If you want to upgrade your home, get excited! The perfect time to upgrade to your move-up home is coming. The window of opportunity is open with mortgage rates still high. But thanks to a strong stock market, robust labor market, and an expected decline in mortgage rates, I’d look to buy a home now.
Once mortgage rates do come down, expecting bidding wars to return. While you are searching for your move-up home, be patient and build your cash reserves.
I really can't believe the good fortune for move-up homebuyers. The supply of homes has stayed relatively steady (and still well below pre-pandemic levels), but the demand for homes has been dropping since the end of 1Q 2022 given mortgage rates have increased by ~2%.
For those of you with strong cash flow and large cash balances, you should appreciate this economic environment. Not only is the Fed helping you make nicer homes more affordable, you're also getting a higher return on your risk-free cash. Now, with the economy so strong? pent up demand for homes is growing.
The Desire For A Nicer Home
As a parent to two little ones, I'm actively trying to accumulate more money to live in the nicest home possible. After all, the best time to own the nicest home you can afford is when you have the most number of heart beats living at home.
Once your kids leave for college, it's unlikely you will be buying an even larger home. That would feel wasteful, lonely, and illogical. Rather, you'd probably either just keep your home or downsize. Maybe a condo by the ocean would be nice.
In 2020, I climbed up the home upgrade ladder when we bought our current home. It has the ideal floor plan for work from home parents with kids. Having an office is huge. It even has an extra room for an au pair.
However, more than three years have passed and there are more home deals appearing at higher price points. Even though I said that I had bought our forever home, as a real estate fanatic, I'm always looking.
It took a nationwide lockdown for me to buy a move-up home. That felt scary at the time. However, soon you can just buy a move-up home simply because bidding wars will disappear.
The Best Time To Upgrade Your Home
The perfect time to upgrade your home is in year two or three of a real estate down cycle. Some might call this market timing, but every investment is a type of timing. Historically, real estate moves in seven-to-ten year up cycles and one-to-three year down cycles.
The risk of buying after only one year of declining prices is that prices could still go down for another one to two years. And the risk of buying three years after the peak is that you might miss the bottom.
You see, it's hard to know when the peaks and troughs are in any real estate cycle until about six months AFTER they happen. Therefore, the perfect time to upgrade your home may be at about 18 months after the peak. Basically, recognize when the peak was (takes 6 months to really know) and then wait 12 months.
Home Prices Have Bottomed
Today, we know that around April 2022 was the peak in recent home prices. The national median home price will likely still be up YoY in 2022. But prices are now fading as the Fed aggressively hikes rates greater and faster than what most of us expected last year. Only if the Fed relents by the end of the year shall we see a pickup in demand again.
If you bought a home at the top of the cycle, not all is lost. You will just have to come to terms with your actions and enjoy the home for as long as possible. If you can hang on for 5-10 years, you'll likely be fine. After all, if prices decline for three years worst case, you'll likely need at least three years to recover. But I don't think prices will decline for that long.
Based on the framework above, the best time to upgrade your home may be between June 2023 through March 2024. We’re past that point now, but the Fed has yet to cut rates, so I’d be buying.
Summers and winters are the slowest months of the year, which also make them the best times of the year to buy a home.
During the summer, people are traveling. Homebuyers will usually want to settle on where they will live before school begins. During the winter, people are also traveling and spending the holidays with family. Any seller listing in July, August, December, and January tends to be more motivated.
I did an interview with Ben Miller, CEO of Fundrise, A private investment platform with over $3.3 billion in assets. He believes October 2023 was the bottom of the real estate market.
Higher Priced Homes Decline More In Absolute Dollars
During a real estate down cycle, higher priced homes will usually decline more in absolute dollar terms. Some luxury homes might also decline more than the median-priced home declines in percentage terms as well.
During a recession, nobody needs to own a vacation property or a house with two more bedrooms than needed. Hence, they tend to be the properties that decline the most since they are the first to flood the market.
As an upgrade buyer with strong cash flow, you are thrilled to see more higher-end homes with price cuts. Even if your own home is losing value, you are still gaining on a relative basis. Here are some examples.
Upgrading During Equal Home Price Percentage Declines
Let's say you live in a $500,000 home and you want to upgrade to a $1,000,000 home. Properties in your city will decline by 10% from here. As a result, your $500,000 home depreciates to $450,000 and the upgrade home depreciates to $900,000 from $1,000,000.
