Losing Blogger Series Part 3: Is a Declining Market Always a Bad Thing?
Oct 25th, 2007 by Steve Scheer
By Steve Belt, Phoenix Real Estate Blog
For my final installment in the Losing Blogger Series, I'd like to talk about why a real estate market, in which prices have declined, is not necessarily all that bad.
Real Estate markets are very local. The market in Denver is certainly different than the market in Phoenix, and I'll bet the market on the west side of Denver is very different than the market on the east side of Denver. That's the nature of real estate markets. So in your local real estate market, if you experienced a price decline, how could this possibly be good? Let's find out:
Young newlyweds purchased their first home in 2000 for a cost of $185,000. It's an 1800 square foot, 3 bedroom, 2 bath ranch style home on a small lot. This young family has no kids, but believes they will probably have kids in the future. The home is a great fit for their current needs.
Fast forward to 2005. The young family now has 2 children and are thinking about a 3rd. The oldest, a 3 year old boy doesn't want to share his bedroom with his little sister, so what used to be the office is converted into her bedroom, and the office moves into the dining room. What was a nice comfortable home is no longer as comfortable as it used to be. The family decides it wants to move into something bigger.
In 2005, their home is found to be worth $350,000, nearly double what they paid. The family wants to stay in the same area, they just want something bigger. 3200 square feet, a 3rd car garage, and 2 more bedrooms on a bigger lot would be perfect. In 2005, homes like this are selling for $550,000. The move-up cost is an additional $200,000.
Unfortunately, this price puts their desired home out of reach, and the family decides to stay where they are at, and put their plans for a 3rd child on hold.
It's now 2007. Prices have fallen in their neighborhood by 10%. Their home is now worth only $315,000, and the family is feeling
depressed. They feel like they should have bitten the bullet back in 2005, and found some creative way to afford the house they wanted. In the last 2 years, however, family income has risen by 3% annually, and their buying power has increased noticeably. Their desire for a 3rd child hasn't gone away, so they begin looking into moving up once more.
They still want a 3200 square foot home, with a 3rd car garage, and 5 bedrooms, and find that prices for those homes are now $500,000. Doing the math, their move-up price is only $185,000. They are getting the same house they wanted before for $15,000 less than 2 years ago. They hadn't expected that. They were so focused on the "loss" in their own property, they hadn't fully considered what it would mean to their buying power when they did sell.
With the increase in their family income, coupled with the smaller delta in their move-up costs, they are now in the perfect position to move up.
In many real estate markets across the country, we are in one of the best move-up markets we have seen in a great while. Declining prices are ideal opportunities for new home buyers to get into a home they otherwise could not afford, and for existing home owners to move into a more expensive home that was previously out of reach.
The press notes that we are in a buyer's market, as if that's a bad thing. Actually, a buyer's market is a very good thing for buyers. Selling your home for less than you could have in years past will be hard to swallow. But then you put yourself in a position to be a buyer. And being a buyer right now, puts you in an enviable position.
Good luck Denver in the World Series. Last night's defeat had to be tough to watch. I imagine the mood around town isn't great today. But one reason they call it the World Series, and not the Championship game, is that there's a lot more baseball yet to be played. I also want to thank Steve Scheer for taking a chance with this blogging wager. It's been a lot of fun for me, as I know it has been for him.
Steve, I think that in relation to the rest of the country, most parts of the Denver area do not have it as bad at all. While some areas of Denver have dropped a little I see it more as things have stabled out right now. Most people are still not thrilled with having their values not increase at the rates they were in years past, and overall we are not seeing prices drop like they are elsewhere in the country - as sellers they still would rather get top dollar and that is just not realistic. But I think your point is very valid - and people have to realize that while it can be harder to be a seller, that can come back to them as a buyer.
Thanks for guest authoring on my blog, it was a pleasure. Here’s to game 3 - Go Rockies!
Best of luck tonight in the series. I’m headed out shortly to a listing appointment for a house that was listed in August at $465,000. Realistically, it can sell for $325,000-$340,000. That’s a $125,000 problem I need to find a way to make this seller “happy” about. That’s the story in many parts of the Phoenix market (not all, but many).
Good Luck with that Steve. You just need to tell it like it is. Honestly is ALWAYS the best policy (but I can tell you already subscribe to that).
[…] with my fellow real estate bloggers. The first loss had me posting on another blogger’s blog. The second loss resulted in a less than flattering video on You Tube. And now I’ve lost […]