Friday, March 20, 2009

Realtor Math and Logic

We are very leery about taking financial advice from realtors. And often, we are proven correct. Realtors are good at selling properties. Bu the financial advice from realtors should be limited to what the monthly payments will be. So when the nationally known realtor Barbara Corcoran advises that buying a more expensive house will put money in one's pocket we find ourselves scratching our heads. From the Real Estate Channel's Q & A with Barbara Corcoran we get the following -

Q1 - My husband and I have our house on the market in South Florida. We want to buy a larger home and take advantage of the lower house prices. Is it a good idea to take that loss now and be able to buy a larger home, or should we wait until prices come up so we make money on the sale of our house but have to pay a higher price to buy a home?

A -
You're in a perfect position to make some money here, and making money in real estate doesn't happen much these days. If you unload your smaller house at a steep discount, let's say 30%, you'll be able to buy a larger house at the same 30% discount. And as the price will be considerably higher on your new house, the same 30% discount puts more money in your pocket!

See the house prices are discounted - like a sale. Not like the 30% off peak price may still fall, and prices that will take decades to rebound. No. It is a discounted, sale, price. Buy the bigger property now and save yourself some money! Keep the money in your pocket! (Funny that it sounds alot like the home equity logic about equity is using your own money.)

So let put some money into these percentages and discounts to see how we save. First, suppose the current house appraised at peak for $500,000 - they possibly could sell it for $350,000. And second, the house they are interested in had a peak price of $750,000 - now "discounted" to $525,000. Since we do not know what is owed on the current house it is hard to say, but it sounds like they will not lose money selling at the current price of $350,000. So the next house will put them approximately $175,000 more in debt - but that extra debt is putting money in their pocket. (Funny, but it sounds like the realtors handling the transaction will be the only ones having any real money flowing in their pockets.)

In the midst of The Great Recession it is a great idea to go further into debt because a more expensive property. Florida has been hit really hard with the recession. Lets take a look at how out of historical whack the housing bubble has been (since buying a more expensive house is just a temporary discount) -

Or this other one that puts from the Wiki housing bubble page that puts the home prices perspective in relation with population -

It is evident that this 30% or an adjustment is not a discount. It is merely putting housing prices back to their true values. So telling the potential buyer to jump in the market (during the recession) to get a bargain and that this supposed discount "puts more money in your pocket!" (complete with an exclamation point to emphasis the savings!!!) only works that that special math we call "real estate math!"

If Ms. Corcoran advised Q1 that if their incomes were recession proof and stable, and if they are able to sell their properties first they it may be a good time to move up, that would be one story. But advising someone to buy a bigger, more expensive property because it will put money in their pockets does not really make any sense - even during the bubble. But it does show us realtor math and logic at its finest!

Update - This map (also from the Wiki link above) shows just how much Florida prices rose during the bubble -

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