Should I Move-up in Today’s Market?
I receive a lot of questions about whether or not now is a good time for a family to move-up by purchasing a larger home than they currently have.
Let’s take a look:
Let’s assume the house they currently live in was worth $450,000 just two years ago but is now worth $400,000 (I realize that these prices cannot reflect every market. Make the changes to fit your circumstance). Let’s assume that the house they are considering buying was worth $650,000 two years ago. Assuming the same level of depreciation, that house will now be selling at approx $580,000. Though they will be ‘losing’ $50,000 on their current house, they will be saving $70,000 on the purchase of the new residence.
Net Gain = $20,000
Now, let’s look down the road into the future. Let’s assume in ten years both houses appreciate by 20%. If they stay in their current home (present value $400,000), the house will be worth $480,000 a $80,000 gain. If they move into the new home (present value $580,000), the home will be worth $696,000, an $116,000 gain.
Net Gain = $36,000
The actual gain in ten years would be $56,000 ($20,000 now and $36,000 later). That is how wealth always has been and always will be created in this country.
Now, let’s look at interest rates. If they wait to move-up, they can almost guarantee that rates will be higher. The New York Times just this week said:
“One of those things propping up the market has been the Federal Reserve, which has been buying mortgage-backed securities to keep interest rates low. As the Fed begins to wind down its purchases in the next few months, rates will become less enticing. Analysts expect them to rise to at least 6 percent from the current 5 percent.”
That 1% increase in interest rates would mean a higher mortgage payment over the next 30 years. Financially, it makes absolutely no sense to wait if you are moving up.
We must also look at the non-financial reasons for moving. As the Wall Street Journal recently stated:
“There’s a good reason homeownership has been such a central part of the American dream. It delivers security, pride of ownership, a sense of community and decent investment returns as a bonus…And people are getting what may well turn out to be the deals of their lives.”
The question shouldn’t be “Should I move-up?”
The question should be “Why wait?”