An UrbanTurf report states that it is 28% cheaper to buy than to rent a comparable home in the long-term here. Ever since the U.S. housing crisis, homeownership has waned and the rental market has exploded. Subsequently, the number of rental units hasn’t kept pace with the demand, especially in popular millennial areas such as D.C. This has led the rents in D.C. to rise faster than any other consumer category and D.C. is now the fifth most costly place to rent in America. Even those with solid salaries are finding their expenditures on housing to be more than the recommended 30% threshold, states a SmartAsset report. In other words, renters in the District are paying heavily for homes that don’t build equity, don’t offer tax advantages and don’t provide protection against payment increases each year.
On the other hand, the D.C. area is ranked among NAR’s top ten places to buy a first home in 2017. Median house prices here rose by only 4.3% this year, which was offset by a year-over-year appreciation of 5.7% by Zillow’s estimates. With the supply of affordable housing increasing, income levels rising, and interest rates dropping to a historic low, the outlook for millennials who are considering becoming property owners is very optimistic.
Buying a home has tax benefits
While there are limited tax advantages to being a renter, homeowners can realize tax benefits at purchase time, during their homes’ lifetime, and even at sale time, in the following ways:
- Mortgage interest is a tax deduction: The mortgage interest paid annually is deductible from the applicant’s federal income tax, up to $1 million of the mortgage amount.
- Points to ensure loan rates are deductible: The points (fees paid directly to the lender at closing in exchange for a reduced interest rate) paid to ensure a loan rate are tax-deductible, as long as the buyer pays them, not the seller.
- Property Mortgage Insurance (PMI) premiums are deductible: If a borrower takes a mortgage with less than a 20% down payment, his/her lender will require the mortgage to be insured. The insurance premium is tax-deductible if the applicant’s yearly income is less than $100,000.
- First-time homebuyer special tax benefit: If first-time homebuyers are tapping into their IRAs for the down payment, they can use up to $10,000 ($20,000 for a married couple) of the IRA funds toward the purchase of a first home. However, the IRA funds must be used within 120 days of withdrawal.
- Capital gains on selling are tax deductible: The profits earned on selling a home are protected from tax deductions. If the applicant is married and filing jointly, $500,000 of the capital gains are sheltered; $250,000 for single homeowners. Certain conditions must be met to qualify for this tax break.
- Property tax is discounted: Property taxes are deductible for the entire lifetime of a home.
A home is a good hedge against inflation
Inflation typically impacts rental costs, driving up monthly payment each year. This is a benefit for homeowners who use their residences for rental income. Property prices and home values also rise with inflation making them good hedges during these economic periods and good investments.
Conversely, fixed rate mortgages are unaffected by inflation. The monthly amount remains the same. And an adjustable mortgage (where the interest rate varies with inflation) has a cap for the number of times in a year that the rates can “adjust.” Hence, homeowners don’t have to worry about surprise hikes and they can plan their finances accordingly.
A home can build retirement savings
Retirement may be a long way off for millennials, but it can be an important factor when evaluating the benefits or buying vs. renting a home. According to Harvard’s Joint Center for Housing Studies, just 50% of U.S. renters in 2014 had affordable housing. The rest used more than 30% of their salaries in paying rents, leaving them with less money to put towards investing and saving for retirement.
Owning a home supports a more customized lifestyle
Apart from all the financial benefits of homeownership, homeowners typically enjoy more control of their living spaces, with greater freedom to decorate, renovate, or landscape. They tend to develop deeper engagement in the communities while also enjoying more landlord-free privacy. And their purchases decisions more often offer flexibility to accommodate their longer-term needs, e.g., marriage, children, home office space, etc. On the other hand, renters often make shorter-term decisions that may require them to move to more expensive space every time their circumstances change.
To sum up
In the short term, renting might seem like a good option, but after a year or two, renters end up paying more per month with no tax benefits or equity to show for it.
For financial grants and programs available to first-time homebuyers, read the “Financial Assistance Programs to Help First-Time Home Buyers in the D.C. Area” blog. For a realtor who can explore your home-buying options and get you the best deal, contact Hunter McFadden.