Home price appreciation has been headline news since the recovery began 18-plus months ago. The National Association of Realtors (NAR) repetitively reports monthly existing home sale prices are stronger than the year before. This is good news for current homeowners and a subtle push for buyers to pull the trigger and commit to purchasing a home now. But what is the reality? Looking back over time, what do the numbers tell us about home appreciation and what is the economic forecast going forward? More importantly, what is the true cost of selling and buying a home and how can buyers and sellers balance saving money and level of service?
Reading Between the Numbers
According to Robert Shiller, PhD, the renowned Yale Professor, a 2012 contender for the Noble Prize for Economics and the early co-creator of the Standard and Poor's Case Shiller Price Index, home price appreciation adjusted for inflation increased by one-half of one percent per year from 1890-2008.
Looking forward, Kenneth Rosen, PhD, chairman of the Fisher Center for Real Estate and Urban economics at the University of California-Berkeley believes home prices at the national level should appreciate at "pre-bubble" rates once the market re-establishes its equilibrium, "I'd say prices are back to (increasing) 1 or 2 percent more than the inflation rate over the next ten years."
The conclusion is that both experts confirm that home prices will beat inflation, but a homeowner should not consider a home a short term investment and expect significant appreciation or gains.
True Cost of Selling or Buying a Home
A PEW Research Study conducted in March 2011 confirms 81 percent of respondents believed owning a home is the best long term investment a person can make. A home investment implies that at some time in the future the purchased home will appreciate to increase wealth for the homeowner. In a recent study by iGOfsbo (September 2013) reported that 34 percent of Americans who have sold a home felt that the service of their listing agent/broker was not worth the commission paid. In real estate, the relationship between homeowner equity and the commissioned charged by a traditional agent/broker can be the difference between a homeowner making and losing money. For example, reflecting on Dr. Shiller's assertion a home seller that purchased a home prior to 2009 and owned the home for 10 years will have recognized home appreciation of 5 percent. Once the seller factors in the Cost to Sell (a 5 percent commission plus closing costs) using a traditional real estate broker/agent the seller losses money. Therefore the commissioned broker/agent is draining the appreciated equity recognized from the seller's home (if any) for the benefit of the broker/agent.
In the alternative, let's assume the broker/agent's commission is factored into the sales price of the home. Consequently, the buyer of the home is financing the commission paid to the broker/agent. A $20,000 commission factored into the sales price of the home amortized over a 30 year loan will cost the buyer nearly $60,000 in extra, unnecessary mortgage payments.
Finding a Better Way to Buy and Sell
From a cost to transact standpoint, it's not in the best interest of the buyer or seller to engage the services of a traditional commissioned real estate broker/agent. In 2013 buyers and sellers have an abundance of resources at their disposal thanks to the internet. With increased consumer knowledge, home sellers and buyers are now able to take more control in transacting real estate.
Moreover, today's home sellers have more options than ever before to list and market their properties. The goal is not to cut out the real estate agent/broker, but to use a real estate professional that engages technology and provides hands on support or a level of service that best reflects the seller's and buyer's needs. Most important is the real estate broker/agent is transparent, cost efficient and charges a competitive fee.
Through technology, increased consumer control and professional efficiency, the cost to sell does not need to be as high as the current real estate model predicates. Consumers can save money by doing their homework and finding the right solution to sell their home in a more cost-effective way.