However, we did have the chance to talk loud and sound smart after the little princesses went to bed. One night, after awhile, the conversation touched, touched I tell you, on politics and specifically the housing crisis.
I need your thoughts.
I tried making the point that people who claimed they couldn’t take a job because it would force them to move were throwing up a canard. I feel that as the value of the home they currently live in declines, so too would the home they buy have lost value and, in the end, they would come out close to even, if not more so.
A financial wizard next to me jumped out of his seat and called me a fool. The cash flow position would be such that they would be out the money the home depreciated over the last 2-3 years and that while they may walk into a bargain, their cash position would be worse, much worse.
Uncharacteristically I decided that discretion would be the better part of valor and agreed that I was a fool. However, when I came home, I took a nap. And after the nap, I ran the numbers. Check it:
So, you have 2 homes, one for $200k and one for $400k. You want the one because it’s freakin’ awesome, you want the other because it’s more affordable. You choose the cheaper home.
A 20% down payment is $40,000, thee other would have been $80,000. You make the purchase and after the last 3 years the home is now worth $150,000. A net loss of 25%. You sell. You have to kick in $10,000. You’re down 10k.
Now suppose you want to buy that $400,000 home. But, BUT it too has depreciated 25%. It’s now worth $300,000. The down payment is $60,000. That, PLUS the $10k your down on the sale of your old home means your out of pocket $70,000. Which is $10,000 less that the 80k you would have had to put down had the home been worth $400,000.
In this case, you get a $400,000 house for $10,000 less than you otherwise would have.
Am I right?
That is a good thing, right?