreciation over the long term being a secondary consideration. With all the focus on declining prices in some areas, I think this fact gets lost. It is a good time to buy if the buyer has the resources and credit to do so.

George

cottages in Scotland

Sure, buying a home is really good investment. And it will be really good to be outside the city, having your own land when hard times come.
The prices for private houses in Europe change so quickly, so it is hard to keep a track of all the changes.. ((

realbench

The Gross Rent Multiplier calculation has helped me a lot in the past. In my opinion one of the greatest benefits of the Gross Rent Multiplier is that it tells me how many years I need to collect rent to total the purchase price.

Nice post, keep it up

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