Don't Beleive the Hype! It still makes sense to make your move in real estate.

Nearly a full third of households are still renting...but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these "echo boomers" could mistakenly decide to put off the purchase of a home because of all the noise about a "bubble" in home prices.

Is there a "bubble"? The simple answer is "no". Even if interest rates move a bit higher, it won't be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won't stop someone from purchasing the home of their dreams...but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.

It is important to note that housing tends to be localized. So if the job market in your area is weak, housing prices could under perform the rest of the country.

But this talk of a housing bubble has been going on for a few years now, and those who were unfortunately victimized by continuing to rent instead of purchasing a home are painfully mulling over their missed opportunity. But is it too late? Even with the more moderate levels of appreciation expected…procrastinating on that home purchase could cost you a bundle.
Let's look at an example. If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it - how about any improvements you might make to a rental property? It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what…all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With the extensive variety of programs to help buyers obtain a mortgage with little to even zero down payment, the very same money could have been used towards home ownership. Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment - including property taxes and insurance - of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage would be reduced to $279,000, adding $21,000 to your net worth. Home appreciation can add an even bigger chunk. If your home appreciates at a modest 5% per year, the value of a $300,000 home would increase to $383,000 after 5-years. Subtract the remaining mortgage of $279,000 and you have a whopping $104,000 of additional net worth! Even if the appreciation level were at 3.5% or half the historical norm, the result would be $77,000 of additional net worth.

But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.

Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the effect a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.

Don't be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction.

The Cost of Waiting.. Real Estate Continues to Appreciate in the Greater Seattle Area

This month we are going to focus on another cost for real estate investors. That, of course, is the cost of waiting. Economists call it opportunity cost, that is; the cost of loosing one option while you are exercising another. In this situation, it would be the cost of leaving your money where it is, instead of moving it into an investment vehicle. In the next couple of weeks Vicki and I are going to be publishing several blogs that really go deep into investigating the "actual" cost of waiting.

This week we'll be talking about one of the primary costs incurred in the real estate waiting game; appreciation. As I tell most of my clients, "Appreciation is a wonderful thing if you're the one getting the benefit of it, not so great if you're the one chasing it." We are very blessed to live where we do. This market has been, and continues to be an amazing place to live and do business. Following is a blurb taken from our local paper, The Seattle Times.. By: Elizabeth Rhodes and Justin Mayo.

Prices keep soaring

"Superstar" Seattle market has grown faster than U.S. market for decades.

Of course, if moderate-income buyers instead choose a condominium or less-expensive house (often a fixer-upper), the possibilities are greater.

But for how long? King County's single-family-home prices shot up 19.7 percent in the first six months of this year, compared with the same period in 2005, according to The Times analysis. It's based on price per square foot, considered the truest measure of housing cost.

As the residential real-estate market cools in other parts of the nation, one question is why Seattle's market remains robust. Money magazine predicts homes in the Seattle-Bellevue-Everett area will appreciate 10.5 percent between this June and next. That's twice the rate predicted for the country overall.

Home prices are often described in simple terms as products of supply and demand, but several factors — land availability, job and population growth, and interest rates — make the housing market more complex.

Professor Chris Mayer, director of the Milstein Center for Real Estate at New York's Columbia Business School, says Seattle outperforms other major cities because it's relatively unusual.

"Seattle is one of a handful of places I've written about and referred to as a 'superstar city,' " Mayer said. "It's not quite in the same league as San Francisco and New York, but if you look at census data, house prices in Seattle have grown faster than the national average for 50 years, from 1950 to 2000."

So major home appreciation "is a pattern that's been going on for a long time," Mayer said.
He defines superstar cities as people magnets because of their attractiveness and amenities.
"But being attractive isn't enough," he said. "It's also necessary to limit supply." That's happened here for two reasons.

First: Seattle is essentially out of land on which detached houses can be built.

Second: The state's Growth Management Act effectively limits supply by restricting where homes can be built.

"When you restrict construction you inherently raise the prices of homes," Mayer said. "So it ends up being the case that the only people who can afford to live there are people with higher incomes. I'm not saying this is good or bad or desirable, but it is an outcome of restricting new construction."

Plenty of King County residents can afford houses. The percentage of households earning more than 150 percent of median income — that would be more than $90,000 today — grew faster than any other income category between 1990 and 2004. It now accounts for almost one-third of all households, a county study found. They number almost 250,000.

But Mayer says having well-off local residents isn't the whole story.

"In superstar markets, including Seattle, you can tie the price of housing to the incomes of the wealthiest Americans — not just the people who live in those cities right now," he said.

"This means house prices can grow faster than the incomes of existing residents if there are new residents from outside the metro area who can afford to move in and buy those houses."

That's happening here. Puget Sound's already strong economy is growing — a trend expected to continue at least through 2009 with the addition of 140,000 jobs, according to Conway Pedersen Economics.

This growth has made Washington one of the top 10 states attracting more people than they're losing, the state's Economic and Revenue Forecast Council reports.

Californians account for roughly 30 percent of our newcomers. Their state's housing prices make Seattle's look like a fire sale and nearly guarantee that California homeowners arrive here equity-rich. Just one example: Late last year, San Francisco's median home price was $825,000 — more than double Seattle's.

"In a regional sense, it's job growth that's driving housing demand and house-price growth the most," King County demographer Chandler Felt observed. "The demand is there and continues to be there."