Myth: Home Sellers will make more money if they wait for the market to recover.

Suppose Mr. Jones bought a house in 2006 for $300k. He put 10% down, got a then current loan rate of 6.75%. He pays the bank $1750 per month for the mortgage.

Home values in Chicago have fallen off by about 20% since the peak of the market. According to JP Morgan Chase, they will drop 6-7% more in 2012. This means that the Jones house will be worth about $225600 this year.

Moody's Analytics predicts that values will increase at about 1.2% per year after 2012. At this rate it would take about 20 years for the house to turn an 8% profit over its original price of $300k.

Mr. Jones could wait until 2031 to sell, or he could sell now and buy the bigger house next door. It's listed at $440k. with 10% down at today's rates of 3.91% his monthly payment to the bank would be $1870. Let's see which scenario makes more money in the long run.

 Monthly PaymentEquity AccruedInterest Paid to Bank
Waiting until 2031$1750$181k$334k
Moving now$1870$195k$231k

If Mr. Jones sells his old home and buys a larger one, he will gain $14k in equity and save $113k in interest over the next 20 years.

Want more stats? Curious about my math? Let me know in the comments!

2 Responses so far.

  1. David Loeb says:

    Most of the supposed savings come from refinancing at a much lower rate, a change that does not require moving. Also consider that rental rates in Chicago are presently so out of alignment with mortgage rates that it may be “ideal” to buy the $440k property and refinance the original property, renting it out.

    • Kay Cleaves says:

      David, you’re right, it’s all a question of comparative mortgage rates, with some amount of price drop included in the mix.

      Refinancing and/or renting out are also both options, thank you for mentioning them. You’re thinking at the next level, and that’s fantastic.

      In this article I was speaking more the very common belief that a homeowner who bought in at “peak” market must wait for their equity to return to the dollar amount it was at when they purchased before listing to sell. There’s a lot of folks still expecting a miraculous market rebound to 2006 prices and they will keep blaming anyone and everyone for it failing to occur.

      Love your “domain” by the way. 🙂 Thanks for commenting!