Thanks to equal home price percentage declines, you've now saved $50,000, or a net 5% off the purchase price for your upgrade home. Hooray! If you're putting 20 percent down, you now only have to come up with a $180,000 down payment versus a $200,000 down payment.
Not only do you pay a lower price for your move-up home, your property tax bill will also be 10% lower as well from the original price. For long-term homeowners, having a permanently lower proper tax bill is very valuable.
Upgrading When The Nicer Home Declines By A Greater Percentage
In a scenario where higher-priced homes decline more than your home price, you're really loving the situation. This scenario is very common if you look closely at the opportunities in a down market.
This summer, I saw a home listed at $5,800,000 that gave me some real estate FOMO. After three months, it finally lowered its price to $5,500,000. After a month of no activity, the seller delisted.
I'm confident if a buyer came in with a $5,100,000 offer with no-financing contingency today, the seller would accept. If the transaction went through, that would result in a 12 percent price decline.
We can argue whether the home was overpriced to begin with at $5,800,000. But I think it would have gotten $5,800,000 had it been listed in March 2022.
Now let's say you own a median-priced $1,800,000 home in San Francisco. At one point, the median price was $1,900,000. So you've lost $100,000 either due to real price declines or due to seasonality.
But thankfully, your company went public ten months ago and you sold a lot of your stock. You're sitting on $3,000,000 in cash and $600,000 in home equity from your current residence. With an annual household income of $800,000 a year, you're looking to upgrade!
You're thrilled with the housing downturn because the house you want to buy costs $700,000 less. Meanwhile, you only lost $100,000 on your primary for a net benefit of $600,000.
But given you want to build more passive income, you don't create economic waste by selling your primary residence. Instead, you rent it out for $6,000+ a month after you buy your upgrade home.
Upgrading When The Cheaper Home Declines By A Greater Percentage
Sadly, there is also a chance your cheaper home declines by a greater percentage than your desired move-up home. In such a worst-case scenario, you are likely still coming out ahead if you upgrade to an expensive-enough home.
For example, let's say your $450,000 home declines by 20% to $360,000. It was a spec house in a neighborhood an hour from city center. During boom times, builders overbuilt.
Even though you're bummed out about a big price decline, if the $1,000,000 upgrade-home in a prime neighborhood declines by only 10%, you're still winning by $10,000. Then of course there is lower property tax and insurance bills compared to the pre-decline price as well.
To make this big leap in a very difficult economic environment, you would need conviction in your job security or cash flow. Because even though you’re saving on your big fancy home purchase price, your mortgage, property tax, insurance, and maintenance expenses will all be higher.
Embrace Economic Decline!
Although my risk assets have lost value in 2022, my passive income has not. Instead, my passive income has actually increased due to strong private real estate distributions and new tenants in my main rental property. After finishing my downstairs remodel, my rental home is getting rented out for $1,350 more a month.
Further, rents are increasing in the heartland, where many of the Fundrise funds invest. Real estate has always been a relative safe-haven compared to stocks. However, it's turning out that investing in Sunbelt/Heartland single-family rentals is proving to be a wise move.
For a while, I was deliberating on whether to be an idiot and buy a nicer home just two years after buying our forever home. To do so, I would have had to sell lots of assets and stretch like crazy to buy this nicer home. It was funny to observe how I couldn't contain my desire for more.
But four months later my desire for a nicer home has faded. Every month that goes by, nicer homes I'm eyeing are getting a little bit cheaper. And because I understand real estate cycles take time to turn, we should have another ten months or so to find a great deal.
While we wait for upgrade home prices to come down further, I'll be aggressively accumulating as much cash as possible. And you know what? It feels amazing to have a new reason to save again. It also feels better to live in our home for at least three years, instead of just two.
Just know the unexpected risks of upgrading homes. I've written a post on some of risks that nobody really thinks about. They are important to know!
Thank The Fed For Going Overboard
For trade-up buyers, the Fed is doing us a favor by hiking aggressively into a slowdown. If my read on how rich central bankers think is correct, then I expect to see at least 10% price declines in luxury property by mid-2023. The national median home price may decline by 5% in 2023 after showing a single-digit increase in 2022.
And if the Fed somehow relents by year-end with its aggressive rate hikes, our investments will likely start to appreciate in value once more. If so, due to a lag in the real estate market, we should have about a three-month window to buy our upgrade homes at discounted prices before they get out of reach again. Inflation is dropping and so will interest rates.
We may pay a higher mortgage rate. But at least we'll get a nice purchase price discount for our home upgrade. As inflation returns to trend, then we can refinance into a 7/1 or 10/1 ARM and save even more.
