Uncer­tainty at Record High

If Gross Domes­tic Prod­uct (GDP) mea­sured uncer­tainty and inde­ci­sion in the hous­ing mar­ket, the gov­ern­ment would be report­ing record num­bers right now.

And while all home buy­ers and sell­ers are affected by this uncer­tainty, its most debil­i­tat­ing effects are likely with “move-up buy­ers “who have the need, where­withal and desire to buy a big­ger home. Pow­er­ful moti­va­tors notwith­stand­ing, these buy­ers find them­selves lack­ing not only the con­fi­dence to make a deci­sion, but, per­haps more impor­tantly, the basic frame­work for iden­ti­fy­ing and eval­u­at­ing the rel­e­vant fac­tors. Armed only with a vague sense of poten­tial fur­ther declines in real estate val­ues, the deci­sion to wait is all but inevitable. And all it takes is next month’s Case-Schiller Index to reflect even a frac­tional decline in hous­ing val­ues to “val­i­date” the pru­dence of procrastination.

Deci­sion to wait may be the wrong one

The prob­lem, of course, is not that the deci­sion to wait is nec­es­sar­ily the wrong deci­sion, but that any deci­sion of this mag­ni­tude affected by a com­plex inter­play of vari­ables requires a more thought­ful analy­sis than is typ­i­cally brought to bear.

Absent this, the poten­tial for fur­ther declines in real estate val­ues is twice over-weighted in the decision-making process, once when con­sid­ered in iso­la­tion (since the net­ting effect of the reduced value of the buyer’s cur­rent home is rarely explic­itly con­sid­ered) and again when con­sid­ered in rela­tion­ship to other off­set­ting fac­tors such as the poten­tial for increased financ­ing costs if inter­est rates increase. This lat­ter fac­tor is more dif­fi­cult to quan­tify, yet often more con­se­quen­tial to the long-term impli­ca­tions of the deci­sion because its effects are oper­a­ble over a much longer period of time (assum­ing a typ­i­cal 30 year mort­gage) and over a larger com­po­nent of the equity equa­tion (assum­ing that a sig­nif­i­cant por­tion of the pur­chase is financed).

Elim­i­nate the guess work

The good news is that through the magic of Excel, a thor­ough analy­sis that prop­erly con­sid­ers all of these fac­tors can be achieved with lim­ited effort or spe­cial­ized know-how. With min­i­mal data, a poten­tial move-up buyer can quan­tify their assump­tions about real estate and inter­est rate trends, pro­vide spe­cific data about the cur­rent home’s equity and future home’s tar­get price and imme­di­ately see the impli­ca­tions on future equity of buy­ing now, vs. wait­ing for the mar­ket to “hit bot­tom”. Armed with bet­ter infor­ma­tion, these buy­ers can move beyond a reflex­ive paral­y­sis to a more nuanced and informed deci­sion based upon all of the rel­e­vant factors.

Take a look at the two charts below.

Then enter Your Own Data in the Move-Up Evaluator!

The two charts illus­trate the esti­mated net equity in a new home under two dif­fer­ent sets of assump­tions over a 10 year period.

Fig­ure 1

Fig­ure 2

In both charts, inter­est rates are expected to increase by a mod­est ½% per year over the next two years while real estate val­ues are expected to decline 3% and 5% per year in Fig­ures 1 and 2, respec­tively. While this analy­sis alone will not (and should not) be com­pelling for every buyer, it does clearly show that a mod­est increase in inter­est rates will cre­ate a greater drag on equity within the first 5 to 10 years after pur­chase even under very pes­simistic real estate pric­ing trends. Buy­ers who antic­i­pate being in their new home for at least 5 years may very well be empow­ered to buy the home they’ve been dream­ing about since 2007.

Now see for your­self if mov­ing up is the right thing to do for You.

Enter Your Own Data in the Move-Up Evaluator!

Con­tact the author of this post,  Chris Butaud at Guild Mort­gage, about mov­ing up to a big­ger home. Tell Chris you saw him on SERENE™.