The New Oxford American Dictionary defines opportunity cost as "the loss of potential gain from other alternatives when one alternative is chosen."
With interest rates and home prices expected to rise in the near future, the opportunity cost of not purchasing a home in today’s market may grow, according to the Opportunity Cost Report issued by realtor.com. The site provides online real estate information and services through the National Association of Realtors.
The realtor.com report examines various factors by market, including the property appreciation gain renters forego when they hold off on buying, as well as other financial benefits of homeownership.
According to Jonathan Smoke, chief economist for realtor.com, “Current market conditions give buyers an opportunity to build substantial wealth in the long term, compared with renters and later buyers, in advance of the projected increase in mortgage rates and continuing price appreciation.” He notes that the “analysis looks solely at the financial reasons to buy a home, based on assumptions about rising mortgage rates and changes in home values.” It doesn’t consider other reasons to buy or not buy.
In buyer-friendly markets, homeowners generally make more money over the life of their ownership than in balanced or sellers’ markets. However in virtually all markets, homeowners see significant financial benefits over lifetime renters. In 88% of U.S. Metropolitan Statistical Areas (MSAs), buying a home produced a financial benefit of at least $100,000 in 30 years. In buyers’ markets, that benefit will rise to, on average, $217,726 over a 30-year period.
“We’re at a critical juncture: Rents, home prices, and mortgage rates are all expected to rise significantly over the next several years,” Smoke says. “That means the cost of delaying homeownership will go up even more sharply, if you wait three years or even one. It’s much like the decision to start contributing to a 401(k). Delay contributing, and you lose out on the compounding returns.” Check out Realtor.com's Rent or Buy Calculator.
According to Smoke, "Nearly 90% of the markets (335 of ‘em) produce a financial benefit of at least $100,000 from owning over 30 years. In addition, almost a quarter of the nation’s markets reap a financial return greater than the national average." Buying a house can provide positive financial benefit, but owners have to wait until the buying and selling costs cancel out so they can break-even in their purchase. The national average is just over three years, but staying committed to the long term will provide higher financial benefit.
It’s important to realize that opportunity costs are not just financial or lost monetary gains. Opportunity costs can include things like lost time or other delayed or foregone benefits. In the case of home ownership, tax benefits, the ability to access area schools and amenities – and the satisfaction of being a homeowner and realizing the American dream – should all be considered.
Check out these common questions to help get you started in your home buying process.
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