As we mentioned in a recent blog entry, real estate is a commodity with market fluctuations that are common to other commodities like stocks. After years of annual increases, home prices have gone the other way in most areas. Yet, most homeowners who bought during those years of price appreciation have earned positive equity in their home. Some homeowners who did not need to sell at the market peak, but need to sell now are remembering those peak prices and feeling that they are losing money by selling at today’s market-influenced prices.
One way to look at this is to compare a similar situation with another commodity. What if someone bought stock in a blue chip company at $70 per share and then watched it rise to $130 per share and then fall to $100 at the time they needed to sell it. Did that person lose $30 per share or gain $30? If they focus on the peak price, they lost an imaginary $30. However, since they paid only $70 and sold it at $100, they actually gained $30 per share, an excellent return. Today’s sellers should see their situation in a similar light.
What about those sellers with negative equity owing more than their property is worth? There are many reasons why sellers have found themselves in this situation: refinancing, taking out a home equity loan on equity valued during the peak, or buying at the peak. If they don’t need to sell for a while, they know that commodities that go down will come up as real estate always has. If they do need to sell now, there are multiple ways to get to the settlement table with a buyer depending on the situation.
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