First of all, you get a larger discount on the home you’re buying than the ‘hammering’ you take on the home you are selling. The gap between the two home prices narrows. If you own a ‘formerly’ $100k home that sells for $90k due to a 10% market decline, then the $200k home you wanted to move up to has dropped to $180k. The result is the price differential dropping by $10,000! Many times the more expensive home drops by an even greater percentage, making your savings larger.
Secondly, when the economy is in distress, the cost of mortgage money usually declines. This allows you to finance the larger home purchase for a much lower cost. A 1% drop in mortgage rates gives you 11% more home for the same payment!
Thirdly, I have always maintained that real estate is a ‘10-year play’. The more volatile the investment, the longer the time horizon needed to balance out the return on investment. Historically, there were three other times besides this year that housing has lagged the Consumer Price Index (an inflation measure). In each case, values rebounded nicely in 5 and 10 years, based on statistics I gathered from the Office of Federal Housing & Enterprise Oversight.
Home buyers in 1990-1991 who then sold in another flat market, 2000-2001, still did fine. Their annual return on a 20% down payment is 23.50%! (4.70% annual appreciation ÷ 0.2).
Someone who bought a home in the 1st quarter of 2000 who then sold in the 1st quarter of 2010 (the worst market ever seen!) still had 37% overall appreciation, and an 18 ½% Return on Investment on 20% down. The ability to use ‘leverage’ is what makes real estate provide a MUCH greater return on cash investment than the raw appreciation figures indicate.
So when you use a 10-year time horizon, real estate historically is a safe investment.
Brayden Capital Home Loans