The Cost of Waiting to Sell in a Down Market
The Cost of Waiting
California has seen a decline in home prices over the last half of 2022, making homeowners reluctant to sell, and higher interest rates making new home buyers reluctant to buy. Does that mean it’s a bad time to buy or list your home? It depends on your particulars, but the cost of waiting is something to seriously consider
Every investor seeks to buy low and sell high, but what happens if you sell low and buy low? Over time, this becomes a buy low and sell high strategy as real estate always appreciates historically. Let’s look at a hypothetical case of what a home
owner at the beginning of 2023 might be considering.
In this example, Joe owns a house with an outstanding mortgage of $200,000. One year ago, his home was valued at $1 million dollars, but since then, the market has shifted, and when he checked online, he was shocked to see his home value estimated at $900 . He wanted to buy a home valued at $1,300,000 a year ago, but he was too busy to sell back then and is now wondering what he should do.
The $1.3 million home Joe wanted to buy is now listed at $1,100,000, so Joe calculates that if he sold his home today, in a down market, his net proceeds from the sale of his house would total $665,000 which he could apply to buying a nicer home. Joe figures if he buys the home he wants at $1,100,000, he would have a new mortgage of about $435,000 and property taxes of $835/month.
If Joe secures a 5.5% loan with a seller-funded buy-down, his monthly mortgage payment would be $2,750. Including taxes, his new, monthly obligation would be $3,800. Joe thinks that if he refinanced his mortgage when rates go down to 4%, he could pay two points ($8,400) and lower his interest rate to 3.5%, bringing his monthly payment to nearly $2,200/month for a total monthly obligation close to $3,065/month
Joe wonders if he should wait until the market bounces back to what it was a year ago when his property was worth $1 million. Joe speculates that if the market does bounce back, and he sells his home then, he would net about $750,000 from the sale of his home. But the home he wants to buy would also be back to its original price of $1,300,000. If he sells and puts $750,000 down on the new house, it would leave him with a new mortgage of $550,000 at 4% interest and a monthly payment of about $2,909/month. When $1,350/month in property taxes are added, his total monthly obligation will be over $4,260/month.
Joe figures that by selling now and not waiting for the market to return to its previous seller’s market, he will save himself nearly $1,200/month for as long as he lives in the new home. It’s a no brainer for Joe and so he decides to sell, which will save him a total of over $430,000 over the life of his new, 30-year mortgage.
This example uses approximate values and every case will vary, but the principle illustration is valid; that waiting for the market to change to sell your home could cost you a lot more money in the long term.
2-10-23 • by James Steidl, DRE#02170116 • Keller Williams, DRE# 01889763