A relenting Fed by year end is my main risk for waiting until the summer of 2023 to buy and not sooner. If you can buy at a price 10% or greater below March 2022 prices, I think you’ll be fine.
Increase Your Cash Hoard
The thing with personal finance enthusiasts is that we are forward-thinking. Instead of spending our money like uninformed maniacs as we head into a storm, we are increasing our saving rate.
Hence, not only will we be able to better withstand Fed-induced economic violence if it doesn't relent, but we are also more easily able to withstand elevated inflation.
As the average person gets crunched partly because they don't spend enough time on their personal finances, we swoop in and take advantage of opportunity. This is how it's always been and how it always will be.
My favorite private real estate investing platform is Fundrise. They invest in single-family and multi-family homes in the heartland of America, where valuations are lower and yields are higher. Fundrise offers great diversification and passive income potential. I've personally invested $810,000 in private real estate funds so far to diversify and earn 100% passive income.
Update On Upgrading Homes
I can't believe my good fortune, but I bought my upgrade home! After my stock portfolio rose by over 20%, I sold most of it and bought a home I had been eyeing since May 2022. The home's price came down about 15%, which created a double win for me.
Sure, home prices could still go down. However, my kids are growing up quickly and I want to own the nicest home I can afford while my kids are still at home.
For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter.
Also check out my Wall Street Journal bestseller, Buy This, Not That, for your unfair competitive advantage in building greater wealth. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
Sam – what are your thoughts on selling now while the market is still “hot”, then renting for a period of time until the market cools. We would obviously be making a call on the housing market but for some context:1) we don’t plan on staying in our current house long term (another 12-18 months MAX), 2) our current home is in the sweet spot price range for our market with very limited supply and has appreciated well since we purchased it in Spring 2020, and 3) renting wouldn’t cause that much disruption to our lifestyle.
The downside risk is the market reverses course and rips up again and/or we can’t find that forever home for longer than we anticipated and are stuck renting. On the flip side we lock in our price appreciation in a house we weren’t planning on staying in long term and we free up liquidity for when the “forever home” comes on the market.
Would love to hear your thoughts and/or follow up questions.
Hi Sam,
Thanks as always for your thoughtful post. We’re following your advice and waiting until early/mid next year to look for a new home (unless something perfect pops up). We plan to keep our current home and convert it to a rental, per your advice. No mortgage on the current home.
But a question—how does age factor into your 30/30/3 home-buying rule? Specifically—I am early 50s, spouse is late 40s. I am looking at 7-10 more years working (and am the primary income earner). Thinking we can stick to your rule IF we get a 15-year mortgage and/or a 30-year or adjustable and just plan to pay down by retirement. What are your thoughts on how or if your 30/30/3 rule should be adjusted for folks within 10 years of retirement?
Thank you as always—so appreciate all your insights. (And we love your book!)
Howdy, it depends on how much cash flow you plan to have in retirement. I would try and figure out your average income for next 10 years + the next however many years you plan to keep your mortgage. Then you can buy based on 30/30/3 rule.
Thanks for the book support. I’d love a nice review on Amazon if you get a chance!
Cheers
Sam, great article. We are considering upgrading in a new community with new construction luxury town homes being built in northern part of Maryland. The homes start at around $750K. Our current home if we were to sale would fetch approximately $500K. The new development just started, only 10 of 180 total sold in about 2 months. What is your take with new construction, buy now or wait? Most likely pay cash or finance no more than $250K.
Thank you.
Good write up, but there are so many variables involved with the market at the moment that the risk isn’t worth it. I think the correction will be rapid and harsh, and many people, especially near retirees and FTHBs, will be in financial despair (as most Americans have their wealth tied into their primary residence) and unable to leave to accomplish their goals/retire save for short selling or foreclosure.
Maybe I’m jaded, but I bought my first home when my career finally was solidified and I wasn’t making poor money, in 2007. I then witnessed a ~40% reduction in value until it bottomed out in around 2011. My income also was drastically reduced after I lost my job and had to take a lower paying one and I was forced to hold two roomies at all times just to pay the mortgage. It still is not worth what I paid for it today, so I ended up renting it out (with so far poor results/cash flow). I also make less than I did in 2007 adjusted for inflation.
Last year I was forced to move to AL for work and ended up purchasing another home thinking current values weren’t a result of a bubble, but merely home values finally catching up to what they were 15 years ago. It’s a home I do actually like, unlike my last “starter” home, but with the way things seem I wouldn’t be surprised to see another 2008 style crash, leaving me underwater once more and bag holding two properties.
