Everyone has that perfect home in mind, but if this is your first or even second home, the perfect home should not be the priority. The appreciation should be, and here is why:
Seattle is expensive. If you are buying your first or second home, you might not have the capital required to buy a “perfect” home. A home with few flaws, views, and location in Seattle proper start at nearly a million dollars and soar up from there.
Let’s look at how you can use other people’s money “lenders” to leverage your down payment:
For easy numbers, let’s say you buy a starter home at $500,000. Your down payment is $100,000. Your home value increases in one year’s time at 10% to $550,000. Your leveraged money has just earned 50%… but not really. You also paid $24,000 in interest during that first year, but you are able to write off the interest, so you really only paid ($24,000 x 0.35 estimated income tax rate). So in this case, you saved or got a return on your taxes of $8,400, so let’s say you only paid $15,600 that year for living in your home. That is only $1,300 per month, for those taking notes. (This is an estimate for explanation purposes only—please talk to an accountant. I am not an accountant! :-] )
Even though I deduct the interest from your selling profit, you still get the interest paid back upon selling. You paid that money from wages. So your next down payment is really the appreciation plus the selling costs. Let’s say you lived there for 3 years at 10% growth (which is much less than average currently). That puts your $500K house at $665K; you owe $385K. Selling fees are $61K for taxes, commission, escrow, title, and getting it ready to show. Your new down payment is $218,800. That is 20% on a million with enough for closing costs.
Now you can think of your interest payments as your rent and your principal payments as savings. You need a place to live regardless. When you buy a home, you are essentially living for free with profit for doing so. You could live with your parents and still not come out as well as buying your own home. Remember though, houses—especially older homes—often need work every year. Depending on what it is you do to the home, you will see some portion of return. New townhouses actually pencil out the best for returns, especially for those who might only live in the place for 2-5 years.
Now many people will ask, “But when will this all end? When are prices going to come down?”
People say this as if the last depression was a normal occurrence in our housing market. To them, I simply ask, “What did your parents pay for the home you were raised in???” I do not think our market will continue on this trajectory forever, but I do think it will for the next 3-5 years.
We are nowhere near meeting demand in new construction. Our rentals are full even though they are building them like crazy. Those people inevitably want to buy, and do so usually 1-2 years after they move here. (A 2-bed, 2-bath unit in Lyric on Capitol Hill with courtyard views rents for $3,300 per month, which is a $735K mortgage including taxes and homeowners insurance!) With a median income of right around $100K in Seattle (not including bonuses) means people can afford it. Upper middle class median income is at $172K per person in Seattle, which is just shy of San Francisco’s top earners. Yet our homes are still half the price of our Southern cousin.
I’ve said it once and I’ll say it again: Seattle is turning into the “NWFrancisco.” Getting on the right side of the proverbial “fence” is more important now than ever before. Getting priced out permanently is a real possibility for many in Seattle. Owning will insure you can continue owning in our beautiful city!
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