The Cost of Home Ownership and Why It Matters
BY NANCY BIERENGA, REALTOR®, E-PRO, ABR, éLAN REALTY, PAST PRESIDENT, WEST MICHIGAN LAKESHORE ASSOCIATION OF REALTORS
We hear a lot about home prices and interest rates and the actual cost of owning a home. Numbers fly and most everyone knows the truth of what Mark Twain quoted: “There are lies, damned lies, and statistics.” So rather than just toss around the numbers, let me explain the numbers about home ownership and why they matter.
Over the last 10 years the price of homes has gone up significantly. In Muskegon County if you had purchased a home in 2008 for $100,000, today that same home would be worth about $163,000. That is without you doing anything to improve the home. This is definitely an amount of money it would be hard to match in any other investment.
Here’s another statistic for you. There is no doubt that the price of a home in Michigan, as in most regions of the country, is greater now than at any time in history. However, when we look at the cost of a home, it is cheaper to own today than it has been historically.
How can that both be true? The price of a home is the dollar amount you and the seller agree to at the time of purchase. The cost of a home is the monthly expense you pay for your mortgage payment.
To accurately compare costs in different time periods, we must look at home prices, mortgage rates, and wages during each period. Home prices were less expensive years ago, but paychecks were also smaller and mortgage rates were much higher (the average mortgage interest rate in 1988 was 10.34%).
The best way to measure the cost of a home is to determine what percentage of income is necessary to buy a home at the time. That would take into account the price of the home, the mortgage interest rate, and wages at the time.
If we look at the historic percentage of your income needed to purchase a home versus what is needed today or in the near future, if interest rates continue to rise as is predicted, we see that historically we needed 21% of our income to afford a mortgage. At the end of 2017 it would use only 15.7% of the median income to purchase. If today’s 4.75% interest rate goes up to 5%, it will take about 18.3% of your income to purchase. Rates would need to jump to 7% in order for the percentage of necessary income to be greater than historic norms at about 22.1%.
Rental costs have been going up faster than the cost of homes, simply because of supply and demand. There are fewer available rental units than there are potential renters for those units. Remember that no matter if you rent or if you purchase, you are paying a mortgage. The difference is that if you’re buying your own home, it is you who benefits from the increase in home value. When you rent you’re purchasing a nice retirement nest egg for your landlord.
Nancy Bierenga, of élan Realty, is past president of the West Michigan Lakeshore Association of REALTORS®, a member of the National, Michigan, and West Michigan Lakeshore Associations of REALTORS®, and the Greater Muskegon Woman's Club. She is an Accredited Buyer's Representative, a Certified e-Pro REALTOR®, and a Certified Fair Housing REALTOR®. She and husband Robert have lived in Muskegon since 1996. Phone Nancy at (231) 730-0887, email Nancy@HousesByNancy.com, stop by élan Realty's office at 4075 Airline Rd., Muskegon or visit the élan Realty on Facebook here.