How Can it Hurt?
That house is EXACTLY what you've always wanted. Why not at least go look at it?
You've been responsible, paying down (or off) your debt. You've gone frugal for several years now and, well, you're finally able to think about a housing upgrade. Maybe it's the kiddo count, maybe it's the school district, maybe it's just that it would be nice if you could turn around in your kitchen without pulling in your tummy every time.
Or, you just want another place, no reason offered. Just because.
So… why haven't you done it yet?
Have you been waiting for prices to go up, so you can get a good price for your current home?
Of course! Isn't it best to make as much as you can before you move on? Or up?
If that's your thinking, you might be revving up your happy motor. Home prices, it seems, are finally in a sustained recovery. The New York Times thinks so. And DataQuick, a national real estate data tracking website, concurs:
Recovering Home Prices (source: DataQuick)
So… should you be excited? Should you turn on your radar and begin scouting out candidates? On your next Home Depot excursion, do you dare linger in the kitchen cabinet section? Is it time to stop throwing away those catalogs with the nice cabinets and furniture?
Believe it or not, this is easy to figure out, but the answer may surprise you.
Let's see, shall we?
The math is simple. Let's say you look around and find:
- $250,000 is your current home value (your “now house”)
- $350,000 is the price of the house you're eying (your “new house”)
(The principle is the same, regardless of the actual numbers, so don't worry if these are not your exact numbers.)
At the bottom of the recession, the prices for both houses were lower than what they are now. The chart above tells us home prices are not as depressed as they were a few years ago.
For the sake of argument, let's say your “now house” was worth, say 10% less than today at the bottom of the recession. The house you are eying (the “new house”) was also worth 10% less than today, not an unreasonable assumption. So, at the bottom of the recession
- $225,000 was the value of your now house
- $315,000 was the value of the new house
To complete the picture, let's say in a few years, when the market hits its new peak (as it always does) your house will be worth $325,000, which is 30% more than today. (Again, actual numbers don't matter – the principle holds true, no matter which actual numbers you use.)
Here's the table which summarizes our scenario:
Now and Then – What you pay for the Upgrade
So, if you upgrade at the bottom of the recession, you will pay $90,000 more. If you sell the same house and buy the same new house, you will be paying $130,000. These are the numbers in blue.
Same house sold, same house bought. Very different dollar amount you pay. The only difference is the date.
What's the key, then, to saving $40,000 in the example above?
The best time to upgrade is when it feels the least like it: the bottom of a recession.
If you wait the price of your house to go up, and if you catch the market at or even near its peak, you may feel very pleased with yourself, but you will have overpaid for the upgrade in this example by $40,000. Your amount might vary, but the principle stays the same – waiting doesn't pay.
This is simple, but not intuitive. None of us like to sell our house for way less than what we think we can eventually get for it.
But going by feelings could cost you real money and set you back in your quest to get your drop dead money as quickly as possible.
Here's how I think of it: at the bottom of the recession the people selling their house to you are losing more than you are losing on the sale of your house.
The Big Picture
All of us chase a single financial dream, one which we call Drop Dead Money. Simply put, it's enough money to tell everyone to drop dead – just a fun term for financial independence.
There are two key issues we all look at as we chase that dream of ours. The first is “how much?” Different people have different numbers. Jamie Dimon has hundreds of millions of dollars and it's still not enough for him. Someone else has $200,000 and that's more than enough for them. We all have a different number.
The second issue is: how long it will take to reach that number? When we do, we have the freedom to do whatever our hearts desire.
Drop Dead Money is measured in dollars, not percentages. And, as you can see from this example, the “when” of financial decisions can have a significant, even dramatic impact on how long it will take you to get to your number.
In this example, going against the grain of what “feels” right can put $40,000 toward your Drop Dead Money goal. This is not money you have to work for – this is money you get by letting the economy work for you.
Know the times and the seasons. And know when to do what.