The Real Kirkland

Rent vs. Buy?

Kirkland, WA -

Nationally, nearly a full third of households are still renting. It’s approximated that in King County we’re at about 38%. If you’re one of them, analysts say you could be paying a hefty price.

There are two things that are important to note before talking about leaving a rental and buying your own home. First—and this is very important—the housing market is actually localized. People often ask me, “How’s the market?” (and I’m all too happy to oblige them) but what they should be asking is “How is the market in my neighborhood?” So the outlook in your neighborhood likely differs from the town 5 miles away and across the country. Second, home prices are tied to the temperature of the economy and job security. For example, I hear quite a bit that even though people understand that there are serious advantages to buying right now, they are going to hold their money close and sit tight for now. Wait and see what happens. Wait and see what others do. So, if your local economy is feeling a pinch, the home prices in your area may be down as well.

When things were going so well in 2005, Kirkland homes prices were rising swiftly, disproportionate to the rest of the county and even the country. Kirkland home values rose 23% from 2003 to 2004. Five years later in 2009, Kirkland homes sales are down 42% and prices are down 18% from 2008 according to Fidelity Title. This presents opportunity galore for renters who want to become buyers because they are a hot commodity in sellers eyes. Any seller or listing agent will tell you that there is a shortage of qualified buyers out there. We have moved from a “desire” market to a “need” market.

In my opinion, there has never been such a “perfect storm” of opportunity to buy and I am not sure there will be this opportunity again for a long, long time. If you are an employed, first-time buyer with good credit, you are a golden child and most real estate industry professionals today would encourage you to buy vs rent.

An argument for buying vs. renting…

If you pay $1000 per month in rent and that rent is increased a modest 8% each year (which is the legal limit in WA state, however this does not include additional add-on items such as parking or storage) you would end up paying just about $65,000 over a 5-year period! Worse yet, if you are paying $1,500 per month the total amount after 5 years is closer to $100,000! After forking over $100,000, you still would have nothing to show for it. Today, the average condo rents in Kirkland for about $1600 a month and a single family residence averages about $2300 according to the MLS. That means that the average renter in Kirkland will say goodbye to $120,000 over 5 years.

And what if you have been in this rental for years and care for the place as your own? Or you simply like to have nice surroundings or want to make the place your own? It’s not uncommon for renters to throw up the paint, install new light fixtures or plant some nice flowers outside. But you know what? All of your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With low down payment options in the 3.5% range still available for qualified buyers, affordable home prices and low interest rates, the very same money could have been used towards home ownership. This is not to mention the $8,000 First Time Home Buyer Tax Credit for qualified buyers, which is not a deduction off of taxable income but rather a fully reimbursed dollar amount which new home buyers can take advantage of through the end of November. The IRS defines a qualified buyer as someone who has not purchased a home in the last three years and the credit starts to phase out for individuals who make more than $75,000 a year.

In the economic pinch, new construction seems to be one of the best ways to take advantage of the buyer’s market. Builders desperate to move inventory are offering unprecedented bonuses on new homes. Right now Quadrant Homes is matching the government and granting homebuyers an additional $8k off home prices. They, as well as many others builders, are also including high-end finishes such as stainless steel and granite, in the low purchase prices, rather than charging the buyers for them as an upgrade. It’s really the buyers turn to command the market. It’s as if after all of these years of sellers kicking back while they perused multiple offers and squeezed buyers for top dollar, the buyers are getting their revenge.

Even using a standard 30-year fixed program, a mortgage of $300,000 (approximately the average purchase price of a condo in Kirkland) could be obtained with a total monthly mortgage payment—including property taxes and insurance—of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. In a typical market and over the long term you are building equity and presumably a retirement nest-egg. Most people count their home as their number one resource for retirement funds. Just ask the 240,000 seniors who are currently utilizing reverse mortgages in the U.S. according to HUD. After 5-years, the $300,000 mortgage could be reduced to $279,000, adding $21,000 to your net worth in addition to any gained equity.

Homeowners can also write off their paid monthly mortgage interest payments and property taxes on their federal income tax return. Check with your state income tax office to see if it allows deductions as well. Be informed and don’t believe the national headline hype. Seek the advice of a local Realtor who truly understands your local market. Try not to fall victim to nerves and make smart, sound decisions when it comes to home ownership. Many times is comes down to simple math. A qualified Realtor will consult with you on that math and any other outside considerations.

Jennifer Nilssen can be reached directly at 206.853.1491 or at  jen@tecrealestate.com. Learn more about the Kirkland real estate market at www.livekirklandwa.com

This is not meant to be legal advice in any way. Please consult your real estate or tax attorney with any further questions.