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The American Dream.

How Home Ownership, Done Right, Can Help You Sleep Better At Night. Even With the New Tax Bill.

Taliesin West. Architect Frank Lloyd Wright's studio in Scottsdale, AZ, USA. Photograph by Greg O'Beirne. Used with Permission: GFDL / Creative Commons. 

Home ownership done right can be a great way to build wealth. Homeowners in America have a median net worth of $231,400 versus just $5,200 for renters (according the 2016 Survey of Consumer Finances, conducted by the Federal Reserve Board). Having a healthy bottom line can reduce a lot of stress in your life. However, homeownership done wrong can be a complete nightmare. More than seven million Americans lost their home in the Great Recession; 4.6 million are still severely underwater on their mortgages (sources: RealtyTrac.com and ATTOMDATA.com). 

Home prices are back to all time highs, and the new Tax Cut and Jobs Act has changed the playing field in some markets. So, it’s important to proceed into the American Dream armed with the tips that will ensure successful homeownership.

How Will the Tax Bill Affect Home Ownership?

Dr. Lawrence Yun, the chief economist of The National Association of Realtors was quite clear about the impact the bill will have on real estate. In my interview of December 13, 2017, Dr. Yun stated unequivocally:

In terms of homeownership, the Tax Bill will be negative. Homeowners who feel an extra financial burden might wish to sell. Buyers will want to scale down. They will want a smaller home and a lower price, so they can stay within the mortgage interest deduction and property tax deduction limits. The upper end market will become much softer, while some of the residents living in high property tax states like New Jersey, New York, Connecticut and Illinois, may want to move elsewhere, where there is a lower property tax.

If you live in Silicon Valley, Silicon Beach, Seattle or Denver, the mortgage interest deduction cap will trim back the tax credit that has been keeping homeowners afloat in these expensive home markets. If you live in the Northeast, the $10,000 cap on your property tax deduction could be the straw that breaks the family’s budget. New Jersey is already the nation’s leader in foreclosures.

Tips for Achieving the $231,400 Homeowner Net Worth (Vs. the $5,200 Renter Net Worth)

1. Consider Purchasing in a More Affordable Area. If you live in San Francisco and a starter home is priced at three quarters of a million dollars, then consider buying a more affordable weekend home on the outskirts of the expensive city. If you are 15 or 20 years out from retirement, perhaps there’s a more affordable, fixed-income friendly locale that you’d like to retire to. If you purchase there now, it could be paid off by the time you are no longer working and on a tighter budget.

2. Shop in the Shadow Inventory. There are still 4.6 million U.S. homes that are underwater (ATTOMDATA.com), concentrated in Louisiana, Pennsylvania and Ohio. 1.4 million properties are vacant, concentrated in California, Florida and the Northeast (New Jersey, New York, Pennsylvania, Illinois, Ohio, etc.). New Jersey, Delaware, Maryland, Illinois and Nevada are the states with the highest foreclosure rates in the U.S. If you shop on the MLS, then you’re paying retail. When you shop in the shadow inventory, you can enjoy deep discounts, including a third or more off the competition.

3. Be Patient. If the Tax Bill is negative for homeownership, then there could be pressure on prices to come down. It’s better to wait and buy lower, than buy high and watch the value of your home sink under the cost of your mortgage. Just ask anyone who purchased in 2006 and lived through the Great Recession.

4. Buy What You Can Afford. Sometimes the equation includes thinking bigger. Instead of a one-bedroom cottage, should you purchase a 4-bedroom home and rent out a few bedrooms? Or a family home with a guesthouse in the back for your parents? Sometimes the extra income can reduce your own housing costs dramatically or even take care of the costs altogether.

5. Consider Taking a Job in an Upcoming Area. Tesla is building a gigawatt factory in Reno, Nevada, where median home prices are $306,000 vs. San Francisco, where homes average $839,000. Home prices have rocketed up by 40% in the last 5 years, while incomes are only up 10% — particularly in technology heavy cities, like San Francisco, Los Angeles, Seattle and Denver. If you can find a great job that’s off the beaten track a bit, your quality of life might be enhanced, along with your fiscal health.

6. Don’t Wait Until After You Pay Off Student Loan Debt to Purchase a Home. You’re going to live somewhere any way. So, why make the landlord rich? If you are earning a decent income, a lot of your housing load can still be tax deductible when you own your home, making your tax burden lighter. And, if you make a good purchase for a great price, then you have a real chance at increasing the value of your home and your personal net worth.

Home equity, done right, can be your key to financial freedom. Taking on the “good debt” of a mortgage could be your ticket out of the rut of student loan and credit card debt. This is clearly evidenced by the astonishing difference between the net worth of homeowners vs. renters.

The new tax bill limits the deductions that homeowners can take, but it doesn’t eliminate them. As Lawrence Yun told me last week, “Home ownership is the American Dream. Let’s ensure that home ownership incentives remain in place.” With the tips above, you can ensure your dream is realized.

Listen to my complete interview with Dr. Lawrence Yun, the chief economist of The National Association of Realtors at BlogTalkRadio.com/NataliePace.

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