Current homeowners are in a much better position than are first-time buyers. If nothing else, current homeowners can continue to hold the house they’re in now and watch appreciation create wealth. But for many of these people, appreciation is a double-edged sword. Yes, it increases the value of their home, but it also increases the property taxes they have to pay each year.
Current homeowners are also more likely to be in the upper half of the income distribution. That means they can afford a higher payment and the ever-increasing tax burden, which could increase their monthly payment every year. [As a side note: don’t think you avoid property taxes by renting. You still pay your landlord’s property taxes; you just don’t get to deduct them.]
Finally, current homeowners can roll the equity in their homes (garnered through payment and appreciation) into their next home purchase. If they need (or want) a bigger home or one in a more expensive neighborhood, that equity helps them keep their monthly costs down by providing a larger down payment.
On the flip side, all home prices are likely to rise. I remember my parents talking about the difficulties of trading up because even though their house was worth more, the price of their next house had inflated faster than their current home. They still had to come up with more money to buy the “better” one.
And that raises a good point, home prices do not increase evenly across a market. Some neighborhoods inflate faster while others may even deflate. A deteriorating neighborhood will not hold its value. Generally, well-maintained neighborhoods close to city centers appreciate quickly. The demand to live close-in may even cause gentrification in otherwise distressed neighborhoods. There is only so much land available, and demand drives up the price of that land.
Conversely, outlying areas such as suburbs have more limited appreciation because of the availability of “cheap dirt.” Where raw land is available for development, appreciation is limited by the cost of new construction. This statement may seem counterintuitive, but think about it. Near the city center, land is a limited resource. I’ve known investors to pay more than $600,000 for a house they planned to tear down. They would then spend another $300,000 building a house they could sell for more than $1.1-million. That project resulted in a profit of more than $150,000 after holding costs.
The cost of the underlying dirt is what determines the value of a house. In the suburbs, there is a lot of cheap, undeveloped dirt. Let’s apply those same numbers to a $60,000 lot. A builder could buy the lot, spend $300,000 building the house, and make the same profit by selling that house for under $600,000. Now if you bought a similar house two years ago for $500,000, you’re probably not going to be able to sell it for more than $525-550,000 because a buyer could pay another $50,000 and get a brand new house.
So, if you’re buying a house to live in and raise your kids, you would probably do better buying a house in the suburbs even if it doesn’t appreciate as fast as one closer in. You get more house for the same money. But if you’re buying a house that you want to sell for a profit, you would probably do better buying closer to downtown, even if you don’t really like that lifestyle. Population density will make the dirt appreciate faster than than building costs inflate.
Either way, we’d like to be able to help you sell your old house and buy your new one. We have an extensive network of investors who, like us, buy, redevelop, and sell houses. And did I mention Carol is a licensed Realtor®? Even if we or someone in our investor network can’t make the best deal for you, she can help.