Time Heals All Real Estate Wounds If You Let It

July 21, 2016 No Comments »
Time Heals All Real Estate Wounds If You Let It

Let’s talk about real estate investment for a moment. A recent commentary from mortgage financier Freddie Mac revealed that those aged 54 and older control about two-thirds of the home equity in single-family homes throughout the United States.

However, this age group only accounts for a little more than a quarter of the population. The takeaway is that old people (yes, you’re old) hold much of the housing wealth in this nation.

The reason they possess most of the housing wealth is the fact that they’ve owned homes for a long time, and because real estate values tend to rise over time, they’re in pretty good shape.

Long Term Real Estate Holdings Increased Nearly Four Fold

Meanwhile, classic senior citizens (those 65 and older) who purchased what Freddie called the “average” house at age 30 have seen its value increase 3.7 times.

And guess what. I’m sure a lot of these folks went through spells where their home values plummeted, then increased, then fell again. But if they actually held on and didn’t let the year to year stuff bother them, time would heal all wounds.

That’s the thing with true real estate investment. It isn’t a 30-day flip or a TV show, it’s a long-term commitment to invest in a piece of property, and not worry about what happens next month or even next year.

As I noted in a recent post, a home purchase is an illiquid investment, but that’s arguably a good thing so long as you can afford to keep making payments each month.

Gotta Hang On

That’s the key, isn’t it? Being able to weather the storm and ride the ups and downs without panicking and selling when times are tough. Or buying too much with a mortgage you can’t afford once it adjusts.

The unfortunate reality is that many homeowners do just that. They buy a property when prices are high, at least relative to near-term levels, then when prices correct, they bail.

During the most recent crisis, many folks purchased homes between 2004-2006 when home prices were overheating, often with adjustable-rate mortgages because it wouldn’t have been possible otherwise.

Then home prices nosedived and many of these homeowners walked away from their homes, or sold the homes short to cut their losses.

But had they stuck around, and played the long game, many would in fact have seen their adjustable-rate mortgages move lower thanks to related mortgage indexes tanking.

So their monthly housing payments would have gone down. And, had they just ignored the day-to-day carnage and stuck it through, they’d likely have a solid chunk of equity and the ability to refinance into a fixed-rate mortgage at record lows today, if they saw fit.

A typical example is a property that sold for $600,000 back during the boom. Prices eventually slid dramatically, with such a home going for closer to $400,000, at which point a lot of owners lost faith.

Don’t Sell a Paper Loss

But this is exactly the wrong time to bail on that long-term investment. Instead, it should simply be viewed as a paper loss and nothing more.

Again, you have to be able to make monthly mortgage payments to persevere, but this goes back to buying a property you can reasonably afford.

If you can, it doesn’t matter what the property is worth during the hard times because that same property that fell to $400,000 for a brief moment in time (maybe a year or two) is now priced closer to $800,000.

If you got fixated on the bad years and couldn’t look beyond them, you may have made a decision to sell, or you may have destroyed your credit via short sale or foreclosure.

Had you instead stuck it through you’d maybe be sitting on several hundred thousand dollars in home equity, like those older folks. And perhaps more importantly, not buying another home when prices are peaking yet again.

In summary, there are certainly better and worse times to buy a home, but time heals all wounds in real estate if you give it a chance to.

(photo: Lena)

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