Does the declining real estate market make it a good time to trade up?
Filed under: Real Estate
I've heard real estate agents arguing that the weak real estate market makes it a good time to "trade up" and buy a more expensive home.Keller Williams Realty founder Gary Keller makes the argument this way:
Falling home prices are a great opportunity for move up buyers. Even though your home sale price may be lower, the smaller loss at sale can be compensated by greater savings at purchase. If home prices dropped by 5 percent, here's what it could look like if you decided to trade up:
Old home price = $200,000
Sell at $190,000 = $10,000 less
New home price = $400,000
Buy at $380,000 = $20,000 savings
I'm not so sure. In fact, I think that's a ridiculous argument. First, those numbers are based on a rear-view look at where home prices were at the height of a bubble. That has no bearing on the realities of the current market. You're not "saving" anything. Second, selling a home will likely require you to pay a real estate agent 5% -- plus any legal fees, moving expenses, time that could have been spent working, etc. Plus, you'll have closing costs when you buy your new home -- and with closing costs on the rise, that's a significant chunk of change -- an average of $3,118 in 2008.
The larger point is that while real estate appreciation has been great for home owners over the long run, the home you live in is not an investment -- it's an expense. Unless you really need a larger home, you're better off staying in a smaller home and investing the money. If you think real estate is a good investment, consider a real estate investment trust or rental property that can generate cash flow.
Of course selling a trade-up as a sound financial decision is a great deal for the agent: He can make money selling your house and helping you buy a new one instead of earning nothing.
But it's a much better deal for him than it is for you.
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Reader Comments (Page 1 of 1)
1-12-2009 @ 7:20PM
Audrey said...
The first thing came to my mind when reading this is, " How will it save you money to trade up to a house that is worth twice as much as your old one when your mortgage will also be doubled?"
Lets assume that the first house is paid off and the whole $190,000 from the sale goes to paying the down payment of the new one. Now you will have a $190,000 mortgage when you have none before. Again, how is this saving money? One can use the money for the new mortgage and other moving cost for isafe nvestments like CDs and bond funds. Especially in this economy, who wants a bigger mortgage or any mortgage?
Trading up is the mindset that got us in this housing bubble/shamble to begin with. Real estate agents are starving now and they will do and say anything to get business. They are hoping some morons will believe them and give them the 5% commission.
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1-14-2009 @ 6:23AM
s s rao said...
My newly built duplex house (300 sq.yd) 2,300 sq.ft built up area--facing east--located adjacent to the National Highway - 202 (Warangal Highway), Hyderabad -500088, Andhra Pradesh, India. Opposite to the newly coming up Infosys largest Campus in the country, 1.5 KM from Raheja IT Park, 3 KM from Outer Ring Road (ORR) 2 halls (32'x27' each) 3 bed rooms (15'x13'), surrounded by many Engg; Mgmt; MCA; MBA, BEd. Educational Institutions, 4 toilets (2 western - one with large bath tub), round the clock bore water--kitchen garden--(140 sq.yd with parking for 3 cars). No legal encumbrances. Immediate registration. (Independent House for the price of a 3 BHK Flat in the posh area.
Owner wants to move to NOIDA (close to Delhi) to take care of his ailing daughter. samsrirao@rediff.com
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3-09-2009 @ 4:16PM
Jt said...
I saw Gary Keller explain this myself at the event he did in Boston... and I felt the same way when he explained it himself - First, as a buyer that conversation would make me run. As a REALTOR, if I have to work that hard intellectually to explain why a potential buyer should move here.... or, should even move at this time...this is the WRONG HOUSE FOR THEM, or this may not be the best time for them. We work with buyers that want to buy and sellers that want to sell - and there are a lot of them out there! (#1 C21 office in CT)
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3-09-2009 @ 8:52PM
David said...
Are you kidding me, this is the BEST time to buy in many many years for buying real estate. I agree that moving to a larger home just for the savings makes no sense. If you consider the whole story it is about people that WANT to upgrade, that is to say that if they are "losing" money on their present home they will (if they would be moving anyway) make it up in the new home.
If I was looking for an agent and they did not have the "intellecuall" ability to explain this I would look for a new agent in one second. It is the agents job to help educate the consumer into what makes sense in the present market.
There has been no better time to move or move up in 10-15 years, affordability is at a peak.
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