The housing market's low end shows high returns on home value for owners interested in selling.
For the past five years, homes have been like whisky — their value has increased over time, and quality doesn’t always match the price.
The equity on starter homes grew 44 percent, while more expensive homes gained only 27 percent, says real estate company Zillow.
First-time buyers usually seek cheap homes, but most have already been purchased. Those eager to enter the market this year will have to fight to buy one, Zillow’s study says. The rate of entry-level homes on the market is down 18 percent since last year, making it more competitive for new buyers to enter the market. Right now, it’s a seller’s market.
More than you paid for
Owners of cheap homes made their purchase at the right time, and can thank the economic recovery of the past 12 years for their return on investment.
The early 2000s saw an increase in real estate prices that bubbled up in 2006, ultimately bursting in 2008. Shortly after the U.S. was in a financial crisis, and not much later in one of the worst economic recessions of its history.
The Great Recession completely reshaped the U.S. economy, but certainly benefited new homeowners. What was rough the first five years finally started to turn around by 2013.
“When the housing market crashed, owners of the least valuable homes were especially hard hit, and lost more home value than homeowners at the upper end of the market,” says Zillow senior economist Aaron Terrazas.
Luckily for those on the lower end of the market, that trend reversed, according to Terrazas.
“Since then, though, demand for less expensive, entry-level homes has built steadily, causing prices to grow rapidly,” Terrazas says. “As a result, these homeowners have been able to build wealth at a faster pace than owners of more expensive homes.”
However, this could create some anxiety for these homeowners.
Another housing bubble?
When’s the next housing market crash? Nobody knows. Economists disagree, but Americans are in fear of it.
Debt.com reported last September the U.S. was unsure if we’re in the next housing bubble, and even experts won’t know until it bursts again. Home values were up as high as the last collapse and have been steadily rising since last April.
Last August, almost two-thirds (58 percent) of Americans predicted there to be a housing bubble within two years, says a study from ValueInsured, a down payment insurance provider.
“We see more homebuyers concerned with timing the market,” says Joe Melendez, CEO of ValueInsured. “No one wants to buy at the peak and find themselves underwater as so many did a decade ago.”
Regardless of that gloomy feeling in the pit of those Americans’ stomachs, real estate is still the nation’s favorite long-term investment — despite the fact that it’s been increasingly harder to buy.
Mortgage rates increased after President Trump was elected, and a month later the Federal Reserve voted in favor of increasing the federal funds rate.
“When you combine higher mortgage rates with increasing home values, mortgage affordability starts to suffer, and buyers will have to spend more and more on their monthly payments,” says Zillow chief economist Svenja Gudell. “This makes it even more important for buyers to prepare their finances.”
Following the Tax Cuts and Jobs Act, many buyers interested in cheaper homes may just wait it out, says a survey from Realtor.com. And same goes for those interested in more expensive homes — actually, more for them.
“Some house hunters – particularly wealthy buyers – will see an increase in after-tax income making an already tough housing market even more competitive,” says Joseph Kirchner, senior economist at realtor.com. “This increased demand could drive prices up even higher than they are already.”
The law is predicted to slow down home prices, according the National Association of Realtors. But that will happen over time.
Meet the Author
Article last modified on July 5, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Cheaper Homes Make Better Investments – If You Can Find One - AMP.