My ultimate point is that the FED has made it very clear prices will have to tank. There are a lot of homes across the country that still haven’t reached their mid 2000s highs, and with another crash on the way, likely never will. The aforementioned near-retirees and young buyers will be stuck in their homes for at least another decade, if not more, and won’t be able to move due to work, family, lifestyle, etc unless they rent it out and risk property destruction.
I genuinely hope I’m wrong and interest rates will indeed drop over the course of next year, returning demand and improving affordability, but given the track history of the FED, I’m not confident.
Great post Samurai, I love how you point out the ideal time to buy is between June 23 and Feb 24, I’m padding my cash position until then and looking to purchase some distressed homes. I vividly remember the 2009 housing downturn and I want to be on the ‘business end’ of this next one!
Hi Sam,
If you do end up buying a new home and keeping your current primary residence as a rental, how do you plan to refinance the mortgages on your current primary residence and other rental properties? Would they all be considered investment properties by a lender? If so, how much different are the rates vs. owner occupied? Thanks!
I won’t refinance my remaining mortgage at 2.125%. It’s too attractive a rate. I’ll just let it ride for as long as possible until I pay off my mortgage or let it float.
Locking in a low mortgage rate is one of the reasons why so many people don’t plan to sell.
The lesson is to always refinance your primary mortgage to as low of a rate as possible before you rent it out. Because rental property mortgages are generally 0.375% higher.
Related post: https://www.financialsamurai.com/why-are-rental-property-mortgages-more-expensive-than-primary-home-mortgages/
Hi Sam,
We bought our current home for 1.2 in 2020. There will always be a better home and one could always want more. But we love the schools and the communities here, plus we already have 5,000 sqft (I’m in your hometown McLean!). So now we focus on improving the house.
With the energy price rising, I’m considering getting solar panels. After all subsidies, I calculated the pay back period is about 8-10 years. So about 10% cash on cash return. I know a lot of people would think of it not worth it or an eyesore, especially in a relatively conservative place like Virginia. But if you have this cash laying around (about 20-30k), between buying sp500, treasury bonds (ibond or t bill) and getting solar panels, which would you choose?
Hi Sam, I’m wondering if your expectation of the trough (June 2023 to Feb 2024) is adjusted based on yesterday’s inflation report. Sounds like there will be a lot higher interest rate increases in Q4 than suggested in your article (I don’t think the Fed will relent – rather, I think they will try to hit interest rate hard – even with a full percentage point increase next week.) Any particular thoughts about the housing prices in SF/Peninsula within that horizon? I feel more strongly after yesterday that the US will need to get into a recession before it can ease inflation. All the signs are pointing to a recession (slowing domestic GDP growth, Europe, Asia, etc), even the labor market – in which unemployment is really driven by the decrease in workers, which would actually slow down the economy. Even if interest rates will not cause wealthy SF housing prices to drop, a recession will probably lower housing demand and prices. Your thoughts?
Aren’t you worried about over-extending yourself on the re sale of your home? Who will be left to afford such a home in 15 years or less?
Many people like myself have been saying we are going to experience an economic collapse in human capital and productivity because in 15 years or less, there will be very few qualified people remaining to do the jobs we have now. Personally, I think we will back into the 1970’s and Elon Musk et al. have made past comments about the human species population being half of current levels.
I’m retired while my spouse enjoys her work greatly (Managed Healthcare). Everyone in her department is at or within 7 years of full retirement. She has 1 person in their 40’s and have been frantically searching colleges and other candidates with legal experience, using any means necessary, to get semi-qualified candidates into their business. I also have many friends who are C-suite executives to Managing Directors in various vertical markets and are experiencing the same. We are in our paid for, forever home and won’t be moving or buying anything except large family vacations.
It is my firm belief in 15 years or less, America won’t be recognizable as our workforce will be greatly reduced in numbers, skill, formal education and personal desire for success.
I’m not. It’s one of the amazing things about inflation. It sneaks up on you. What seems expensive today will seem very affordable 10 years from now.
If you’ve believed in an economic collapse for a while, does that mean you’ve also not invested in stocks and real estate or have been short for a while? Curious how your investments have followed your beliefs.
Thx
People have been believing in economic collapse forever. It’s not going to happen. For one, inflation over the next 15 years will increase nominal incomes by 55%, making things much more affordable to todays prices. A modest shortage of labor drives wages higher, which is good for the economy long term, as those collecting the incomes spend it. Jobs with the most shortages will have wages go up the most which will in turn drive folks into that field. In the short term it could be painful but the system will correct. Plus automation will help as well.
