We celebrate National Homeownership Month each June, but this year, we are particularly aware of the important role “home” plays in our lives. We have spent the past year quarantining, working, and learning from home. More than 140,000 individuals and families purchased a home in Virginia over the past 12 months, setting down roots in the commonwealth, starting a family, and building a community. It’s important to be aware of the financial benefits of homeownership as well.
There are many reasons homeownership continues to be an important part of the American Dream. One key benefit of homeownership is financial. Owning a home is the primary way in which Americans build wealth. Homeownership promotes financial stability. Nearly 75% of Americans said that buying a home is a good investment, a share that has remained relatively constant for years.
Is Buying a Home Still a Good Investment?
As home prices escalate, some people are worried that buying a home at this time is not a smart financial move. But there is solid evidence that over the mid-term and longer-term, homeownership is a good investment and there are many financial benefits of homeownership.
In the first quarter of 2021, the median sales price in Virginia was $323,333. Five years ago, in the first quarter of 2016, the typical home in the state sold for $249,167, which means prices rose by 30% over the past five years.
If a family had purchased the typical home in 2016, five years later, that family would have accrued nearly $55,000 in housing equity. The profit accrued takes into account the out-of-pocket costs associated with buying and selling a home and also reflects changing interest rates.
There are even impressive financial gains after just three years of homeownership. In Virginia, if a family purchased the median-priced home in the first quarter of 2018, they would have gained more than $34,000 by the first quarter of 2021.
With home prices rising quickly over the past year, there are even gains to be made in the very short term; however, in most local housing markets, homebuyers should not expect to turn a profit in just a year.
Where Are Financial Gains Greatest?
Buying a home in Virginia is a smart move throughout the commonwealth. There are several local markets—particularly communities in Northern Virginia, the Charlottesville area, and parts of the Northern Neck—where the typical homeowner purchasing a home five years ago would have gained more than $90,000 in equity, even after taking into account a 5% downpayment, 1.5% buyer closing costs, and 10% seller closing costs.
In most counties and independent cities in Virginia, the typical housing equity gain over five years was between $60,000 and $90,000.
What is the Outlook for Homeownership?
Home prices have hit record highs in many parts of Virginia and many home buyers face stiff competition and significant price escalation. It is easy for a home buyer to get caught up in the FOMO (“fear of missing out”) and wind up in a bidding war they did not expect. Home buyers should be cautioned about pushing the limits of what they can afford or conceding on inspections or appraisals which could put them at financial risk down the road.
But even in this frenzied market, buying a home to live in for five or more years will still typically be a positive financial move for individuals and families. While stories of homes selling for hundreds of thousands or even a million dollars over asking price will continue to make headlines, most price appreciation reflects the strong underlying fundamentals of the market.
Here is some advice REALTORS® can offer buyers to help them navigate this fast-paced market and come out ahead:
- Be prepared to make an offer when you find the right house. Getting a mortgage pre-approval, setting aside an earnest money deposit, and identifying the sources for a downpayment are all essential steps to take to be ready to act.
- Decide what compromises and concessions you are comfortable with. In the heat of the home-buying process, home buyers may make decisions that are ultimately not right for their situations. Buyers should think ahead about the maximum home price they can afford, as well as their comfort level with waiving inspections or appraisals. And then they should stick to those decisions during the negotiations.
- Broaden the home search to look at different neighborhoods or for different home types. While home prices are rising in just about every community, there may be neighborhoods a buyer has not considered that meet their needs and offer less competition. In some markets where the inventory of single-family homes is tight, buyers could look at townhomes where there are more options.
- For some prospective home buyers, waiting to purchase a home could be the right decision. Inventory should expand a little later this year and the frenzied bidding wars should begin to calm down. Mortgage rates could tick up a little by the end of the year, but that could be a reasonable price to pay for a less hurried home-buying experience.
Click here to send any comments or questions about this piece to Virginia REALTORS® Chief Economist Lisa Sturtevant, PhD.