Buying Up in a Down Market
Kelly Sweeney
It's no secret among professional investment counselors that most individuals who have accumulated wealth through their own means are contrarians. These people do not get caught up in the emotion of media negativity. They are able to look beyond the current situation and see opportunities which are overlooked by the masses.
Our current real estate market provides just such opportunities that are being overlooked by many due to the emotional pain associated with the decrease in value of their own homes. When home values were consistently appreciating every year, we all felt great about the market and homeowners were more than willing to sell for a gain and buy a larger home.
But consider this example. Let's turn back the clock five years and look at a young couple living in their first home having a value of say, $200,000. As their family expands, they desire a larger home more accommodating to their lifestyle. Typically, they would move up to a home of approximately $350,000. In order to do so, they would have to invest an additional $150,000 in the form of a larger down payment or a larger mortgage.
Now let's fast forward to today's market. That same family's existing home has declined in value to approximately $140,000. Emotionally, that is a big hit! But the move up home of their dreams has also declined in value. Applying the same percentage of decline indicates that the move up home is now worth $245,000.
They key point here is that the difference in cash or debt required to accomplish this move has been reduced from $150,000 to $105,000! Financially, it is far easier for this couple to afford the home of their dreams in the current market than it was five years ago, even when the loss in value on their current home is factored in.
Many homeowners today are missing great opportunities because they are emotionally caught up in the loss in value of their own home. The best advice for move up buyers is to accept that loss and then more than make it up on the purchase of your dream home!
