I know people who bought their home at the peak of the market in 2005. At that time, with the frenzied pace of the market and competition from so many buyers wielding their easy-to-get credit, overbids were virtually required.
Today I get a call from one such owner who is disappointed to see a home similar to his come on the market at about 10% less than the price he paid. “Where did my equity go?” he asked. I feel for him. I feel for anyone who finds himself or herself “under water” now after overbidding for a property bought during the heat of the market. But I also want to offer some perspective.
We are all living with the results of what happened in 2005. In 2000, there were 4.6M homes sold nationally. In 2004, sales grew to 5.7M and in 2005 sales exploded to a peak of 7.1M homes sold – 40% of which were non-owner occupied! Alarm bells should have been ringing that speculation was running rampant in the market. People were leveraging their credit (either equity lines, second mortgages, credit cards, etc) to buy and flip properties. Another phenomena we saw were investors using 1031 tax-deferred exchange mechanisms that have specific timing requirements to locate and buy a property or else face big tax penalties. This may have motivated them to overbid on properties because the consequences of paying taxes was worse than paying a little more for the property.
Buying a home is not like buying a stock. Yes, it can be considered an investment – a Long-Term investment. No, it should not be looked at each month to see what it is worth like you may do with a stock or fund. Of course we all want to see our net worth grow. People who look at the value of their home very often have a purpose, and I would suggest that purpose is unhealthy. Maybe they are looking to refinance and pull money out. Maybe they are looking to add an equity line so they can buy consumables (flat-screen TV, boat, trip to Hawaii, etc). If this is your pattern, then these are indications that you are living beyond your means. Slow down and reconsider what you are doing.
Even a home bought at the peak in 2005 is still a good investment for the long-term provided the fundamentals of Location-Location-Location were followed. I have a friend who bought a home in San Mateo in 1989, at the peak of that cycle just before a downturn. Within six months he was “under-water” and it was a few years before getting back to even. He still owns the property today, now worth 3x what he paid for it, and has since grown his real estate holdings into several investment properties.
No matter what you paid for your home and what it is worth today, it is a place to live and grow with your family; a place from which to build memories and experiences of life; and a place to make you feel warm and comfortable to return to after each and every hectic day.
My thoughts may not make you feel better, but I hope it does make you see things from a different point of view. As always, we appreciate your comments.