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Upgrade to a Larger Space, in this Market?

Uncategorized // Jan 09, 2009

Is this the time for one and two bedroom owners to upgrade to larger apartments even though market volume and pricing is down significantly?

That may be the case depending on a number of factors.  Usually we see an upgrade to a larger space because of a growing family and the need for extra bedrooms to accommodate a larger brood.  That is still happening, but not with the same frequency as it has in the past. There is a wait-and see attitude with buyers now on the presumption that the market has not yet hit it’s plateau, and that they will hold off on the purchase for three to six months, or longer, until they can feel assured that the market has bottomed out.  With owners who have purchased their one and two bedroom units five years or earlier, there is still a tremendous upside to selling now and purchasing a larger apartment. The reason for this is that the proportional increase in the value of the apartment has been significant since the purchase price at that time was averaging $500 a square foot or less!  Also bear in mind that a gain in equity up to $500,000 for a married couple, and $250,000 for a single owner, is as a general rule considered tax free gains on the sale of said property.  That tax free equity can be utilized as part of a down payment on the new, larger space.

On the other hand, owners who have purchased within the past two years will have now realized that the price they paid per square foot, which averaged over $1000 a square foot or higher, may have been made at the height of the market.  If they are fortunate they will be able to sell at a break even point, but some owners may not be so lucky and may not be able to recoup the cost of their investment. Prices on three bedroom apartments, which averaged over two million dollars a year ago, are down as much as 25% to $1.5 million, in some cases.

Long term owners who have good credit can now leverage the gains that they garnered over time to purchase the larger space that they desire.  The ongoing credit crisis is a double edged sword to buyers. On one hand, in obtaining a mortgage, the pendulum has shifted to the extreme end of spectrum, and even well qualified buyers now have to jump through hoops to obtain financing to purchase an apartment.  On the other hand, the cost of borrowing money is the lowest it has been in over 35 years!  Fixed rate products are now averaging as low as 5.2% on a 30 year term and 4.9% on a 15 year term.  This is a strong factor in increasing the affordability of a larger home to greater segment of the buying population.

The answer to whether one should purchase a larger apartment depends on the individual needs of the buyer and in this time of uncertain financial stability one not to be taken lightly.

 

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