We are retired and want to upgrade to a much nicer home. Asking price is 1.2M. We would be paying cash with no mortgage. Our net worth is 4,350,000 which includes 550K equity from present house which we would sell after closing. We have 0 debt and no children to leave our money too. We would use 800K from cash and the remaining 400k would come from our brokerage account. My question is do I sell bond funds which I have over 30k in losses in the past year or so or do I sell VTSAX and pay a lot of capital gains? Our family income is over 200k and we spend about 120K per year and 40K of that is taxes. This would leave us with approx 3.2M in liquid assets. I feel we can easily afford the nicer home. Would be interested in your comments.
It feels like both bonds and stocks will rebound within the next 12 months. But then, so might your target property price. Wait until next year and see. Sell the asset that is over allocated based on your net worth allocation framework.
Solid real estate advice as always, thanks! I’m not looking to move this year but might consider it late next year if the right place presented itself. But it would have to be pretty darn amazing and priced at a good discount to convince me. I’m quite content in my current home and feel it is just the right size with a good location. So I’m feel rather fortunate to be a happy clam. I do enjoy following the real estate market though and watching to see what comes on the market. It’s always fun to go for a tour when a gem pops up even if it’s just to “window shop.” great post!
Sam,
How does this play out from the Fed’s perspective? Their balance sheet has gone from 1 to 8+ trillion since 2008. In addition to the historically large rate hikes, they’ve just started to unwind. Curious what ‘pivot’ scenario you see playing out with a potentially deep and painful recession on the immediate horizon. Do they just never complete this unwinding and start lowering rates?
Easiest way is to publicly recognize lower inflation expectations in 2023 and beyond. All the balance sheet figures are less important than moral suasion. So now we wait at least another month longer.
What are your thoughts around Williamsburg, NYC specifically in the multi-bedroom condo ? Do you still see that on a delayed cycle from March 2022 (12-18 months)? When looking at the historical median prices in that area, I don’t see that things have peaked in March 2022. What are some other ongoing indicators to continue to look at? (First time homebuyer)
Don’t know about Williamsburg specifically. Best if you present to me an argument with numbers and forecast, and I can let you know what I think.
Great post. How do you feel about your existing crowdsourcing real estate investments in the down market you’re predicting? Are you still buying in given your prediction of a further downturn for real estate?
What’s fascinating is that NAVs for funds that invest in heartland single-family real estate (eg Fundrise) continue to go up Because rent growth continues to be stronger than the national average. Higher mortgage rates have pushed less people to buy and more people to rent.
But rent growth, like headline inflation, should moderate / normalize.
The majority of my investments were made in 2016, 2017, and 2018. So I expect them to mostly exit fine. Today, I am nibbling through dollar cost averaging in private real estate funds. However, my main goal is to buy a move a property in one or two years.
How about you? Do you feel about your real estate investments and what are you investing in?
Thanks for sharing. Similar boat. Still dollar cost averaging in with sites like fundrise, albeit in lower amounts than a year ago. Larger percentage to cash these days, with an eye towards finding a bargain in the next year or two (perhaps new home, etfs if the market really crashes). I’m dc based and this real estate market has historically been more insulated from recessions.
Good update. I would assume this will be a great opportunity not only for those planning to move-up, but those first time homebuyers as well. My son, who is single, 5 years out of college, working (two jobs the first 4 years out), has primarily lived at home because housing (rent, purchase) were just too costly. Pays all of his expenses except roof over his head and the food he eats at home. Now has a great nest egg, diversified well between retirement (401K, Roth and Trad IRA), Brokerage and Money Market (Emergency and House Down Payment, Closing Costs, furniture/appliances). No debt, excellent credit rating 820. He is pre-approved and we are looking but not in a big hurry because we are starting to see a lot of homes here in the midwest come on the market and many of them are starting to drop their price from original list. Likely will see this trend as you indicated through 2023 and into 2024. For now, he is just going to keep hoarding cash, waiting on right home, price and location. We’ll see how this plays out as we take it day by day.
What the hell? The fact you are posting this with such detail… Your son should NOT be living at home at 28+. Dont care about costs. You have put your life on HOLD for 5+ years so he can get “situated”. You are creating a spoiled brat. My recommendation: give him 3 months to leave and sell your place to move to somewhere (you have always desired) he can no longer squat.
