What is home equity?
I read an interesting post on another real estate blog this morning. A guy whom I usually don’t agree with made a comment that too many people place monetary value in their home’s equity. I agree. It doesn’t take much searching to find talk about how home prices have plummeted, but I wonder if people really get what that means.
Sure, if you bought a home in the past 2 years and are being forced to sell now, home depreciation hurts. I don’t want to discount that. How many of you have lived in your home for less than 2 years and are thinking of selling? Not many is my guess. Let me review home equity from a different standpoint, using real numbers as examples.
I randomly picked 2 houses that sold in the past month here in Gig Harbor and looked at their sales history on the County Tax Assessor’s site. Home #1 was purchased in September of 2005 in a nice neighborhood in South Gig Harbor. They bought the home for $411,000. They then listed their home for sale for $550,000, and it eventually sold in July ‘08 for $512,500. Home #2 is another home in a nice neighborhood in central Gig Harbor. It was purchased in November of ‘00 for $255,000, listed for sale for $455,000 and eventually sold in August of ‘08 for $417,000.
My question regarding equity is this. Did the first home lose $37,500 or did it gain $111,500? Did the second home lose $38,000 or did it gain $162,000? In the case of home #1, their house gained $111,500 in 2 years, 10 months! Is that bad because it sold for $37,000 less than they thought it would have? Home #2 gained $162,000 in 7 years, 8 months! Isn’t that a good thing? Home #1 gained over $37k per year, home #2 gained over $20k per year.
Yes, there are things such as home maintenance, mortgage, and other expenses that I’m not able to put a price on, but I do know this. Had those folks been renting, their landlord would not have paid them over $100,000 as a parting gift for moving out. They would have paid their rent, some upkeep costs, and left with nothing.
I know the housing market has slowed. It had to. Homes weren’t affordable anymore. I still contend that it’s a GOOD thing that our market is correcting. I know that it’s not good if you bought recently and are being forced to move, and I’m sorry for those circumstances. But those few folks don’t override the millions of others who have built strong equity in their homes while making memories in them as well. A few unfortunate cases don’t create a national crisis. None of this overshadows the fact that home ownership is becoming affordable again for the average folks. Those are GOOD things.
Investors are using this market to increase their wealth. Astute buyers are using this market to move up into homes that they previously couldn’t afford. Sharp first-time buyers are using this market to get out of a rental and into their own home. What are you doing in this market? Is it hurting you, helping you, or are you indifferent?
Photos courtesy of Evaonne Hendricks, John Baeyens, and Cupcakes for clara on Flickr.
