The real estate market is under the microscope now more than ever. The notion of home ownership was shattered for millions of Americans during the financial crisis, when an estimated $19.2 trillion in household wealth evaporated. Approximately 2.6 million homes were foreclosed on between 2009 and 2012, and the prospects of home ownership — still one of the top priorities for many Americans — became clouded with pessimism.
The recovery has been slow, but walking into the second half of 2013, the housing market has emerged as a pillar of the U.S. economic recovery. Inventory of unsold homes is declining and new home sales are stabilizing. Housing prices in many parts of the country have fully rebounded, and low mortgage rates continue to spur buying activity. Still, home ownership is at its lowest level since 1995, according to the U.S. Department of Commerce, striking the recent low in the second quarter of 2013. The home ownership rate in the U.S. fell to 65 percent in the second quarter compared to the pre-crisis high of 69.1 percent.
But President Obama is on a mission to change that. Speaking in Phoenix at the beginning of August, the president said the issue of home ownership is “the most tangible cornerstone at the heart of middle-class life.”
Here are a few reasons why, five years after the peak of the crisis, home ownership is looking attractive.
1. Mortgage Rates
According to Freddie Mac, the average commitment rate on a 30-year fixed-rate mortgage in August was 4.46 percent. Those who watch the market will know that this is substantially higher — by about a full percentage point — than where the average rate was in April, but those with a historical perspective will also know that this rate is still relatively low. Over the past decade, the only year during which the average commitment rate for a 30-year fixed-rate mortgage was meaningfully lower than August’s average rate was 2011, when rates averaged 3.66 percent.
What’s more, one of the primary reasons for the dramatic increase in rates over the past few months was speculation over the tapering of asset purchases by the U.S. Federal Reserve, which has yet to come true. Benchmark interest rates have already come down in response to the news (or non-news), meaning that mortgage rates could edge down in the coming months.
2. Tax Deductions
Home buyers — particularly first-time home buyers — can qualify for a variety of tax deductions. Home buyers can receive deductions on mortgage interest payments, deductions for the interest on home improvement loans, deductions for energy efficiency upgrades and repairs, and even a deduction for having a home office.
“Homeownership is one of the best tax benefits that the federal government gives out,” Robin Gronsky, principal attorney of Gronsky Law Offices in Ridgewood, N.J., told Bankrate.com. “People count on it. It’s how they calculate their out-of-pocket costs in owning versus renting.”
If you’re fortunate enough to be able to afford a vacation home, there’s even more good news — there are tax breaks on vacation homes, as well:
3. Increasing Confidence
There are many ways to measure the health of the housing market, and tracking home builder confidence is one of them.
After climbing higher for four consecutive months, the National Association of Home Builders/Wells Fargo’s index of builder confidence was unchanged in September, holding at 58. Confidence is now at its best level since November 2005, bringing back memories of the housing boom.
The reading was in line with estimates. Any reading above 50 indicates that more builders view sales conditions as good rather than poor. In the five years before the Great Recession, the index averaged 54, and hit an all-time low of 8 in early 2009.
“While builder confidence is holding at the highest level in nearly eight years, many are reporting some hesitancy on the part of buyers due to the sharp increase in interest rates,” said assciation Chairman Rick Judson, a home builder from Charlotte, N.C. “Home buyers are adjusting to the fact that, while mortgage rates are still quite favorable on a historic basis, the record lows are probably a thing of the past.”
4. Housing Prices
In July, home prices across the nation increased on a year-over-year basis for the 17th consecutive month. According to CoreLogic, a leading property information and analytics provider, home prices jumped 12.4 percent in July from a year earlier. Compared to June, CoreLogic’s home price index gained 1.8 percent in July. Excluding distressed sales, home prices increased by 11.4 percent from last year, and they are expected to post another double-digit gain in August.
Home prices are still nearly 18 percent below their bubble peak in April 2006, but every state except for Delaware logged an annual increase in July. The nation’s second-smallest state experienced a decline of 1.3 percent in home prices. The five states with the highest home price appreciation were Nevada (27 percent), California (23.2 percent), Arizona (17 percent), Wyoming (16.4 percent), and Oregon (15 percent).
Many observers expect home prices to continue increasing — however, it’s important to point out that other observers are warning that the rapid increase in prices recently is indicative of another bubble.