We are coming out of a 2 1/2 year pandemic. Living at home for the past 2 1/2 years is a rational thing to do to be with family and save on money.
I doubt the father put his life on hold for the past five years if he has an extra bedroom. Sure, five years seems longer than the average adult child living at home. But there were probably some good bonding happening after college as well.
Due to the pandemic, I think everybody gets a pass since early 2020. I didn’t want to put my life on hold either, but I think many of us were forced to adjust.
I wasn’t too keen on writing a new book as well. But one of the reasons why I wrote Buy This, Not That was to give the pandemic a big F U. I told myself if I was going to be trapped at home, I’m going to make the best of it.
Yes, I think for first-time homebuyers as well, there should be more opportunity in the next 12 to 18 months given it takes time for the cycles to turn.
But it doesn’t mean you can’t make lowball offers and track things that pop up closely every day or every week. Just put on a filter on Redfin or Zillow.
Your son sounds like he is financially on the right path. Hopefully he can leave the nest and build his own nest by the time he’s 30.
Is June 2023 – Feb 2024 is a good time for first time home buyers too? Also, I saw in your other post that you mentioned “June is the worst month to buy a property due to its highest median sales price at closing and shortest days on market”. It’s contradicting to me but can you shed some light on why June 2023 could be good time to buy? At the moment we are saving to buy new house and thinking about waiting until favorable times onset.
Yes. The reasons are stated in this post. June begins the start of summer. But July and August are better for buyers to look for deals.
We want to move to Santa Barbara after our son goes off to college. That will be 7 years so we have plenty of time. Hopefully, I can sell our properties at the next peak then rent for a few years. I can wait a bit. Although, I don’t think the property price in SB declines much during a slowdown. The inventory is always meager there.
It’s a much more expensive place than Portland. So you’ve definitely got to pump up that savings to add to your Portland sales.
I have been thinking about this for the past few months. I’m 25 years old with a house with roughly 175K in equity. We have a decent income that could support a much larger house that we both want, but we have a good mortgage rate @ 3.5% and our savings rate is over 50%. We’re dumping most of everything excess into our brokerage account. Our house equity to net worth ratio is way above 30%. For now were saving/investing and going to stay put, but were going to keep an eye on R.E. around September of next year! Great post as always.
“The perfect time to upgrade your home is in year two or three of a real estate down cycle. Historically, real estate moves in seven-to-ten year up cycles and one-to-three year down cycles.”
Weren’t we down about six years during the Great Recession? I want to say we peaked in spring ‘06 and didn’t return to an up cycle until ‘13. Do I remember that correctly? I recognize that lending practices and inventory were much different and contributed to that extended down cycle, but it was about seven years wasn’t it?
Peaked at the end of 2006 and bottom around 2010 and traded sideways until liftoff in 2012.
The GFC was the worst downturn in our lifetimes. So if you think we are going to go through a similar magnitude, then housing could go down 4-5 years.
The credit quality of homeowners and the lending standards of banks since 2008 are much higher. The amount of wealth gains since then have been enormous as well. So I don’t think the downturn will be nearly as significant.
But if you think so, I’d love to hear your analysis and why. Thanks!
I don’t. Just wanted to get your thoughts on a potential worst case scenario. Thanks!
Got it. Please share your thoughts too! Thanks
I recently thought about this. The 2.5% 30 year fixed mortgage rate is just too hard to give up and I would have to sell to upgrade. My current CA property taxes are hard to give up as well. Redfin’s estimate is now at all time high so if accurate then no discount yet (that could change). Ultimately, I have decided to do two things… 1) finallly live it up more (I just joined a fancy gym), and 2) have various building contractors over to get their suggestions and quotes as I have a generous lot. There were tons of developers who had offered on this home I upgraded to & purchased in JAN 2021 (using the listing agent), and now is the time to figure out the expansion potential after full completion of the interior re-modeling and needed break. I’m under 40 and can withstand the lengthy process, while doing some labor myself.
Yeah, a low fixed-rate mortgage is probably one of the big reasons why a lot of existing homeowners are not selling to upgrade. The ideal would be to rent out your existing place and have enough cash to upgrade, if that is what someone wants to do.
That’s another reason why just being patient and enjoying your property is a good idea. And if you have expansion potential, then that’s great. It’s the best way to make a return on real estate since building costs are almost always lower than selling price.
