The housing market is still red hot...but not quite as hot as a few months ago. A recent study shows that buyers who made lots of money selling their old home (equity) tend to overpay when buying a new home. Why is this happening, and how does it affect you?
Here are Five Fast Facts about the connection between home equity and paying too much:
- 📝 The Data - The study looked at 25 years of Zillow data (1996-2021), comparing equity gains, overall housing price trends, and unique attributes of the homes being sold. Sounds like a riveting research project…
- 💡 The Findings - On a home purchase of $400k, buyers who had equity from the sale of their previous home overpaid by about $8k (2%)! On top of that, the more equity they have, the more they overpay. Go big or go home, right?
- ‼️ The Explanations - The study suggests two possible reasons. First, it could be that these buyers can afford a bigger and better house, meaning they are willing to pay more in general. Second, buyers with equity may be willing to overpay simply to avoid the time-consuming effort needed to thoroughly research their potential new home’s value. Call it a laziness tax!
- 🤔 The Complication - Overpayment becomes even more likely when buyers can’t figure out exactly what the home should cost. This can happen with unique features or specific locations factor into the sale price more than just the number of bedrooms or square feet. Looks like that water feature out front really does cost you big bucks.
- 📈 The Effect - This may seem like a small thing, but consistent overpayment snowballs, and over time this means that the housing market itself becomes unnecessarily inflated. So, higher prices today are (at least partly) the result of overpayment from years ago!
🔥Bottom line: So what can we do about this? It goes back to fundamentals - do your research on potential home purchases, be patient, be thorough, and be prepared. And brush off your negotiation skills, too, you’ll need them if you’re going to trim that extra 8% off your price tag!
What’s your best suggestion for negotiating the price of a home purchase?
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