Knowledge Hoop

Homeownership has always been a key component of the American Dream, but as a result of the recession, many Americans are beginning to question if it’s worth it.  Since 2008, home values have declined at record levels.  In the African American community, home equity is one of the most significant contributors to an individual’s net worth.  Although many of us focus on what we make or our annual salary, the true measure of wealth is net worth.  Net worth is the difference in the value of your assets (what you own) and your liabilities (what you owe.)

While home values in most communities were impacted by the increase in the number of foreclosures, African American communities were affected at a greater level due to the number of sub-prime mortgages issued to African Americans.  The State of the Dream 2010:  Drained, published by United for a Fair Economy reported that over half of the mortgages issued to Blacks in recent years were sub-prime loans mostly to people who qualified for regular loans.

There are a host of calculators and charts that can be used to assess whether it’s better to rent or buy, but I believe the decision should be based on more than math.  If you are faced with making the decision to rent or buy, please consider the following:

• Mortgage rates and home values are at historical lows.  This should not serve as a notice to buy more house than you can afford.  It simply means that individuals who couldn’t afford to purchase a home years ago may now be able to experience home ownership.  Additionally, we have to stop looking for the quick pay-off.  Many of us want equity in our homes right away, but I have a question for you – how much equity will you earn while renting?  A key takeaway from the recent housing crisis is to be weary of quick equity.  According to the Federal Reserve Bank of Cleveland, a reasonable estimate for home appreciation is approximately 2% annually.  As such, it is important to be realistic and patient
• Credit worthiness is required for renting and buying.  If you are choosing to rent because you are afraid of being turned down by the bank when applying for a loan, you can also be turned down when applying to rent.  Another consideration is that more people are renting today, which means landlords have the ability to be selective when interviewing potential occupants for their property.  If you are concerned about your credit profile, take an opportunity to go to www.annualcreditreport.com and request your credit report from all three major credit bureaus.  You can also go to www.freecreditscore.com to receive your Experian credit score for free
• Do your homework by researching different loan products.  You don’t have to become an expert on mortgages and the home buying process, but you should know the basics.  There are a number of credible sites that can provide a baseline of information for you.  Be realistic about what you can afford and ask questions.  Avoid creative loan products that may allow you to purchase more ‘house’ today, but can carry hidden costs or balloon payments that could very well mean trouble later

The choice to rent or buy may vary from person to person, but for the African American community, I believe the answer should be to ‘buy’.  There are a record number of foreclosures on the market right now and there are investors purchasing them for ‘pennies on the dollar.’  To achieve anything in life you have to be willing to take a risk.  The same holds true for investing.  Many of us only want to purchase something when others see the value in it, but true investors see the value before others.  This is how wealth is accumulated.  I know that renting may appear safe in today’s market, but if you want to accumulate wealth, you must take the risk and choose to buy instead.