Archive for August 15, 2007
Does it make sense to buy and sell a home in the current housing market? Friends of mine are thinking of moving into a larger home. In order to do so, they’ll first need to sell their current one. But is this a good time to upgrade? Honestly, I don’t know the answer to this but I started thinking it might make sense and I was hoping someone could redirect this theory if they think it’s wrong.
Obviously the housing market has fallen from it’s peak, but houses in the DC area are much higher than they were a few years ago. Luckily my friends bought their house about five years ago, which means they are still sitting on a sweet profit margin.
Let’s take a purely hypothetical example. Let’s say my friends purchased their home in 2001 for $200,000. Now let’s say they plan to sell their home tomorrow for $400,000. That’s a profit of $200,000.
Let’s set the hypothetical price of the new home at roughly $630,000. At the market’s peak the house may have priced as high as $660,000, but in the current market one can assume a 5% decrease in home prices. So my friends will save roughly $30,000 on the new home. The more the new home costs the more money my friends will save. After all, on a $550,000 home they’ll save $27,500, on a $600,000 home they’ll save $30,000. Of course, if the markets have fallen by 5% that means they will make 5% less money on the sale of their own home. But on a $400,000 home the loss will only be $20,000. So they’ll lose $20,000 on their end but owe $27,500 to $30,000 less on the new home.
My friends could stay in their current home and wait for the market to rise again, but the same variables seem to be true. If the market increases by 5%, they will sell their home for 5% more, but also pay 5% more for their new home. So it seems they are better off selling their home and buying a new one while the market is dipping.
The only problem I foresee is the rise in interest rates for non-conforming mortgages. The current conforming loan limit is set to $417,000, which means my friends will need to put down at least $183,000 on their new $600,000 home. If the price of their new home rises, the price of their down payment will rise as well. One possible option could be to hold off until they can afford a larger down payment but the housing market could rise as their saving, wiping out any potential savings from the down payment. So I’m not certain if that’s a worthy option.
What do you think? Should my friends sell their home and buy a new one in the current market?