Great article. It now seems that the $FOMO demand in RE is cooling off slowly. I’m seeing new Contruction vacations homes in Miramar Beach, FL dropping $75k to $100k last few weeks. As demand drops off will continue window shopping for the right deal. Meanwhile will be concentrating on downsizing to a condo in Denver market to raise some cash. The $YOLO post pandemic itch, age 49 midlife crisis has started. Access to full service restaurant, barista, live music, being downstairs in the building just feels right. Heading south from Oct-Mar enjoying fresh seafood and fishing in the off season of tourism in FL will be a blast. whether you are stuck inside from poor air quality from forest fires burning, water supply being cut by government 4 making snow in mountains. Over crowded resorts and highways. Rising Ocean levels or living thru hurricane Katrina. The Risk and Rewards of Life never quit coming. Almost like the Californication of Denver.
Enjoy! And don’t watch too much news. It’ll only make you sour.
Good luck selling your house in Denver.
I like living in my home free and clear. No payments. Houses just suck your money. I have 3 cruises planned. 30 days in Mediterranean. 21 days in Iceland and Scotland. 48 days from San Diego to Hawaii to Polynesian islands then Australia the Tanzania then New Zealand. I like having low overhead expenses so I have plenty of money to have fun. Spending all your money on a house makes no sense to me. To each his own. I live in affordable Tucson Az and also have10 weeks part time ownership in Oceanside Ca. That’s plenty of time at the beach and I don’t have to pay all those taxes in California. Gas is 3.25 not over 5 bucks.
“ Spending all your money on a house makes no sense to me.”
I hope the same. Which is why I have my 30/30/3 home buying rule and my alternative Primary Residence buying rule based on net worth.
For those who want to move up, please spend responsibly.
Personally, I want to have the best Home I can afford and come back to it every single day from my travels. We spend the most time at home, so we might as well spend the most money responsibly on our homes.
Ordering a vacation home, on the other hand, is a different story.
It feels like you are reading my mind. I turned 50, sold a bunch of stock last month and raised $1.6M after taxes (#%&$*! taxes). Now I want to go in and make a strong bid for a bigger house with office space for both of us and room for my winemaking hobby.
I like the idea of turning our current house with a 2.5% mortgage into a rental is tempting, but keeping $500k of tax free capital gains is also tempting.
Decisions, decisions.
You know you can do both right? So long as lived there 2 of the last 5 years, it still can be sold tax free. So you just rent it out for a duration, and then move back in for a couple years then sell it. The other option is, live there the first year then rent the next 3 and then live there the last year. The 2 years don’t have to be sequential.
See this post on the $250/$500K tax free profit rule. Prorated benefits. Doesn’t last forever.
https://www.financialsamurai.com/tax-free-profits-for-home-sale-250000-500000/
Ah, taxes, the main reason why I cannot sell any stocks in my taxable portfolio. It just feels too painful! I would rather just ride it forever. But I have sold my tax advantages retirement accounts.
Money is meant to be enjoyed. Especially at 50!
Sam,
I love your optimism. This post really puts things in perspective for me. I’ve been watching the two houses I own decline in value for 6 months, and considering what impact that may have on my long-term net worth.
Now instead of worrying, I’m wondering when the right time to buy the lake house I’ve always wanted may come.
Focus on cash flow, enjoyment, and look to the future I say!
Sam – This is my favorite type of post! Interesting read and topic!
I’m currently looking at new construction that is scheduled to start building/selling this fall? Thoughts on the pricing/buying window for new construction and the initial pricing of a first phase? I know some new construction homes in Cali (Orange County) saw buyers make upwards of 450K before even moving in (i.e., construction was completed) on 1.2M-2M semi-custom homes over the last couple years. Obviously, that time has passed. What about the optimal window for new builds now with initial pricing about to be set? Don’t builders have to factor in rates and declining prices into their initial pricing because they don’t want the second (and later) phase(s) to be priced lower than the first? Doesn’t that tend to make phase one pricing a little conservative with builders figuring they can go up from there? Possibly an opportunity to take advantage of this with demand down?
Also, what you said about age and remodeling, doesn’t that also apply to renting an existing home for passive income, versus selling and applying to an upgrade (reducing the mortgage on the upgrade)? Could it possibly be more optimal to trade the equity in this environment just in case prices on the existing home fall further than expected and factoring in the hassle of being a landlord for the first time?
Love all your questions. What do you think they are?
What is the walk the line cost if you decide not to buy the house?
If you lock in a price now, expect market prices to decline by 5 to 10%. So the price of locking now should be your expected price 12-18 months from now whenever you own the house and move in.
