A common theme for our blog articles is that the Covid 19 real estate market is crazy! From bidding wars to waived inspections and a general euphoria around buying every home on the planet, people are possessed! The other week we wrote about how to buy the home of your dreams during this madness but today we are looking to the other side at the people who SOLD their house over the last two years!
Every home seller these days expects – and essentially demands – a bidding war. They want a dozen offers and all of them over asking price by a good $25,000. This is certainly exciting but sellers forget that once they sell they need somewhere else to live, unless they are going to move in with their kids! (That was meant to be a joke but I’m sure some people are doing just that!)
Prior to Covid the typical sales cycle was for homeowners to sell their homes then retire to a cheaper state or a smaller home with savings from their home sale. Nowadays, the traditional “retirement” areas are just as expensive as their pre retirement counterparts which is causing a major problem.
One of the most common moves was to sell one’s home in New York and move to Florida while pocketing a couple hundred thousand dollars in the process since Florida was always more affordable. On average, Florida still remains more affordable but the difference in price is now negligible, causing many residents to stay put which further exacerbates the inventory shortage throughout the country.
Now to get to what you’ve been waiting for – the choices recent sellers have.
Choice 1 – Sell your home for top dollar and buy a new home for top dollar
I hate to sound like an Instagram finance guru, but I truly believe this is the correct decision. People still have the great recession in mind when real estate prices dropped drastically and for a prolonged period of time, leading to negative equity in their homes.
I would not bet on this occurring again. Yes, prices are very high, but everyone in the market for a home this time around appears to be qualified. These buyers are choosing to “overpay” because they value having somewhere to live, not because they are speculating on the future appreciation of an unknown asset, as they were in the 2005 housing market.
If this comes back to bite me in the future, feel free to send me an email saying “I told you so, the market was in a bubble!” but my bet is that won’t be the case. I’m not an economist but I can tell you that bubbles are caused by the uninformed. Everyone at this point knows exactly what they are doing when they overbid.
If we look at the large markets such as New York, California and Florida, the average home is worth well over $500,000. People are making the calculation as follows: “Interest rates are very low and appraisals are no problem regardless of what I pay. If I bid over asking by $50,000 (or 10%) it doesn’t change my monthly payment by that much and it’s still cheaper than renting.”
I know this rationale is weird but we are living in some weird times. Everyone paying the extra 50k spread over 30 years at 3-3.5% interest rates can spend the extra couple of bucks on a higher mortgage instead of Grubhub which is what they are doing.
Choice 2 – Sell and rent an apartment or home until the market settles down
We have heard from many people that have done this and they are very happy with their decision. I always say, “There is nothing wrong with renting!” in the context of potential first time home buyers, but I very much agree with the sentiment for people that have previously owned homes too!
Renting is not some type of evil that should be avoided like the plague. I’m not going to break down the math on renting but if someone moves from a high property tax area to a rental elsewhere they very well could come out ahead year after year. Home ownership is great for some, but it is not the be all and end all. Everyone’s situation is unique and should be treated as such.
Choice 3 – Sell and find a cheaper area to live that isn’t so popular
The most common moves from our users are New York to South Florida, Boston to South Florida and Southern California to Texas. These are popular for a reason, but if you are adventurous and/or have the ability to work from anywhere, you should take a look at the map and find another, cheaper area to move to.
We recently moved both personally and professionally from South Florida to Pennsylvania. I will save the details for another post but this was something I dreamt up by looking at a map then read about the financial ramifications of living in the state.
Don’t box yourself into what you think is the trendy move. Explore all of your options.
Just because the market is crazy doesn’t mean your options are limited. Without a doubt, to profit from the sale of your home was easier in 2019 but it can still be done. Either bite the bullet or explore other less popular cities. Either way, if you’re with the people you love, it will be great and if it isn’t, you can always move again!