By: By Dian Hymer
Interest rates are low. Prices have come down in many areas. More buyers are deciding it's a good time to buy, even though it may be awhile before the housing market stabilizes.
Buyers who have a house to sell face a more complicated situation than they did when they bought their first home. They may not be able to afford to buy a new house before selling the old one. And, it may be more difficult to find a home to buy because many sellers are not selling now due to current market conditions.
Despite complications, homeowners who want to trade up in a down market can benefit financially. They may sell their current home for less than it might have sold for a few years ago, but they also could pay a lot to less for the replacement home.
Let's say your current home that was worth $500,000 two years ago is now worth $400,000, or 20 percent less. Even though you would sell for $100,000 less today, if you buy a $1 million house that two years ago was worth $1.25 million, or 20 percent more, you come out $150,000 ahead.
The math may not be as advantageous if you're downsizing. You may find that you sell at a bigger discount than you would have a few years ago without realizing as large a cash discount on the purchase of the smaller, less expensive house. You also might find that you are in competition with buyers who are either first-timers or trade-down buyers like yourself.
Another factor is that, in general, the price per square foot of smaller houses is more than the price per square foot of larger houses in the same area. So you might have to pay more than half the selling price of your house to buy a house that's less than half the size of your house. That is, if you're purchasing the new home in an equally expensive neighborhood.
Regardless of this disparity in prices, if housing prices in your area are falling, it would be better to sell now than wait for the market to turn, as your home might sell for even less if you wait.
HOUSE HUNTING TIP: There is more to consider than how much profit you might realize in making a scale-down move. The first step is to make a list of all the reasons why you are considering downsizing. Common reasons are that the house is too big; it costs too much time and money to maintain; it's in an inconvenient location; or it's not located close to family. Then make a list of all of the reasons it would make sense to stay in your home. Weigh the pros and cons.
The next step is to do a cost comparison to figure out how much it costs to own your present home, including property taxes, home maintenance, utility bills, mortgage payments, insurance premiums, and homeowners association dues, if there are any. Then consider how much it would cost to get your home into prime selling condition. And factor in the costs of sale. Quality of life is hard to quantify monetarily, but is a major factor in most moves.
Then, calculate the cost of buying and owning a smaller home. Make certain you consult with your tax adviser to find out about the tax consequences of making the move.
Downsizers who are contemplating an out-of-area move should consider renting before buying. It usually takes awhile to learn the neighborhoods and figure out which one is best for you. Even if you're not moving out of the area, it may make sense to rent for a while.
THE CLOSING: In low-inventory markets it can take time to find the right home.
Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist.