Should I Wait to Buy a Home? (Part 1)

First in a series of three posts on the financial impact of buying and selling real estate in a softening market.

Image courtesy of Flickr

It seems like everywhere we turn today there is someone else who’s telling us that buyers (and sellers) should wait till the real estate market improves.  But is that really wise?  Personally, I don’t think so.  To illustrate my point, I will take you through a series of three different, common scenarios that people today find themselves in.  (WARNING: You will need to be able to do a little math as you proceed with this post – - – Sorry!)  My scenarios are based on a real estate market which begins to overheat (i.e. appreciation rate goes from 4% to 12% in four years), rapidly declines (i.e. appreciation rate goes from 12% to -6% in three years), then steadily climbs back to normal (i.e. appreciation rate goes from -6% to 4% in three years).  Sound familiar!

Scenario #1:

A couple walks into an open house and loves the home and is visibly excited.  After spending fifteen minutes with them they say, “If only I would have purchased two years ago when the market was hot.  If I try to sell my home now I’m going to get hammered.  Based upon what I know from my neighborhood, I’m going to lose at least $20,000.”

Response:

 They are absolutely correct (but just partially).  When determining whether someone is going to get “hammered,” it is necessary to look at all factors affecting their particular situation..  The potential buyer/seller in this scenario is only looking at the sale price of their home.  They must also take into consideration that the home that they are buying is also affected by market conditions.  In addition, if they have a mortgage, and most people do, this will also come into play.

Take a look at Table #1 below.  You will see that if this seller would have sold their home five years after purchasing it (at the peak of the market), they would have sold it for $274,450.   But hey – they weren’t ready at that time – lots of stuff was happening in their lives.  Now that they are ready two years later, the real estate market has softened and they can only sell their home for $252,824.  Simple math tells you that this is a loss of over $21,000!  Ugh!  Don’t fret – look at Table #2.  If they would have timed the market right (in their minds) and purchased their new dream home at the end of year five, they would have had to shell out just over $343,000 and used the equity that they realized from the sale of their home to secure a new mortgage for $245,400.  Because the market has softened and prices have come down, they can purchase the same home today for just over $316,000.  If you apply the equity they will receive from the sale of their home, they can obtain a mortgage of around $233,000.  This means their mortage amount will be reduced $12,000; or, to put it another way, about $70/month less out of their pocket!

Too often, people seem to think that the only home that rises and falls in a market is their own.  Remember, if you sell your home in a “good” market, you’ll have to buy a home for top dollar in that same market.

(NOTE: Even though I’ve painted a wildly advancing and retreating real estate market in this scenario, prices in Lancaster County have remained relatively stable.  Click on the Market Info tab to view current market information in Lancaster County.)