Pandemics, bull markets, bear markets, recession, depression, and freedom of expression are all phrases we commonly hear in the media today. In any financial scenario about our future as a society, these phrases would be accompanied by recommended actions to preserve or protect wealth. One would be hard-pressed not to find a reference to real estate investing these days, and there’s a reason this constant hasn’t changed for decades. It is an indisputable fact of life that everyone needs somewhere to live.
Many factors impact one’s quality of life. Economic stability is one reason owning a piece of property may top that list. The benefits of home ownership remain despite the reality that housing shortages, an insurance crisis, increased interest rates, and political policies have lowered housing affordability to the point that many Americans feel that dream of home ownership will evade them.
The Dilemma Of Qualifying For A Home
There are plenty of algorithms and factors that may determine loan eligibility for home ownership, including debt-to-income ratios, credit scores, etc. Let’s take an oversimplified approach and use some standards. Let’s say housing affordability in Central Florida. Assuming your income as a single person is $60,000 per year and you want to buy a home, the prevailing recommendation is that your housing costs should not exceed 30% of your income. That would equate to around $1,500 per month in total household costs. With today’s median price in Central Florida of around $400,000 for a three-bedroom, two-bathroom house, if you were to put down 3.5% on a 30-year mortgage with interest rates just above 7 percent, your payments would be about $3,000 per month, which is twice the recommended amount.
Annual Appreciation May Be Your Key Component To Wealth Building
If you purchased this home for $400,000 you’ll have made $167,889 in payments over seven years. With a 7% down payment and closing cost, you would have paid, roughly $196,000, which is a $56,000 positive net (Or one year’s salary for many) over renting. The table below, which compares monthly payments to equity gained further highlights the reason this appreciating asset is valuable. Furthermore, with a conservative annual appreciation of 5% a year, you would accrue $121,334 in equity in just 5 years! That’s wealth-building equity.
Your Equity In 5 Years Could Be $121,334
| Year | Home Value | Amount Owed | Your Equity |
| 1 | $400,000 | $382,372 | $17,628 |
| 2 | $420,000 | $378,465 | $41,535 |
| 3 | $441,000 | $374,260 | $66,740 |
| 4 | $463,050 | $369,733 | $93,317 |
| 5 | $486,203 | $364,869 | $121,334 |
A Reality Check
The reality is that we are in the midst of a cultural paradigm shift and the definition of the American Dream is changing. For years, many equated big and fabulous homes with success. The definition of success in today’s world means being healthy, wealthy, well, and most importantly, in control of “time.” Maintenance of mega-mansions requires a commitment of time that many are not willing to sacrifice. They would rather spend their limited time doing what they love with those they love, not working to maintain status symbols. In this new world, just as in the times of old, the dollars associated with home ownership make sense. So make sure your home purchase makes sense for you.
