By Chad Huebener
Homeowners who have good credit and are thinking about upsizing have good reason to consider trading up in a down market, particularly if they have equity in their home. What we have in this current market is essentially the "perfect storm" for buying a larger home. Here is why:
1. There is more demand for what you are selling than what you are buying (i.e. more people are buying $200,000 homes than $400,000 homes). This means that right now, you won't have as much difficulty selling your home in this market compared to high-end sellers.
2. Lower interest rates put affordability at an all-time high. People with excellent credit scores are seeing 30-year fixed mortgage rates as low as 4-7/8% with no points.
3. Home values are back to 2002-2003 prices. Anyone who was saving for a home in 2002 or 2003 probably found that values were soaring faster than incomes, and faster than a savings account could be built for a downpayment. Now, those prices have returned, and with lower interest rates to boot. So now you can buy a larger home with less money than you could have even just a couple years ago.
4. Sellers are doing what it takes to sell. Sellers are using price reductions, rate buydowns, and offering other concessions such as paying off the buyer's remaining rental payments in order to get a home sold. These offers are more predominant with high-end sellers because they are finding smaller buyer pools for their properties.
5. What might be a lesser sale price than could have been obtained years ago is made up for, and surpassed, in the larger purchase. While starter homes have declined in value, they have not declined as much as mid-and upper-priced homes. So even if you need to sell your home for a break-even amount, you may still find yourself in an even better financial position seven years from now because you can acquire that larger home for far less money.
Here are the figures on why it is a good time to upsize when equity exists in the current home. Let's say that John and Susan bought a home in 2000 for $275,000. Their family also grew, and they are finding they need a larger home.
In the years 2004 and 2005, John and Susan's home was valued around $415,000. But they did not sell their home in 2004 or 2005. (If they had, they could have seen $146,000+ in appreciation.) Now, the home has returned to 2002 pricing, and is valued around $320,000. Although it is not what it might have been had they sold a few years ago, John and Susan still find that they have $45,000 in equity in the home. Essentially, they are down 22.8% from 2004/2005 pricing.
John and Susan want to buy a larger, custom home. The larger, custom home was built in 2005 for $800,000. In our market, larger homes have declined in value in larger percentages than smaller homes. Regardless, for the sake of being conservative, I will use the same numbers for declines in value. If the larger home is also down in value by 22.8%, we can expect it is listed around $617,600. John and Susan are essentially saving $182,400 off the original purchase price.
By making the larger purchase, they gain far more in value on the buy side than they lose on the selling side. They may be losing $101,000 in appreciation on the smaller home, but are gaining $182,400 on the larger home, for a $81,400 gain in value. Once our market fully recovers, John and Susan will realize this value.
Food for thought for those in need of a larger home...
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