The Wealth Effect – Are You Feeling It?

The Wealth Effect

What is the wealth effect? It can be described in simple terms as “if my neighbor just got that price for their home, then I can get that or more for mine!” It’s the effect of seeing a too good to refuse number to get a seller motivated to sell. At least that’s what buyers are hoping. As prices continue to climb to record highs, it’s the wealth effect that often drives “maybe sellers” into “if I can get my price sellers.” It can even turn into a situation where sellers feel like they may have missed the top of the market, and that fear starts driving even more sellers to list their homes. It could actually be what turns the seller’s market into a buyer’s market. But in order to get to this tipping point, we may need to see prices continue to climb.

The challenge to the wealth effect as reported by First American economist, Mark Fleming, is the fear that if you sell your home, you won’t have a new one to move into. This fear is not unwarranted, and in fact, it is this fear of ending up “homeless” that is one of the factors driving prices higher. Many sellers have taken the leap and sold, and are left to duke it out in multiple offers in an attempt to find a new property. There are some workarounds to this risk such as long leasebacks, cross collateralized loans (call me and I can explain), and finding a rental property; but it’s important to keep in mind that you are typically a much stronger buyer with more money in the bank after selling your home first before buying a new one.

So how will we know when the wealth effect is here? The first sign will be when we see more listings, and they may seem overpriced, and with any luck for buyers, they’ll even stay on the market more than 7 days. With weekly new listings hovering around 1 or 2 homes per week, we still have a ways to go, but if prices keep rising, I have a feeling a few more neighbors may be thinking it’s time to cash out.

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