This article is by staff writer William Cowie.
My wife and I took the dog for a walk the other day in our neighborhood. About half a block up the street we met Heather and George as they were unloading one of those moving PODS thingies. We introduced ourselves and asked their life’s story, or at least the part about buying the house they were moving into.
Turns out they were buying something better than they had before — trading up, in other words, as were the couple who sold them the house. Our direct neighbor, Elsie, works in a realtor’s office and she confirms that this is happening all across town these days. Most of their clients are selling because they are getting something better.
Is the value of your home, and your equity, increasing? How does that growing equity make you feel? Does it make you feel rich? Well, OK, maybe not rich, but a little better off than a few years ago? Are you tempted by those ads home builders fill the weekend newspaper with? (If, of course, you still read newspapers.) Have you been invited to a friend’s housewarming after they sold their home and bought a nicer one? Did you walk around their new home and say to yourself, “Hey, we could afford something like this. Why should we be the only ones left behind?”
A growing optimism
The times we live in impose a “feeling” on us. The German term zeitgeist (spirit of the time) is often used to describe this. The Roaring Twenties were famous for the general feeling of optimism and prosperity. The Great Depression brought, well, depression. The first decade of this millennium brought something akin to the Roaring Twenties as every neighbor and his dog were flipping houses and making thousands doing it. Then the Great Recession brought another round of pessimism, when everyone thought the world as we know it was coming to a speedy end.
Now, as that pessimism is fading in the rear view mirror, it’s easy for things like a more stable job, growing home value and equity and a recovering 401(k) portfolio to draw us into the zeitgeist of today, one of relief and renewed optimism. Granted, it’s nothing like the heady days of the postwar Golden Age or the Roaring Twenties, but it’s not the pit of depression anymore, either.
There’s another emotional overhang from the Great Recession many people feel. When their homes went underwater (i.e. they owed more on their home than its market value), there descended on them a feeling of being trapped. Honor dictated that they not join the almost 10 million people who lost their homes or simply walked away from them, so they stuck it out.
During a time like that, it’s easy to project the frustration and feeling of hopelessness on the physical building you live in. Then, when the day finally comes when the value of your home is higher than the loan balance, there’s a strong temptation to just sell and get the heck out of that home. And, while you’re at it, why not see if you can get something better by trading up?
Yet there’s another feeling riding shotgun with that one: When your income and wealth recover, it restores your sense of self-worth. Logic says you shouldn’t measure your worth by your stuff, but we live in a culture which, right or wrong, does exactly that. And it’s hard not to get sucked in, even if only a little, whether it’s paying ridiculous prices for a cup of coffee at the place with the naked lady logo, or trading up to get a nicer and perhaps newer home.
Movin’ on up
It’s easy to be seduced by a realtor or neighbor who keeps telling you how much richer you are because your home price has gone up so nicely. (“You worked so hard for that equity in your home — you deserve it!”) It’s probably worse here in Denver than most places: The local housing market seems to be hotter than other parts of the country, because many people are moving here for the legal marijuana. (I’m not making that up; we met a young couple who told us that’s why they moved to Denver from Minnesota … without even having a job lined up.)
Home prices, of course, have recovered from the Great Recession in most parts of the country. CoreLogic, the real estate data tracking firm, recently released their report for August, which shows that prices continue to rise, although the rate of price increases seems to be slowing a bit.
The line dropping doesn’t represent prices themselves, only the rate at which home prices are rising. As long as the line is above the 0 percent mark, it shows prices are rising, not falling. (The blue line represents all single dwelling homes, the red line excludes distressed sales.)
Why are people trading up their homes now? You might recall the post I wrote about seven months ago, showing why trading up at the top of the market is very unwise. The best time for trading up is in a recession, and the only smart thing to do at this time is to stay put — or trade down, if you absolutely, positively have to make a change. I was talking to a literary agent recently about my upcoming book on the four seasons of the economy, where I repeat that advice. When she read that part, she responded: “That might be too intuitive. I don’t think people need to hear that.”
Really? What do you think? When you see so many people hurt by trading up the last time the home market was hot, don’t you think they’d think twice this time around? Or is this just a new round of people heading for the most expensive lesson of their lives?
When it pays to trade down
Jenny and Karl (not their real names) bought a condo at the top of the market before the Great Recession. They’re both smart and educated. It wasn’t intuitive to them to not buy when prices were high, so they did. What got them was the zeitgeist pressure: “If you don’t buy now, you’ll never be able to afford it in the future.” Then their condo went underwater, like millions of others, and that grated on them every single day. They told us many times they would never have bought if they had known what would happen.
The logic is simple: To get the most value, you need to buy low. Yet very few people do. You’d think that when home prices dropped, sales would soar. You would be wrong. When the market hit rock bottom recently, people couldn’t give their homes away. Buying low is not as intuitive as some people may think. Builders were stuck with unsold inventory for months, even years.
If it’s intuitive to buy when the market is low, why didn’t anybody do it? The only people who did were smart investors, who came out in droves and scooped up underpriced bargains by the handful, especially in places like Las Vegas.
Jenny and Karl’s condo recovered in price, as did millions of others, and the time came when their home equity finally turned positive again. They sold their condo a couple of months ago, not to trade up, but to move out of town, to one of the smaller peripheral communities on the way to Kansas, where property prices are much lower than in the city. As Karl put it, “I’m dying in that place, man. The only way we’re moving again is if the city limits expand and we become incorporated again.” In other words, they’re using the high real estate market to trade down, not up.
The sensible approach
We all make mistakes. My wife and I bought our first home at the top of the market, and it took us decades to recover from that. If we had waited just two years, we would have been able to save about 20 percent on the same house.
What should you do about home prices going up in your neck of the woods? To summarize the prudent courses of action:
- If you’re itching to buy your first home, you may want to think twice. See that chart above? Home prices go up and down. Be patient — it’s not going to be too long before you can get the same home for much less.
- If you’re considering trading up, you will also save several tens of thousands of dollars by waiting just a little.
- If you’re an empty-nester considering scaling down, now might be a good time for that.
We have friends who recently retired and sold their home. They bought a motor home to live in, and travel the country. Who knows? They may be waiting for the market to drop before they buy again. Now that would be smart.
Hmmm … I’ve already started looking at Craigslist. This is a good time of the year to buy a motor home, isn’t it?