Should I Buy a House in a Seller’s Market?

Dear Kristin,

I'm in the market to sell my home and purchase a new one. It's a great seller’s market if you're moving away, but I'm looking to stay in the area. I plan to put the proceeds from my current home toward the down payment of my new home to lower my monthly mortgage. While the median home price for my needs is $1 million, my current home will not sell for that much. I'm worried about being able to sell the new home for at least what I purchased it for when it comes time to do that in the future.

My question is, how financially smart is it to purchase a home that’s over $1 million in a seller's market? Is it likely I'll make my money back when it's time to sell my new million-dollar home?  

Sincerely,

Literally "Sleepless in Seattle"

Dear Sleepless,

When the housing market is red hot, it’s great to be the home seller since you’re likely to sell your house for much more money than you paid for it. But I can understand your anxiety as a buyer: After shelling out so much money for a new house, will you get that money back when you eventually sell?

The thing is, there is no clear cut answer to that question, and it depends on a variety of factors, like when you choose to sell that home, and the health of the overall economy at that time, which will dictate mortgage rates and home prices. But much like the stock market, you cannot time the real estate market. Will the real estate market be in decline when you want to sell? Maybe. But it could also be on the upswing.

However, when there are signs that the U.S. could be heading for a recession, it is likely that a home you purchased for $1 million at the height of the market will decline in price. For reference, during the last recession in 2008, it took the housing market about a decade to recover.

Are you planning on selling in 10 or more years? The longer you can wait to sell this new home, the more likely it is that you’ll be able to sell it when home prices are increasing, and that puts you in a better position to make a profit. But if you are only planning to keep the house for a few years and lack flexibility, it might be better to purchase a less pricey house. 

But most of all, I sense a lot of anxiety here that you might be stretching yourself too thin trying to purchase a new house in this seller’s market and that, in the end, it won’t be worth it. In reality, there is never a guarantee that a home you buy today will become more valuable tomorrow. Would you feel more comfortable if you spent less on the new house? Perhaps if you are more selective in the home you purchase you’ll feel better about the purchase price, because you’ll be buying a home that you really love and deem worthy of what you paid. 

If you manage the discomfort around spending so much on a new home, you might find that you’re less concerned about what home prices will be when you do eventually decide to sell.

Good luck!

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.