Is There a Cost to Not Purchasing a Home Now?

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.

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.

Small Nest Egg; Big Dreams? Here’s How to Catch Up

If you’re dreaming of becoming a homeowner, or planning to upsize, you’ll need to tap your savings for a down payment and to support your mortgage application. Are you there yet?

If not, you’re not alone: Most adults over age 55 are behind on savings, according to a survey of 968 respondents conducted by Financial Engines. The survey showed that 68% of adults aged 55 and older have procrastinated when it comes to building a nest egg. And while most agreed that the best age to start saving is 25, many don’t start until 35…and it makes a difference.

The study provides a hypothetical example: This individual saves 6% of a $36,000 salary annually. The nest egg increases by 1.5% a year, due to raises, etc. If the saver begins at age 25, assuming a 3% employer-matching contribution and a 5% annual return, by age 65, he or she will have saved roughly $500,000.

But to reach the same goal when starting at age 35, the saver would have to contribute 12% of his or her income per year.

Making up for lost time isn’t easy, but it’s not impossible, thanks to the power of compounding. And if returns are compounded in a tax-deferred account, the potential income growth is even greater.

If you did get off to a late start, there’s still time. Talk to your advisor, and together you can build a solid savings plan to make your housing dreams come true. Just perhaps a bit later then you’d like.