Buying Up in a Down Market
- The difference in value between these two homes is smaller after the market falls
- A buyer is closer to affording the next home now then at the market’s peak.
Example: Current home down 30% from $400,000 to $280,000. The next home is also down 30%.
According to NAR the average value of a new destination home is 50% more than the current home. In this example, the destination home also decreased in value by 30% from $600,000 to $420,000.
Net Gain by moving up
The net difference is $200,000 at the peak of the market but only $140,000, at the drop. The buyer of the destination home is $60,000 closer to affording the home now then at the peak of the market.
If you look only at the 30% loss on your home, then you’ll miss the hidden benefit of this market. Instead of looking at your isolated sale, you must look at the entire transaction from your home to the next home. Had you sold at the peak of the market, you would’ve also purchased at the peak of the market.
Buying at the bottom
How will you know it is at the bottom?
Certainly, any buyer would prefer to purchase at the lowest price in this current cycle. The problem is that the bottom of any market is not an absolute position, but a relative position to a rising market. When it goes back up. Because of this relative nature, the bottom of the market can only be determined in hindsight. One cannot knowingly purchase at the bottom.
Benefits of buying before the bottom
If you accept this premise, then the question remains: “Do you want to buy before the bottom of after?” Purchasing after the bottom carries the benefit of immediate appreciation, but it also brings the risk of higher interest rates, fewer homes available and multiple offer competition.
I understand your desire to purchase when the market bottoms. But to do this we’ll have to both know WHEN the market has bottomed, and the only way to know this is when the market goes back up. The media will surely not be of help here since they report what already happened. So we can’t know when it is at the bottom but only when it WAS at the bottom.
Consider this fact: you will be paying $x more than the lowest price. So you must ask yourself, “Is there a benefit to paying that price BEFORE the market bottoms rather than AFTER? You might be buying too early but you’re not paying too much.
Here are the key benefits of buying before the bottom:
- Lower interest rates. They will rise when the market starts rising.
- More inventory to choose from vs. fewer choices.
- Relaxed pace. Rising market brings buyer competition and multiple offers.
- You will not be in the same negotiating position as you are in down market, when the sellers are expecting more than one buyer’s interest in their home.
- Time in home. Buy NOW and ENJOY the home!