When it comes to real estate, there are generally two types of people. There are those already in the market who are praying the market will continue to rise, and there are those outside the market hoping it will crash so they can afford to get in.
The interesting thing about rising real estate prices is it actually works against the majority of people until they are at the point of downsizing.
What do I mean by this?
Well let’s take a look at your standard millennial family, husband, wife, two dogs and a cat.
The vast majority of our generation start out by purchasing a home they can afford, but it’s not going to be there forever home. It’s a stepping stone to their bigger house.
Lets say this family buys themselves a nice $300,000 townhome to get into he market. Now, 5 years goes by and they have 2 children and need to buy a bigger house. Thankfully, the real estate market has gone up 30%! Meaning they can sell their house for $390,000, a nice $90,000 gain. Now the problem is that the house they are looking to buy, used to be worth $500,000 but it has also gone up by 30% meaning it is now worth $650,000 or a $150,000 gain.
Which means our millennial family made $90,000 on their home, just to buy a house that got $150,000 more expensive over the same time period.
Now what do they do 5 years later? That’s right they upgrade again!
Another 30% real estate gain brings their current $650,000 house to be worth $845,000. The problem is now the $800,000 house they wanted is worth $1,040,000. They made $195,000 only to buy a house that went up by $240,000.
This problem continues to compound until the market either goes down, or this family starts to downsize.
You see for people who are at the point of downsizing, this works in the exact opposite way. Their $1,000,000 home is worth $1,300,000 and they can buy a $500,000 home for $650,000. This puts them $150,000 further ahead.
This isn’t to say there aren’t ways to profit from a rising real estate market, just that a rising real estate market may not be as good for you and your family as you think.