Daunting Math for Homeowners Down ≥ 30%
One of the most powerful psychological barriers to selling a home these days is owners’ insistence on breaking even.
Unfortunately, after a 30% drop in prices nationally since 2006 (more in some locales), the math for many homeowners who bought near the market peak is daunting.
So, even if you assume that home prices suddenly started appreciating at a torrid 10% a year — something no one is currently predicting — someone who bought a $200k home in 2006 that is now worth $140k would have to wait until 2015 to break even.
And that’s before factoring in average selling costs of around 7%.
If instead homes appreciate at a more modest 5% annually, the same homeowner doesn’t break even until . . . 2019.
And what if the “new normal” of a sluggish housing market persists, and annual long-term appreciation only averages 2%?
The break even date push out almost two decades, to 2029.
Moving On/Moving Up(?)
It’s a very patient homeowner indeed who can sit tight that long.
Which is why an increasing number of homeowners seem to be biting the (financial) bullet, and moving on.
Once they do, they discover that, unless they’re exiting the housing market entirely, the same plunge in home prices socking them as Sellers suddenly becomes a boon if they’re Buying.
That’s especially the case if they’re move-up Buyers.
So, instead of paying $500k for their next, bigger home, move-up Buyers will discover that they can now buy the same house for $350k (30% off $500k).
In fact, they may do even better than that, because more expensive homes have declined disproportionately, while (still) rock-bottom interest rates make the associated payments lower.
To be sure, not every homeowner who bought at the peak and is down significantly can afford to move on.
However, for many others, the barrier is clearly not financial, but psychological.
P.S.: Thanks to City Lakes Manager Matt Loskota for many of the foregoing insight(s) — and math!
