My dear friend David Silverman ( who has his own Blog on the harvard business school blog) was recently chatting with me about his thought about trading up from a 2 bedroom apartment to a 3 bedroom apartment in this current New York City real estate market....
You can also view his blog posts at :http://discussionleader.harvardbusiness.org/silverman/
On the Harvard Business Blog.... If you would like me to put it into softer terms, shoot me an email and I will be glad to to translate email@example.com
Now is the time to go shopping for a new apartment. We moved into a 2-bedroom about 2 years ago. Let's say the price was x. We didn't buy a 3-bedroom because, frankly, we couldn't afford it. Let's say the price of a 3-bedroom was 2x.
Nowadays, the price of apartments is going down. By March it may be 40% lower than it was 2 years ago. That means, and hold on here there's algebra ahead:
Value of our 2-bedroom = .6x
Cost of that luscious 3-bedroom with a view and a doorman = .6(2x) = .12x
Let's say that x, for the sake of argument, is $1,000,000. (And it makes the math easier.)
Value of 2-bedroom = $600,000 for a loss of $400,000
Cost of 3-bedroom = $1,200,000 or a drop of $800,000
Now, if we make the rash assumption the prices will rebound and that at some point in the next 10 years prices will return to their 2006 levels then we will have made $400,000 if we sell the 2-bed and buy the 3.
That requires a leap of faith and a stomach of steel--and a willingness to stay in the new property for what could be a long time. And who takes risk in a declining market? Then again, if you look at the recession in the 1980s, housing prices rebounded and then some.