Homes are a good investment, Birmingham Alabama Guide To Real Estate

Homes generally increase steadily in value, unlike riskier investments that can become worthless virtually overnight. For example, a new home purchase in 1977 for the median price of $48,800 was worth $150,707 in 1997. A home may not earn spectacular returns like some other investments, but owning a home is less likely to show dramatic declines often associated with stocks and other investments.

To illustrate a comparison between the value of owning a home and buying stock, consider the market during the past 28 years. The value of housing has experienced some ups and downs but the housing price appreciation on a national basis has been liberty_park.jpg (20539 bytes) stable and reliable, averaging 6.5 percent annually. The largest annual increase in prices of existing homes was 14 percent; the smallest was 2 percent in that time. During the same period, average stock values increased by as much as 35 percent in one year and dropped by as much as 24 percent. The average increase in the New York Stock Exchange Price Index was 6.9 percent. Average stock values dropped in eight of the 28 years.

Owning a home also provides unique income tax benefits. Mortgage interest and property taxes are deductible. When owners sell their principal residence, the profits of up to $500,000 are excluded from tax on capital gains. Stock dividends are subject to income tax, and profits on the sale of stocks, bonds and other investments are subject to a 20 percent federal tax rate for most investors.

Another benefit to homeownership is leveraging. A buyer can purchase a home with a cash down payment that is only a small fraction - as little as 10 percent or less- of the total purchase price, but the return is based on the total value of the property. This is called leveraging an investment, and it makes the rate of return on a home much greater than on an equivalent investment where the buyer must put up the entire purchase price. Here's how it works. If a buyer makes a down payment of $10,000 on a $100,000 home and the home's value increases to $105,000 during the first year of ownership, the home owner's equity (the value of the home minus any mortgage debt) as increased from $10,000 to $15,000. That's a 50 percent increase in just one year.