The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: kevj1085 on June 22, 2017, 06:47:22 PM
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Just a quick thought I had on my mind, wondering if someone could clarify for me. So where I live, I have seen the same house sell for say 275k, and 1-3 years later sell for 305k. It seems every year or 2, real estate around here goes up a good amount. Heck, houses from 2000 that we're 95k are now going for 220k! So, my question is, is it really practical to suggest someone stay somewhere cheaper until they have a sizeable enough down payment for a house? Let's say a house is 200k and someone only has 10k to put down so they wait 2 years so they'll have 20k to put down. Well, in 2 years let's say that 200k house is now selling for 210k. Isn't that essentially negating their 10k savings over the past 2 years because the cost of the house has also increased 10k?
I'm just failing to see at this point why waiting to save for a down payment is a wise choice, unless the desired house or location hasn't increased in years. Seems inflation would always mostly negate the savings. Am I missing something?
This isn't my predicament, I'm actually doing very well w paying off our mortgage! Just a thought.
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Markets do go up, but also go down. Generally property is on a 7-10 year cycle depending on location. This does not mean it will go up or down by the same amount. You want to see if you can get historical data for an area that you are looking to invest in and what part of the cycle we are in. You can almost run your watch by some of the cycles. For example, we invested in Auckland, NZ and the historical data showed that 2017 would be the end of the upturn. That is happening now. What we can't know is exactly how much it will go up or down. If we have another recession, it will have a huge downward pressure on house prices.
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If you are buying a house as an investment, yes try to time the market. If you are buying a house so you have a place to live, trying to time the market can be difficult and silly.
You say that houses in 2000 were selling for 95K and now worth 220K?
I bought a house in FL in 2012 for 95K and now it's worth 235K. Yes, the price of that house can go down, but I think there's very little chance it will ever go below 95K.
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Home prices can stay flat for more than 10 years.... and with realtor fees, that is a loss to your savings.
The time to buy a home is when you NEED the home, and you will stay there for at least 7 years. Don't buy before that, because life can change and you end up needing a different location or size, or whatever, unexpectedly.
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Your example of 95k in 2000 to 220k currently is about a 5% annual return. Not bad but the same 95k in an s and p 500 fund would be worth more and not require you to pay property tax although you can't live in a mutual fund. My point is that home equity can build wealth but it's rather illiquid and most of recent history the market would be vehicle for wealth building.
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Laura - your 5% annual return is assuming they paid cash for the place. I'm guessing they financed it with 20% down so about 20k. That 20k turned into 130k or a 12% annual return. But you only realize that return if you pull the money out by selling or refinancing. Equity in a home is dead equity, there is no return on equity.