My wife and I have been thinking about buying a home, so I decided to do a little research. We are planning to upgrade our home, that is to move into a larger (and presumably more expensive) house. I had thought that the market had cooled a bit to since the bit housing boom, but as it turns out, the boom residual is still there.
When upgrading a home it is best to wait until the house prices fall as far as they can. This is true even at the loss in value of your own home. This of course assumes that the loss in value does not go below what you own on your home. This basic idea can be illustrated with a simple example.
Assume that your house is presently worth $250,000, you owe $150,000 on your present mortgage, and you want to buy a house for $400,000. A sale of your house at present would yield $250,000 – $150,000 = $100,000. Buying your new home will cost $400,000 – $100,000 = $300,000.
Now assume that the market cools by 20%. This means you can only sell your house for $250,000*80% = $200,000. However, the house you want would only cost $400,000*80% = $320,000. Since you still owe $150,000 on your present mortgage, a sale of your house would yield only $200,000 – $150,000 = $50,000, but the cost of your desired home would be $320,000 – %50,000 = $ 270,000. A savings of $300,000 – $270,000 = $30,000.
Armed with this bit of mathematics, I searched the internet and found the mean and median house prices for Tucson over the last 15 years. Plotting them over time you can see a smooth trend from 1992 to 2002 and then a dramatic rise in 2003 (See the blue line on the plot below).
It looked as if the market was still swollen from the recent housing bubble and looked like it might still fall. But by how much. Looking at the median house prices from 1992 to 2002 I could see a nearly constant sustained growth in house prices by about 5% per year. I then extrapolated this sustained growth to the year 2013 (See the pink line on the graph above.) Dividing the values of the present curve for the 2007 numbers I estimated that Tucson homes were at present 22% overvalued.
This of course does not mean that house prices will continue to drop. They might even go up. However, it does indicate that house prices when driven by normal conditions rise at 5% per year. Since house prices rose dramatically from 2003 to 2005, and the median salary did not rise to support the new home prices, then I believe that the house prices cannot be sustained by the individuals of the local (Tucson) community. This is supported by two other facts. 1) The house price maintain modified by inflation (House Price Index) have not dramatically increased since 1950 except during the recent bubble, and 2) The inflation rate has maintained values between 3% and 5% over the last 20 years. Together, these facts imply that the community should not be able to support the house values of the current market, and supply and demand being what they are we should see more equalization in the near future.
So… bottom line, keep an eye on interest rates, and if you can, wait for a year or two.