The Real Estate Trade-Up Dilemma

Trading up from a smaller, less expensive home to a bigger, pricier home can be tough in a seller’s market. While selling for a 10% premium on your $500,000 is great—$50,000!—paying that same premium on the new $1 million property can be tough to swallow. Many simply can’t afford it, but what’s worse is that many only think they can’t afford it. And that’s where the advisory role of an experienced real estate agent comes in handy.

By the Numbers

Math is usually the best way to evaluate whether a homeowner can afford to trade up. Going back to our $500,000 home example, let’s assume the trade-up to the $1 million property is occurring in a 3% interest rate environment. That extra cost from the seller’s market premium is marginal—around $200 per month—when the new home is financed at that 3% rate.

Many people assume that prices will drop once interest rates rise. And while it is a possibility, it’s important to factor for the extremely limited inventory with which we’re currently dealing, which reduces that possibility pretty significantly. Rising costs on material, land, regulatory oversight, and labor aren’t going to bring pricing down, either.

What about Renting?

We already know that interests rates are going to rise, which means more people will turn to renting. In that scenario, returns become even more attractive to investors, because it typically fuels rent prices (and particularly in higher inflation settings). The evidence is all around us—the volume of investors buying single-family homes and apartments has multiplied, and large institutions are jumping on board too. That means the number of “competitors” buying homes right now is compounded by only by coming-of-age millennial buyers, but this growing investor segment as well.

Speaking of Inflation…

Upsizing right now may seem a little daunting, but remember to consider inflation. If your income is expected to rise over time, it may well catch up with that additional financing cost. To those who thinking about renting just to “wait out” the current real estate market frenzy, keep in mind that price increases are affecting the rental market too. A $4,000 monthly rent today escalating at a little over 3% annually compounded is over $5,300 in a decade. Even at 1%, it’s over $4,400. 

Obviously, there’s a lot to consider. So often, calm, methodical evaluation is priceless and gives homeowners the information they need to make a decision about next steps. If that’s the sort of insight you need, you know where to find me.

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