I remember a conversation I had before I became a real estate agent. My wife and I were preparing to sell our first home. We plan to sell the house for 67% more than what we paid just 6 years earlier. We sold the house in the first weekend. Our real estate agent, who to this day I call a dear friend, came over with a smile on her face about all the money we had just won. We were buying a new house that cost 110% more than the one we were selling and we thought we had found a good house for a fair price. When Donna told me that we had made so much money on the first house, I told her that I would gladly sell it for the same price I paid, if only the owners of the house we were buying would sell it to us for the value of the house 6 years before. She laughed at my comment, but in a sense, she meant it.
We all want to make money with our houses. We all buy a $100,000 house and dream of selling it for $200,000 or more. But keep in mind that when you do this, the house that was worth $200,000 is now worth $400,000 and the house that was worth $400,000 is now worth $800,000. So tell me, what would you rather do, sell a house for $100,000 and try to go up to $100,000 on a $200,000 house, or sell a house for $200,000, having made $100,000 and try to go up to $400,000.
So who wins in a declining market? Almost every! For the average American family, a home is primarily a place to live. It is secondarily an investment. If you buy a house and live in it for five years and then move out, not only have you (hopefully) made some money, but you’ve received some value for having a place to live. We don’t think about buying cars that lose much of their value in 5 years, so give your home use some credit.
Now, as for the value of the investment. The final question is: is real estate an investment for life, or is each house you own a separate investment? Let’s look at our stock portfolio. Financial advisors will tell you not to look at the value of your portfolio every day, or even every month. Certainly don’t look at individual stocks and bonds by the day, week or month. The question financial advisors ask is how many assets you need to retire, go to college, or whatever your goal is. So why don’t we look at houses the same way?
You buy a house when you are young, and from time to time you change it and eventually you retire. The important thing is the total growth during that whole period, not the fluctuations from one year to another.
When you go to sell your $250,000 home and expect to increase to a $500,000 home, you’ll spend an additional $250,000. However, if all prices fall by 20%, you lose $50,000 in equity in your home. This is the state of many American homeowners. But, you must see what you would have done with that equity. You would have put it in the house next door, which also just fell 20%, and so the $500,000 house is now $400,000. Now it only has to go up $200,000, not $250,000. The savings is almost $600 a month in mortgage. this is huge. And it’s all because you lost the equity in your home.
Now, this does not mean that a falling market is good for everyone. It is not good if you have just bought the house and do not want to sell it, but you are forced to do so due to a move, a new child, a change in the economic situation of your family, etc. bought the house, it may not only consume part of the principal, but it may consume every penny of the principal and therefore make it impossible to buy another house. You can put him in a short dirty position.
It doesn’t help investors. Investors who buy each home as an individual investment will lose money on these short-term changes and therefore will not view the housing downturn with a positive bias.
But, the biggest loser of all, will be the person in or near retirement. Every time he “walks down” from one house to another, he wants the prices to be at their peak. People who rely on their home equity for retirement income will be hurt. If the plan is to sell your home and live off the income from that asset invested in a capital/cash vehicle, you will be affected by the recession. But in general, most homebuyers are buying a house to live in, hoping to move on to another house in the future, and in fact lower prices will help them.
It’s hard to view the decline in net worth in a positive light, but in the long run, this slowdown may help many buyers. And for those who haven’t taken the plunge, now is the perfect time to become a homeowner. Interest rates are near their lowest level in 45 years, inventories are up and prices are down.
