Points of Interest

Isn't it funny how everyone was rushing to buy a home as late as last July?  Buyers were presenting sellers with multiple offers most of which had escalation clauses.  This was to increase the buyer's chances of being the "lucky" ones to get the ratified contract.  And now more homes stand vacant for sale than at anytime in recent memory.

No doubt that situation made for happy sellers. Until those sellers became buyers.  These same sellers had to turn around and find something to buy for themselves.  And if these sellers turned buyers were trading up to a larger home, didn't they have to pay a proportionately higher price on their next home?

Given all the bad news in the media about the real estate market one might tend to lose sight of the fundamentals.  All we’ve really done is come back to a more historic market trend and left the wildness of the past couple years behind.  Thursday, it was reported that home prices across the nation rose 5.9% last year.  That’s not 25%, but it’s not too shabby either.

So what does this mean to you?  Now you can take your time, contemplate your decision, not pay a premium and participate in a “buyer’s market”.

Let’s assume that your current home would now sell for $450,000 but would have fetched $500,000 last spring.  You might say that’s a $50,000 or 10% loss.  Then consider you purchase a home that would have sold for $875,000 last June but you are now able to buy it for $787,500.  That’s still a 10% reduction from last year’s prices.  But your 10% “loss” is in your favor and nets you a $37,500 differential on your new purchase.  You give up $50k to get $87.5k and a new home.  No matter how you slice it, 10% of a bigger number results in a bigger number.

This or something similar is the situation that many of you now face.  Your family is growing, you want a better school pyramid or your existing home is ok, but it could use some updating, a new kitchen or master bath.  In addition to the example of the relative value given above here are several more reasons why now may be a good time to shop for that new home:

1. You can take advantage of the capital gains exclusion for all that equity you have built up in your existing home.  Do it now and you can do it again in another two years.  That equity can be used in the new home or better yet a portion can be placed in other tax deferred investments providing you with diversification and potential retirement income.

2. You can take your time and not feel pressured to make a decision right after viewing a prospective home.  Sellers are now more open to offers including contingencies and closing cost assistance.

3. If you ever considered real estate as an investment you may consider renting your highly appreciated property instead of selling it.  You are already intimately familiar with the property and its condition and the cost of upkeep and maintenance.  And you don’t even have to incur the closing fees for purchasing a new investment property.  As far as taxes you can avoid capital gain here too.  Rent the property now, but be sure to close on a sale within three years of purchasing your new home.  As long as you have lived in the property as your primary residence for at least two of the last five years the capital gain exclusion is available to you.

4. Not interested in becoming a landlord but still wish to diversify your assets?  Don’t use all your existing equity in the new purchase and put it to work in other assets for leverage and maximum tax deductibility.

As if all this isn’t enough interest rates remain near historical lows, the economy is creating jobs and until recently energy prices were retreating.

On the other hand, maybe you’d prefer to wait until you have to act on impulse, write your above-list price offer on the hood of a car, put your sealed bid in and wait like everyone else... again!