In a previous post I addressed the one question that’s on most first time buyers minds; is now the right time to buy my first home? I reminded readers that the answer to this question lies in understanding both the current state of the real the estate market and their own personal circumstances.
I received a couple of emails from readers asking me if the approach I discussed in my last post can be applied to repeat buyers as well.
This approach to deciding whether or not it's the right time to buy real estate applies to all buyers, not just first time buyers. I decided to focus my last post on first time buyers because I find the level of anxiety with first time buyers to be much higher than with repeat buyers. Repeat buyers have already made that first leap and have probably realized some appreciation in their home's value, so the risks aren’t as great.
Having said that, the personal circumstances that influence a repeat buyer’s decision are going to be different than those influencing the first time buyer. Let’s look at one potential scenario.
One of the readers that emailed was planning on moving neighbourhoods, but wanted to purchase a home in roughly the same price range as the one he currently owns. If we can assume that homes in the Toronto area appreciate and depreciate at a similar rate, than attempting to time your purchase in this scenario adds little value. The idea here is that the home the reader lives in, and the homes in the neighbourhood he is interested in are increasing or decreasing in value at roughly the same rate, so whether he buys today or tomorrow doesn’t make a big difference. If either of the neighbourhoods had external factors that would cause one to increase or decrease faster than the other, than we would have taken those issues into consideration.
The fear most people have with this type of move has more to do with their perceptions than with the reality of their personal financial situation. For example, suppose a buyer sells their home for $500,000 to purchase another home at the exact same price in another neighbourhood. Now suppose that real estate prices drop by 20% and his home is now worth $400,000. On the surface, this seems like a pretty bad decision. But suppose the buyer didn’t sell and instead remained in their original home. Their home would have also decreased in value by roughly $100,000 but the difference is that this decrease in value is less obvious to the owner.
Many home owners instinctively measure the savviness of their home buying decisions by looking at the last price they paid for their house. The problem with this approach is that even though their existing home dropped in value by $100K, it is perceived to be a smart investment because the owner compares the current value to the $200K he paid for it ten years ago. In this case, the owner sees himself as beeing 'up $200K'. The move to the new house on the other hand would be perceived as a bad decision because its current value of $400K is compared to the $500K he paid for the house. In this scenario the owner sees himself as being 'down $100K'.
Shrewd buyers will realize that financially, there is no difference between the two scenarios. The value of the owners home is the same in both cases. Calling one a good decision and the other bad isn't accurate because financially you end up in the exact same place.
If you find yourself in this situation, confidently move to the home that you want to live in. A drop in house values is going to affect you whether you move or not. Deciding not to move doesn’t protect you from a loss in your current home’s value, it just makes that loss less obvious.