By Jack Schwabeland, Flyhomes Client Advisor
Here’s something I often hear from homebuyers: I think home prices are going to depreciate, should I wait to buy?
This question comes out of uncertainty about the future of the market, which makes people worry they’ll lose money if they buy a home that drops in value.
The 2008 financial crisis—or the “Great Recession” as it later became known—kicked off a period of depreciation for home values. From 2008 to January of 2012, home prices were on a steady and steep decline. Since 2012, however, the housing market has felt like a roller coaster that just keeps going up.
Given that the market works in cycles, we know that eventually prices have to come down, right? Right indeed. At some point there will, without a doubt, be a period of depreciation in the housing market.
No crystal ball
When the next period of depreciation happens, how long it will be and how severe it will be is anyone’s guess. No one has a crystal ball to peer into the future of the market, but today we’ll examine the question further.
Using the most severe period of property depreciation in U.S. history (2008-2012) as a benchmark, we’ll look into both the top-line figures as well as the oft-ignored numbers that paint the true picture of the financial impact of depreciation.
Ultimately, we won’t find a one-size-fits-all answer to our question. Only you, the homebuyer, can decide when you should buy.
We will, however, be armed with the facts and figures that will help you make your decision to buy a home with more certainty.
For this exercise, we’ll apply the post-financial crisis changes in property values to a standard modern scenario. This way, we can determine the true net financial effect of depreciation (and appreciation) on a homebuyer today.
We’ll examine our standard scenario for three different ownership periods: a peak to trough holding period (worst case), a 5-year holding period, and a 10-year holding period.
Our examples will use data from King County, WA, as that’s where the Flyhomes headquarters is located.
For each time period, we’ll compare the net cost of owning the home to the cost of renting for the same period.
We’ll apply the historic home value changes to a modern scenario, a purchase at the 2020 median sale price of a home in Seattle ($689,000).
Cost and savings assumptions
- We’ll assume a 20% down payment at the par interest rate for a 30 year fixed loan at the time of writing (3.35%).
- To estimate tax savings, we’ll assume the buyer is a married couple filing taxes jointly with a household income of $150,000 ($4,000/year savings).
- To estimate the cost of owning the home, we’ll assume a standard WA property tax rate (1%), the WA state average homeowners insurance premium ($1,514/year), and a standard mortgage amortization schedule to estimate our principal equity accrued and interest paid.
- To estimate the cost of the alternative—renting for the same time period—we’ll use the 2020 King County median rent ($2,515/month). In the four years following the financial crisis, rental rates stagnated, so we’ll assume in all 3 scenarios that this rental rate holds for 4 years then increases conservatively every year following (3%/year).
Scenario 1: 4-year hold (worst case)
With January 2008 as our starting point, the four years following the financial crisis resulted in a -27.4% change in median sales price for residential property in King County.
As we can see in this first scenario, buying at the top of the market and selling at the bottom has a significantly negative net impact…shocking, I know.
What is interesting, though, is how much less the true impact is than the top-line numbers might suggest. The actual net impact is 42.9% less than the top-line numbers when you take all of the factors into consideration.
This is also a good time to make note of a very important concept: depreciation is only realized when you sell. If you don’t sell, the property value is just a number on a page that is subject to change. This goes for appreciation as well. Gains and losses are only truly realized when you sell.
Scenario 2: 5-year hold
In year five following the crisis, home values in King County started to rebound. As a result, buying at the median value and holding for 5 years from January of 2008 would have resulted in a -17.8% change in sale price.
To me, the 5-year scenario is the most shocking of the three and the best indicator of why depreciation is not as scary as it sounds.
With just one extra year of holding the house after purchasing at the peak of the market, the net loss drops from over $100,000 to under $20,000. On a per-year basis, that’s a drop from a $26,960.50/year loss to a $3,500/year loss.
Now, certainly no one wants to lose $3,500/year if they don’t have to, but this example goes to show how even just slightly straying from the worst-case scenario can make a drastic difference in the impact to your finances.
Scenario 3: 10-year hold
Holding the home for 10 following the crisis home would have resulted in a +45.6% change in sale price.
Finally, we see some green! Time heals all wounds. Even with a purchase at the peak of the market before a historic downturn, had our hypothetical test-buyer held onto their home for 10 years, they still would have profited to the tune of over a half a million dollars. Not bad at all.
Summing it up
Looking back at all three of our scenarios, there is one clear trend: the top-line change in value of a property is vastly different from the true net impact of that change once all factors are considered.
But does it really matter if the numbers aren’t as bad as they seem if you’ve still lost money?
As I said at the onset, there is no one-size-fits-all conclusion. The answer will be different for every individual and likely will require some careful thought.
To kickstart that thought process, ask yourself the following questions:
- Am I looking to buy an investment, a home, or a bit of both?
- Am I financially comfortable making the purchase given current prices and interest levels?
- How long do I plan to live in this home?
- How risk tolerant/averse am I?
- How certain am I of the direction that the market is heading?
The answers to these questions coupled with the true view of depreciation outlined here should prove enough so that you know your answer to the question of when to buy.
If not, that’s OK! We at Flyhomes know this process can be daunting and we call our agents “Client Advisors” for a reason. We’re here to help provide you with the information and market insights you need in order to make these big decisions. You can schedule a call with us any time!