In this tale of two homebuyers — one who sold at the bottom of the market, and one who bought — we look at what happens when a homebuyer decides to play the long-term game and why we must teach our clients the long-term benefits of owning a home and locking in a mortgage payment that is affordable.
We’ve all heard talk of a coming shift — a market crash that might create major price drops in many markets. What does this mean for buyer’s agents and their clients? Does it matter if buyers are purchasing homes that currently sit at the top of the market? Will they be OK?
Here’s a historical look at a home in my hometown, Yorba Linda, California. It’s really a tale of two homeowners and how the market affected them — and affects you.
In 2006, the single-family home was purchased for $760,000 using piggyback financing. At the bottom of the market in 2009, the home sold again for $585,000. According to the multiple listing service records, the home was a standard sale — and while we don’t know why they sold, we know the buyers lost over $200,000 after paying closing costs. Ouch!
The contrarian buyer — who bought it for $585,000 when the market was uncertain and people thought it was still crashing — reaped the rewards. Fast forward nine years and we see that the home sold in 2018 for $800,000, representing a gain of over $200,000 from the $585,000 purchase price. They did well, very well.
But what about the first buyer? What would have happened if they had just held onto the home?
What happens if you ride out the storm
I ran the numbers to see where they’d be in 2018 had they stayed in the home. Public records show they had combined loans of $608,000 when they bought in 2006. They used a first and second mortgage combination to buy the home, which in 2006, had higher interest rates.
Let’s assume they paid a blended rate of 5.5 percent. This would bring their payment for principle and interest to approximately $3,400 per month.
An amortization calculator reveals that after 12 years, their principle loan balance would have been $470,000, assuming they didn’t refinance. Had they kept the home until 2018, they would have had roughly $330,000 in equity! They would have been the big winner had they not sold at the bottom of the market.
It’s unfortunate, because many people who sold or lost their homes at the bottom would have benefited the most had they managed to keep those homes. And sadly, most of them are still paying rent to a landlord and have $0 in equity in a property.
What we’ve learned
So what does this mean for today’s buyers? What does this mean to real estate professionals?
First, if you are working with a buyer and they are planning to be in the home for only 2-4 years, they may lose equity if the market drops again. It’s probably not the right time to buy. If they plan to stay for the long haul, they should buy a home, lock in a mortgage payment at a low rate they can afford, and plan to stay awhile.
In the end, the benefits of homeownership are revealed.
Secondly, if the market does enter a downturn, many of the loan programs currently available will be gone and the opportunity to buy a home may be eliminated for anyone who doesn’t have 20 percent or more for a down payment. Once the loan is funded and escrow closes, the bank can’t change the loan terms. Your buyer can stay in their home securely as long as they make their payments! So if they can afford to buy, buy now.
As this case study shows, real estate has always been a long-term game, won by those who have the patience to stay in it long enough. As real estate professionals, we have to look at the long-term benefits of owning a home, locking in a mortgage payment that is affordable and give the best advice we can based on our client’s specific situation.
Aaron Zapata is a licensed real estate broker and ranked in the top 1 percent nationwide among Realtors. Impact Properties, Inc. is a real estate agency serving all of Southern California. Connect with Aaron on Facebook or Twitter.