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Waiting For The Market To Rebound? If You’re A Move-Up Buyer, That Could Be The WORST Strategy

September 5th, 2008 categories: Benicia, Buying

If I’ve heard it once, I’ve heard it a zillion times: “I’d love to buy right now, but my home has lost so much value…I need to wait until the market picks up.”

That strategy may seem to make sense on the surface, but if you dig a little deeper, you may be surprised to realize that if you’re planning on moving up into a bigger or more expensive home, that’s absolutely the WORST strategy of all.

If you’re a move-up buyer, there’s no time like the present. For, selling your smaller, lower-priced home today will net you Instant Equity and lower overall payments than if you wait to the make the exact same move until after prices climb.

Conventional wisdom tells most of us that you don’t sell when prices are down. After all, if your home’s value had dropped $100,000 over the past year, why on earth wouldn’t you wait until it returned to its former value, or at least close to it, before selling? Right now, all that equity is gone for good, never to be seen again, right?

Wrong.

You need to throw that conventional wisdom right out the window, and here’s why. Even though your home may have lost $100,000, it’s probably closer in price right now to those larger, more expensive homes than it was when the market was on fire and prices were soaring.

Let me repeat that. Even though your home has lost $100,000, that larger home has lost at least that much – and probably substantially more in that same period of time. And that, combined with the lower property taxes that you’ll enjoy by buying now instead when prices are higher makes this absolutely the IDEAL market in which to make that move up.

To illustrate what I’m talking about, let’s assume that your modest 3 bedroom/2 bath, 1,500 sq. ft. home was worth $550,000 two years ago. But its value has dropped 20 percent since that high-water mark, so today it’s only worth about $440,000. That’s a $110,000 loss in equity.

The home you’d love to move into, however, was worth about $900,000 two years ago. It too has lost value, but it’s lost 30% over that same period of time (in many markets, larger homes have lost their value at a higher percentage than their smaller, lower-priced counterparts). So today, that big 5 bedroom/3.5 bath, 3,500 sq. ft. home is only worth $675,000.

Now look at those numbers a little closer. Two years ago, you could have sold for $550,000 and bought for $900,000 – a difference of $350,000.  Today, you can sell for $440,000 and buy for $675,000 – a difference of $235,000. In other words, you’re picking up a quick $115,000 in ‘instant equity’ by buying today.

But, as they say on those infomercials, “that’s not all!” Consider, too, the property tax implications. If you’re in California, unless you’re in an area with a huge Mello-Roos assessment, your probably taxes are probably about 1.125% of your home’s assessed value. And that value starts out based on the purchase price of the home when you buy it and is adjusted up (but no more than 2 percent a year) or down (but only if the market drops and you petition the county to lower it).

So looking at our example, if you bought two years ago, that $900,000 home would have cost you $10,000 in annual property taxes (or $833/mo. if you chose to include it in your monthly mortgage payment). Today, at $675,000, that same home’s tax bite would be about $7,600/year (or $634/mo.). That’s an additional savings of about $2,400/year or $200/mo.

Now before I go any further, it’s important to point out that even if you had bought several years ago at $900,000, if the home is now really only worth $675,000, you could, as I noted a few paragraphs back, petition the county to lower to its present value.

However, most counties, who are starving for revenue don’t actively promote this. If you know or find out about it and can provide the appropriate supporting documentation to justify the price you think your home is now worth, the county is obligated to reduce your home’s assessed value. But in reality, very few homeowners even know such an option is available and of those who do, many simply don’t know where to obtain the necessary data whereas still others know it’s something they should do, but never quite get around to doing it.

Moreover, if you buy at $675,000 today and your home’s value later skyrockets, the county can still only increase the assessed value by a maximum of 2% per year. So even if your home is worth 40% more seven years from now, your property taxes would only go up about 15%.

That’s not the case if you bought it for $900,000 and had your taxes reduced. For as soon as values start going up, the county can automatically bring it right back up to its present value until you reach the cap that would have been in effect based on the home’s original selling price.

So from a practical standpoint, if you’d bought that home for $900,000 two years ago, there’s a very good chance that you’d still be paying taxes on an assessed value substantially higher than your home’s current value.

But let’s get back to the topic at hand – why this market represents the ideal time to buy a move-up home – and look at the numbers again. Two years ago, you would have spent $115,000 more and paid $200 a month more in taxes if you’d sold your home and bought a larger home than if you made the exact same purchase today.

If you consider that on a 30 year fixed-rate mortgage at 6.5%, it will cost about $6.32 for every $1,000 you borrow, the cost of borrowing an additional $115,000 is about $725/mo. Add in that extra $200 in property taxes and you’re potentially saving about $925/mo. by buying today.

So as you can see, waiting for the market to return to its former glory can cost move-up buyers in a very big way. And the numbers I’ve used to illustrate this concept are very realistic, both in Benicia as well as many other Bay Area communities. In fact, in some areas, the differences are even more pronounced than what I illustrated. That’s particularly true if you’re moving from a high-priced community and to a lower-priced area.

The one “kicker” to all of this is that you obviously have to be able to afford the payments. And even with the better pricing climate, you still need to have at least enough equity to be able to pay off your existing loans and have enough left over to make an appropriate down payment. So if your home lost $100,000 in value and is now worth $25,000 less than you paid for it, you’re probably stuck and will need to wait for values to start creeping up again, unless you have other means to pay off your existing loans and come up with your necessary down payment.

But unless that’s the case, if you’re looking to move up in size or price, this is indeed the Best Time to make that move. It will save you money and give you instant equity. And depending on your loan qualifying ratios, it may represent a brief window of opportunity for you – a window that could close quickly once prices rebound and you’re faced with a larger price difference between the two homes.

Unfortunately, very few people who would love to move into a larger home and live in a home that still has plenty of equity, realize the goldmine they’re presently sitting on. Most think that they missed their golden opportunity when the market slowed down.

As you can see, nothing is further from the truth. The opportunities that exist today typically only come along perhaps once every 10-20 years. The last time it was like this was back in the early 1990’s.

Have any more questions or want to explore the numbers a little more with respect to your current home’s value and the difference between it and the home you’d like to buy? Let me know and, as long as you’re not already working with another agent, I’ll be happy to run the numbers so you can see how beneficial moving-up today might be.

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This entry was posted on Friday, September 5th, 2008 at 1:51 pm and is filed under Benicia, Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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