Trading Up In A Buyers Market
If you’re someone that would like to move, but aren’t sure if that’s a foolhardy decision, maybe this will help offer some perspective. In the past during other soft real estate markets it can actually be smarter to trade up. It’s widely regarded as investing wisdom that you make your money on the buy, were the purchase price of an asset is the single most important factor when it comes to your end of the day profit. However, in residential real estate, most regular homeowners, not professional investors and focus more on the value of the home they are selling and get all tied up in knots over the decreased value in the market, rather than focusing on the value of the home they want to buy. You want to look at both, the big picture. For example; if the market goes down 10% and your current home was worth $1,500,000 before the downturn, and is now worth $1,350,000, that’s a loss of $150,000, however the home you want to buy was worth $3,000,000 before and it’s now worth $2,700,000, that’s is a loss of $300,000. Of course different homes go up & down at different rates and when there’s a softening of the market like we’ve seen this year most real estate is affected, even if it’s not affected evenly across the board. So, it’s often advisable to worry less about how much your current place has dropped in value and focus more on if there’s value to be had on the trade up home you want. This is especially true if you want to buy a better home in a better location because these properties are the ones most likely to jump in value when the market rebounds.
So what about the effect of the higher interest rates? One of my lending partners sent us this example about why it might make sense to buy a home with today’s higher interest rates instead of waiting for rates to come down. You will save more money on the lower purchase price with the higher monthly interest payments, than waiting for rates to come down, because as rates come down more buyers will jump back into the market causing prices to go up.
Example: In 2020 we were seeing rates in the mid 4’s and a home that sold for $2,600,000 with 20% down had a loan of $2,080,000 and a monthly payment of around $8,000. In 2023 the same property is selling for $2,350,000 with 20% down and a loan amount of $1,880,000 and a monthly payment of roughly $12,500 per month, which is a $4,500 more than a loan from 2 years ago due to the higher rates. If you take that $4,500 per month and multiply it by 36 months (3 years) you spent $162,000 over that three year period based on that higher interest rate and that assumes it’s going take 36 months to get to lower rates, which is pretty conservative since most predictions are really in the one to two years for interest rates to come down. So, if you saved $250,000 on the cost of the property plus another $9,000 in the lower property taxes, you’re still in a better position than if you had purchased in 2020 with lower rates, and your appreciation is likely to be greater when the market fully recovers!
I’m not trying to change anyone’s mind who feels that sitting on the sidelines is a smart move right now, and many would be buyers do feel this way. We expect demand to increase as rates go down, and of course you have to be able to afford the higher payments which is not an insignificant factor. But if you’ve been kicking yourself for not moving a couple years ago, maybe this analysis is some salvation for you and gives a little perspective. There are deals to be had out there, and interest rates will come down and you will have the option to refinance and improve your situation even more. So, please reach out to me to discuss your particular situation so we can come up with a plan and see what’s right for you.
