Real Estate Stories - Moving Up in a Down Market

It’s in the news: the “softening” of the real estate market and the depreciation of home prices - for the first time in over a decade. The number of offers received on homes for sale has dropped and the median price throughout the East Bay is down from the peak just a few months ago. Opportunities have popped up for buyers that otherwise were priced out of the market. We feel that this shift will be short lived, but we aren’t economists and only time will tell.

Here is the thing, if we shift into a true down market it’s not all bad news.

How so? Read on… A few months ago we met with someone who wanted to plan the move from her first home to her forever home. She purchased her first home for $450,000 and, at the time of our meeting, her home was worth $1,100,000. She had gained $650,000 in equity over the past decade Incredible!

She had always envisioned herself moving up and settling into her “forever” home so, on top of the equity in her home, she had put even more away in savings. The forever home that she imagined would likely cost $1,600,000, at that time of our meeting. She had saved and planned, and grown her income over the years to make this $500,000 jump feasible and she was ready to take the leap!

But, here is where things changed. We recommended that she talk to her accountant and a financial advisor because one BIG thing she needed to factor into this equation was capital gains.

Now, we are not tax advisors, but we knew that she needed to be educated on all aspects of this move before pulling the trigger. The last thing we ever want is for a client to make a huge financial decision without knowing all of the ramifications. When you are talking about large financial decisions, you should always have a conversation with a CPA and financial advisor.

What she learned was that her gain (after all expenses) would be about $550,000. And, her taxable gain would be $300,000. She couldn’t do it. That news was the straw that broke the camel’s back.

But wait! This was not the end for our dear client…the market shifted and suddenly the move is possible. Why?

The unanticipated truth: A down market works in her favor. Yes, you read that right. A down market works in her favor. Here’s why:

If values in the East Bay drop 15% (and we know that is a big IF) then her home that would have sold for $1,100,000, sells for $935,000. Bummer, right? BUT, the forever home that she was just about to pay $1,600,000 to purchase would then sell for $1,360,000.

The jump into her forever home would be $425,000 instead of $500,000. A savings of $75,000.

AND her taxable gains from the sale of her first home would be $150,000, instead of $300,000. Saving her even more money!

AND she locks in the property taxes on that forever home at a lower base purchase price.

Win, win, win.

The moral of the story? When you look at the value of your home and your future goals, don’t assume that selling at the absolute peak of the market is the best way forward. Oftentimes, there are big opportunities in softer markets.

We acknowledge this is a very nuanced topic and every situation deserves its own consideration and advice. If you want to discuss your real estate goals, or need a reference for a great CPA or financial advisor, please reach out. We love partnering with our clients to create the best strategy for their individual situation.

And we believe that it’s possible to meet your personal goals in every type of market!