Sunday, March 8, 2009

The Ups of Downs - Buying Up in a Down Market

Many homeowners are understandably on the fence about moving to a new home in a shaky market. We have talked to some homeowners who would like more space for their family, but are hesitant given daunting headlines. The current market, however, is ripe with financial incentives to support such a move.

Phenomenal interest rates make now an opportune time for buyers in the real estate market. A one percent rise in interest rates represents a 10% decrease in affordability. For example; a buyer with a 20% down payment can afford a principle and interest payment of $3,400/mo. Today, while interest rates are hovering around 5.5% our buyer can afford a purchase price of roughly $750,000. If rates increase to 6.5% the same monthly payment and 20% down will only purchase a home of $675,000. Try it yourself with our mortgage calculator.

If you are planning to move up to a $750,000 and sell a home in the $500,000 range you can further profit from discounted prices. Although you may be concerned about a loss on your current home, it is important to remember the benefit of the discount on your larger purchase. For instance, if we assume the same 10% depreciation for both price ranges and home locations, your current home might sell for $450,000 when it had been worth $500,000. That is a loss of $50,000. Ouch. However, the same market discounts the larger purchase by the same ten percent and the $750,000 home now sells for $675,000. Although you may stand to loose $50,000 on your home's sale, you can save $75,000 on the new purchase netting an overall savings or $25,000 through the transaction.

It is important to note that not all markets and price ranges are preforming uniformly. It is often true that the lower priced homes do better than the higher priced homes because there is greater competition in the "starter home" price range. As homes become more expensive, fewer buyers can afford them. This may benefit a buyer looking to move up to a larger home as the move helps this buyer bracket away from some competition.

Location is also very important and a couple of miles can make all of the difference. Check out Zillow Real Estate Market Reports Fourth Quarter: October-December 2008. If you are moving from a down market to an unchanged market, you may not be able to overcome the loss on your current home via our simplified formula. However, the best markets now will likely be the best future investments. It may still be worthwhile to move toward a better location while taking advantage of low interest rates and decreased competition.

This is a complicated market, and we recommend that you talk out all scenarios with your real estate agent. There are risks here. Namely, you must have confidence that your current home will sell in a timely manner. If you have the resources and can find alternative housing, the smart strategy may be to sell your current home first. This too carries the risk of becoming a "permanent renter," if things heat up and you become priced out of the market. Berkeley Hills has many experienced agents available for immediate consultation.

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