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Date: May. 17, 2008
Tags: None
For most of us, math is something we only do when we have to - and all too often, not well. There's a very good reason we all need to be better at it, especially in these trying times. That reason is that there are huge benefits hidden in the math for buyers and sellers in some of our most active client categories. I'm talking about first time buyers, move-up sellers/buyers and relocating sellers/buyers. I'll use as an example a market where home prices have fallen 7% across the board from one year ago and to further simplify, I'll assume that there are no net proceeds from the sale (all too true) and no downpayment needed on the new home (I wish it were true).
Seller has a home that would have fetched $350,000 one year ago. Studies show that the move-up buyers typically spend 50% more than the selling price of their previous home. That indicates a purchase price around $525,000. At 6% interest his principal & interest payment on a 30 year fixed mortgage is about $3150/mo.
Now, I'll factor in the 7% downturn in prices. Seller's home is now worth only $325,000. The home he buys has dropped to $488,000. In either case it's the same 7%, however there's a significant difference in the actual dollars. Seller's home has dropped $25,000 in value while the home he buys has dropped $37,000. $37,000 - $25,000 = $12,000 in hard cash the seller is saving. Not only that, his payment goes from $3150/mo to $2925/mo AND HE'S BUYING AND SELLING THE EXACT SAME TWO HOUSES! This also means that both houses are more affordable to first time buyers.
This would also work where a seller is moving to an area where prices have fallen the same as or more than the area where he's selling. It doesn't work as well for people downsizing or for homeowners with negative equity.
Housing will recover. It always does. Those smart people who take advantage of this opportunity will be very happy with their future financial rewards (and with their Realtor®).
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