Thursday, October 10, 2013

Even in a "Recovering" Market, Staying in a Home Doesn’t Necessarily Lead to Recouped Equity

There’s been a lot of talk in the media lately about a supposed housing recovery lately.  Since I’ve written freely about the money we lost on the sale of our first home (nearly $100,000), I’ve been questioned by many as to why we didn’t just stay put in an effort to recoup some of this value.  And believe me, it was a consideration; especially with the real estate market appearing to level off. 

However, I’m not one to just hope that we’ll come out the other side of such an investment for the better; therefore I ran the numbers that we’d be looking at if we stayed put, as well as considering several non-monetary factors as well.  Once done, this gave us a clearer picture of why staying in our previous home wouldn’t be the financial answer, and would likely have cost us even more money.

Our initial plan was to stay in our home for 10 years, since by that point our son would be high school age, and the area high school was very poor.  But even if we had waited it out that long instead of selling after three years, from my calculations, we would have been out even more money than we actually lost.  Here’s why.

Continued Market Decline
Just because a market has come down significantly, it doesn’t necessarily mean there isn’t more room to fall even if the rest of the country seems to be in a recovery.  In our case, and in our area of Chicagoland, we sold our home for 25 percent below what we purchased it, but since that time values in that area have continued to fall.

We purchased our home for just under $300,000.  We ended up selling for $230,000 in 2011.  That home is currently valued at just under $170,000 by and closer to $160,000 by, and the area’s median home sale price has continued to fall even as many area prices rise, dropping by a further 15 percent from 2011 to 2012.  There is little indication of things picking up, and even if they do over the next six years, it’s hard to imagine us selling our home for anything above what we sold it for in 2011. 

Property Tax Increases
While the market in our previous area continues to decline, the property taxes are going up.  In fact, they had increased by about 40 percent in the last two years we lived there.  We were paying almost $5,000 a year in property taxes to live in an area with poor high schools, aging infrastructure, not much in the way of entertainment, and where property values were continuing to fall.  In our new location our taxes are about $3,000 a year, and in a much better area.

Mortgage Costs
The cost of carrying a mortgage can add up significantly.  Even with the mortgage interest deduction, the interest alone can add tens of thousands of dollars to home ownership costs.

We chose a 15-year fixed rate mortgage at 5.375 percent when we purchased our home.  At the time, this rate was actually pretty low, but we still worked toward paying our mortgage off early.  Even with moving to a bi-weekly mortgage program, and making extra payments along the way, we were looking at about $65,000 in interest paid over the course of 10 years.

Upkeep, Repairs, and Utilities
Those big ticket fixes on a home can hit hard when they come along.  And even the little ones that come in a constant trickle can soon amount to a flood of money out of our accounts.

During the time we were in our home, we averaged about $2,000 a year in maintenance and repair costs.  However, with aging appliances, a 20-year-old hot water heater and 15-year-old HVAC system, it was likely we would have had to replace all those items in the upcoming years.  Therefore, our maintenance and repair costs would likely have averaged closer to $3,000 over time, compared to our new condo where they average closer to about $600 a year.  In addition, we have to factor in that our utilities were also higher in our previous home compared to where we live now by about $1,200 a year.

Better Options Elsewhere
So when we sold our home, we bought in a better neighborhood with top-tier schools and plenty of entertainment and where home prices are rebounding instead of continuing to fall.  We live in a condo where our utilities are $100 a month less than in our home, we have no mortgage, taxes are about 40 percent less, and our only regular monthly cost is for our $300 association fee.

By my calculations, had we stayed put, rather than it costing us $160,000 to live in our home for three years it would have cost us about $220,000 over ten years, and that’s if we could have sold in 2017 for what we sold for in 2011.  And while the numbers look better spread over a monthly basis, it’s important to bear in mind that not only would we have lost an additional $60,000 over time, but in the meantime -- and in our new location -- we’ve cut our housing costs by about $1,200 a month, we own a home outright, our kids can attend great schools, and we live in an area where our median home value is better protected.

So it’s important to note that even though riding out a bad situation might be the first and easiest thought that comes to mind, it might not always be the right thought for everyone.


The author is not a licensed financial or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Calculations have not been verified by a professional.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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