{"id":728,"date":"2007-03-22T16:08:00","date_gmt":"2007-03-22T23:08:00","guid":{"rendered":"http:\/\/seattlebubble.com\/blog\/?p=728"},"modified":"2010-03-22T17:14:50","modified_gmt":"2010-03-23T00:14:50","slug":"get-on-the-equity-escalator-and-trade-up-later","status":"publish","type":"post","link":"https:\/\/seattlebubble.com\/blog\/2007\/03\/22\/get-on-the-equity-escalator-and-trade-up-later\/","title":{"rendered":"Get on the equity escalator and trade up later!"},"content":{"rendered":"

I am hoping someone here will be able to clear this one up for me.<\/p>\n

One of the frequently-repeated arguments that real estate salesmen use to try to convince the renter-serfs to buy a home is that once you buy a home, your costs are fixed. While that’s not entirely true (taxes, insurance, and maintenance can all increase—and it’s not true at all unless you get a fixed-rate mortgage), the costs can certainly be more stable than renting, where your monthly rent is likely to increase with inflation.<\/p>\n

However, the very same people that tout the “fixed-cost” of home ownership will turn around and offer another argument for buying: get on the equity escalator so after your home appreciates you can trade up to nicer digs. This is where I get confused. If your goal is to “trade up” for a nicer home in 5-10 years, aren’t you negating the entire “fixed costs” argument?<\/p>\n

Let me throw a few numbers out here to try to explain what I’m talking about. Let’s say Milton S. and his wife are paying $1,200 per month to rent a little two-bedroom house. They decides to stop “throwing away their money” on rent, and rush out to purchase a home (before they get priced out forever<\/a>), finding a two-bedroom 1,200 sqft house in Shoreline for $325,000. Assuming they get a 30-year fixed at 5.75% and have the $65,000 to make a 20% down payment (a fairly generous assumption), their monthly PITI payment is now just shy of $1,900. They do save over $2,000 that year on their taxes, so let’s shave off a slightly generous $200 per month, and round the monthly payment down to $1,700.<\/p>\n

Right off the bat our example couple has willingly signed up for a 42% hike in their monthly expenses (not counting maintenance). That’s quite a premium to pay just so you can have “fixed costs.” With hikes of 3% per year, it would have taken 12 years for their rent to reach that level. But hey, at least their costs are fixed, right?<\/p>\n

Well, what happens when 10 years down the road they want to “trade up”? Thanks to the “equity escalator” and annual 4% appreciation, their $325,000 house nets them a sweet payday of $227,500 (after fees & taxes). Unfortunately, the house they would like to trade up to—a four-bedroom, 1,900 sqft house in Ballard that cost $450,000 when they bought their first home—has been appreciating at 4% per year too, and now costs $666,110. Even after putting the entire amount down from the sale of their first home, their monthly PITI payment (minus tax savings) will jump 65% to $2,800. The situation is even more skewed if you assume greater appreciation (like say, 7%), with their $1,700 payment skyrocketing to $3,294.<\/p>\n

After 10 years and just one trade up, jumping on the equity escalator has resulted in a 133% increase in monthly costs for our fictional couple (over the original $1,200 rent). If they had instead continued renting, their monthly rent after ten years would have increased “just” 34% to $1,613.<\/p>\n

So I guess what I’m saying is that I can’t see how the “fixed costs” and the “trading up” arguments can both be true. The real issue here seems to be that the idea of trading up when an over-inflated market is your starting point just doesn’t make any sense. If Milton and spouse had bought that $450,000 home to begin with, still only putting down $65,000, the monthly PITI would have only been $2,521 (assuming PMI— it would drop to $2,350 in three years when the equity reached 20%).<\/p>\n

Can anyone describe to me a situation in which “trading up” is a winning proposition?<\/p>\n","protected":false},"excerpt":{"rendered":"

I am hoping someone here will be able to clear this one up for me. One of the frequently-repeated arguments that real estate salesmen use to try to convince the renter-serfs to buy a home is that once you buy a home, your costs are fixed. 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