If you are a first time home buyer thinking of buying a home here in the Chicago area, you are probably asking yourself, why would anyone want to buy a home in today’s market? Fear is in the air and it is a scary time to buy. The news is filled with talk of foreclosures and declining markets. Although the Chicago area has remained stable, real estate prices have fallen sharply in many areas of the country. If you buy a home now, how do you know that prices won’t fall lower? The truth is, you don’t. But if you have good reasons to buy (You need more space, growing family, moving up in your job … whatever, you know your reasons), and you are planning for the long term, now could be a great time to buy a home here in the Chicago area.

Mortgage rates are low now and you have your choice of homes to buy. But there are some crucial benefits of buying real estate that go beyond the current market conditions. In an earlier post I talked about the first financial benefit of owning a home, how you gradually build equity by paying down your loan. A more dramatic benefit of owning a home is property appreciation. Over the years, home prices have risen steadily in the Chicago area and throughout the country. Even now, with the market slower, it still costs tens of thousands of dollars more to buy a home in the Chicago area than it did just a few years ago. Home prices could fall lower, but if you look at long term trends, real estate usually goes up and chances are that homes in the Chicago area will cost a lot more 5 years from now than they do now.

So how does appreciation work for you? Here’s an example. If you buy a home for $300,000, and the market appreciates, that is the property values increase, by 3% per year (Appreciation doesn’t move in a straight line. It may be 0 one year and 5% the next.), at the end of 5 years your home will be worth over $347,000. At the end of 10 years it would be worth over $400,000.

In this example, you have increased your equity by nearly $100,000 while living in your own home. There’s no guarantee of what home values will be in the future, but this is what has happened throughout the Chicago area in the past.

Let’s take this a step further. Let’s say you bought this same home for $300,000, but that you took out a mortgage for 95% of the purchase price, or $285,000. Let’s say that the mortgage was a 30 year fixed rate with an interest rate of 6.0%. Because your mortgage principal balance goes down over time, at the end of the tenth year your mortgage balance will be paid down to $238,500. If, through appreciation, the value has grown to $400,000, your equity is now worth over $165,000. Not bad for an investment of only $15,000.

Appreciation is the reason so many people are able to move up to a larger house. Having the extra money to use as a down payment, gives you the buying power to buy a larger home for your growing family, or maybe the chance to move into your dream home. Appreciation is one of the key benefits of homeownership, but the key here is that you need to allow time for it to work.

The market has slowed down recently and those who bought a home in the last year or two, haven’t seen much of any appreciation, and in some areas the prices have fallen. Time is the factor here. Real estate isn’t an investment you jump in and jump out of. It takes time to see all the benefits and when you buy a home you should plan on keeping the home for several years, minimum.

With prices down, this could be an opportunity. Historically, the real estate market has always moved higher. It may take some time before prices start rising again, but there are always new buyers coming into the market, through birth and immigration. The demographic push means that real estate prices will rise over time.

But owning your own home is a great investment even if prices stay flat. Tax advantages from owning your own home means the government is helping you to pay for your mortgage. I’ll go over this in a future post.

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