Thursday, April 24, 2008

A nice home PRN

Hello. I am a new Blogger and this is my first Blog.

I would like to address a comment that my son in law, Galen made to me yesterday. He told me that he had a neighbor who was re-locating out of Tallahassee. They were opting to rent out their home " rather than take a loss on what they deem its value to be." Their hope is that the market will come back and they will recoup the investment that they have in the home.

We live in the midst of a market that is starting to settle after a major correction. We have seen property values in Tallahassee appreciate an amazing 10 to 15 % per year for the last 5-7 years. I have been a Realtor for 5 years starting my 6th year. My previous career was as an executive in the pharmaceutical industry. I came into this industry as it was climbing in the realm of the most robust "bull" run in its history. I overheard a lot of other realtors speaking about how long would they conjecture this to last. Most were of the opinion that the real estate bubble was a real phenomenon and the rupture would occur sooner than later. It has now transpired.

Where are we now? Amidst a relatively soft landing here in Tallahassee. Recent statistics put out by our Florida Association of Realtors suggests that Tallahassee homes in 2008 compared to 2007 have actually held their value and gained another 1-2%, on average. It is true that we are sitting on the top of a record inventory of homes, especially townhomes.

That is GREAT NEWS for people who have delayed purchasing a home until now. If you are at all credit worthy you ought to eschew paying rent for purchasing. Interest rates are right at 6% on a 30 year, fixed mortgage. Fact of the matter is because the inventory is fat and interest rates are relatively lean you can successfully make a good buy and escape paying rent right now. What does that advantage you? If for nothing else it would be smart to buy just so you can enjoy the benefits of your real estate mortgage interest as a tax deduction. Just how much of your rental payment is tax deductible. If you said NONE then you are absolutely correct. Think about it. If you are paying $1000 per month in rent, almost all of that on a relatively new loan is deductible as mortgage interest on your tax return. What does that mean in real dollars? If you were in a 10% tax bracket that would mean that you would save 10% of $12,000. Who could not stand to put an extra $100 per month back into their pocket? Do you like golf? How many green fees would $100 a month pay? Movie tickets? Meals in a Restaurant?

Now back to Galen's friend. He is all depressed because his home is no longer worth $200k. It is instead, more likely, worth $175-180k. I would be willing to bet that he paid, applying our 10-15% appreciation, per year math, somewhere around $115k for the home, 5 years ago. That is a mitigated SWAG application. Think about that for a moment. You have gathered about $60-65k in equity becuase you had the foresight to buy 5 years ago. Now you are hesitant to sell because you want to maximize your profits like your cousin, friend, ex-wife did. So you are going to rent it out? Ever drive a rental car? Notice how well people care for rental cars? The same applies to your home that you are going to rent out. It will be beaten up. Unless you are extraordinarily lucky or careful.

That home has provided you shelter for 5 years. It has provided you a tax shelter as well. Why not go ahead and sell it and get your equity out of it and move on. In your mind you have lost $20-25k on the house. Guess what. Now you are a buyer. You are moving to perhaps a part of the state or country where the bubble has done more damage than here in Tallahassee. You have cash in your pocket to buy another home. I would be willing to bet that you are going to make out like a bandit on your next purchase. You are going to be able to buy a bigger and better house than you had.

We read too much stuff in the printed media about the real estate crisis. We see all sorts of horrifying scenarios on the boob tube re: the housing melt down. It is all true. However, the steady head will make out, OK. If you hold property then you are still in the drivers seat. It is just costing us a little more to drive on down the road. $4.00 per gallon very soon. That is another subject.

It is going to all work out. Maybe not exactly as you would choose, but certainly in some fashion. It is never going to turn out as badly as you now think it is.

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