Is real estate a good long term investment? Does it always go up over the long term? The graph below answers these questions. Notice the high just about doubles during the cycle.
In December of 1990 prices were just below $400,000 for homes and just above $200,000 for condos. Then there was a 16 years cycle. The next high for home prices was just below $700,000 and condos close to $350,000.
If we project a similar cycle into the future to 2023, the median price for a home will be $1,250,000 and for a condo the prices will be $534,000. Although 2023 seems a long ways off, there aren’t very many low risk investment strategies that allow you to increase your wealth by that much over a similar period of time.
Also, you get to live in the home, eliminate paying rent and you only have to put down 20% or less. Additionally, each year the interest on your loan is a deduction from your income taxes and when you sell your property, most times you can get a tax exemption from the increase in appreciation for either $250,000 or $500,000. Not bad!
This is still the time to buy. Interest rates are around 4.35% and home prices are still relatively low. If you are an investor rates are also attractively low, at just about 4.5%. Even if home prices go down a bit more you are still in great shape for the next cycle.
Even though the trends are somewhat predictable no one knows for sure what will happen in the future with the housing market but here is what you can act on and here’s what we do know:
1. – Interest Rates are low making it attractive for buyers to purchase now. Furthermore, it is likely that interest rates will begin to increase which will make purchasing more challenging. Rates are currently hovering around 4.5%. If the rate increased to 5.5% buyer’s affordability would be reduced by $59,471 for the life of a 30 year mortgage.
2. – According to the Honolulu Board of Realtors between April of 2008 and April of 2009 the median home sales prices on the island of Oahu decreased by 15.8%. However, between April of 2009 and 2010 prices increased by 2.7%. This is a buying signal for those who have been on the fence waiting.
3. – Lender sales continue to rise. The number of these properties on the market may mean more opportunities for buyers to find a good value. Buyers who have purchased foreclosures (lender sales) on average pay 74% of the tax assessed value as compared to 95% of the assessed value for regular sales.
4. – The number of Single Family Homes sold on Oahu has increased by 39.7% year to date. Condominiums have increased by 47.5% during the same period. Local economists Paul Brewbaker has forecasted flat prices to modest gains until the year 2013. Suggesting that significant appreciation will be at least 3 years away. If Sellers can hang on until then they should wait. If not, Sellers should take advantage of low interest rates and the number of buyers in the market now; because Buyers may not be around when interest rates rise.