But don’t you make less on the sale of your existing home? I could have maybe got $1.1 million for modest home back in March 2022 buying frenzy. Now the market is seeing price cuts and I might have trouble getting $950k. In another year…. It might be down to $800k. So any savings I make on my move up home I lose on the resale of my existing home. Once you are on the property ladder it doesn’t matter that much when you buy and sell. Unless our upgrade involves keeping the existing home as a rental. But I don’t consider that a traditional “move up” purchase for the majority.
Check out the three examples in the post! Whoo hoo!
Makes sense… I really tend to lean more into the FIRE lifestyle lately, so upgrading to a luxury home 2x our current home even though we could qualify on income… is not in our plans. As a one child small family we don’t need more space… but we would like newer everything and better layout and easier to maintain outdoor entertaining space. We’ve held off on upgrading anything cosmetic in our current 1950s home. Just did the important stuff.. new roof, A/C, paint, pool plaster, energy efficient upgrades ect. Floors and bathrooms need an upgrade.. (original 1950s for most part), but quotes were ridiculous. If we do enter a recession and home prices collapse 20% or more… would it make sense to upgrade bathrooms and such then? (maybe negotiate better contractor rates). Or just uproot the family and move to an already finished to our liking home?
I want to move further out from NYC when we retire in a couple of years. Current place (no mortgage) is too busy, too crowded, too taxed, has too little land, and has too many stairs as we mature. We both agree on that.
But the wife wants to downscale and I want to upscale (cash from this place will allow upscaling as we get further out). Got her halfway convinced that if we don’t get more rooms, but just get bigger rooms without cluttering them, and lots more storage, it will be easier to clean and keep tidy. It’s an ongoing negotiation. Neither one of us wants a McMansion.
The family cabin in the mountains is fine for a second home. Thought about selling it for a beach house when it comes to me, a few years hence, but with glaciers melting, sea levels rising, and temperatures going up, the mountains are still nice and cool for long term stays and have plenty of water (also cable and, oddly enough, sewer) and we can rent when we go to the beach. Also, the only homeless folks likely to try to get into my garbage are bears, and they don’t set up camp on the sidewalk (even if there was a sidewalk).
Best of luck with the negotiation!
Related: The problem with owning ocean front property, the ocean.
Hi Sam!
Love the article. I am also looking to upgrade in 2023. What do you think about taking out home equity to renovate/expand my current home? I live in a nice area and I could easily upgrade my current house by +20% value and still not be anywhere close to being the most expensive house in the neighborhood.
What do you think?
It depends on your debt to equity ratio and the cost of the debt. It also depends on how old you are and how busy you are. Remodeling is one of the most painful experiences you will ever experience, especially if you try to expand beyond the envelope. Remodeling is a young persons game who has more patience and time.
But remodeling and expanding is also one of the best ways to make money. If you can build less than the selling price, you will make instant equity. And he will likely also pay a much lower property tax bill compared to buying an upgraded home.
Personally, I will never remodel another home again. At least not a gut remodel. Doing something simple like a bathroom remodel is easy. But no more than that. I’m too old.
Related: why remodeled homes will sell for bigger premiums going forward
Thanks for the update Sam! Good stuff as always! I am in SE Florida and looking at waterfront property… Prices have gone up 125-150% conservatively since the pandemic started and about 2/3+ of that since April of 2021! For instance, something that would have traded for 1.5M in January 2020, traded for low 2’s about 18 months ago and now trades for mid to high 3’s conservatively. Unfortunately, prices have yet to inflect lower due to essentially very little inventory. It feels like a double whammy because it seems highly unrealistic that prices will even get close to where they were just 12 months ago (would need to come down 40%ish) and my borrowing costs have 2X. All I can do is play the game in front of me and hope more inventory comes along. For reference, the more central and western communities further from the water only went up about 60 to 100% since the pandemic started and you are seeing inventory build up and price cuts over the last few months. I am hopeful!!!
If I were looking for Florida beachfront property that will be above water in 20 years, I would start looking in Georgia. Given it’s likely to be much cheaper, it’s a win-win. Insurance in Florida for houses is insane anyway.
I have been watching the market, and I do feel comfortable about your June 2023 through February 2024 suggestion. I don’t see the prices have fallen enough here in DC to justify purchasing a 1,200sqft fixer-upper townhouse (which is what I would be targeting). I am looking to own my fixer upper for 2 years, while I live in it and fix it up, and sell it during year 2, hoping to take advantage of the appreciation due to prices raising again, and the increase in value due to the upgrades. So now is not the right time, maybe in 1 year from now, as you mention.