- The American Dream: As Real as Ever
- The Motivating Force of a Demand-Led Expansion
- Buy and Hold, but for How Long?
- Transaction Costs (Greatly) Influence Holding Periods
- Riding Out the Dips: A California Story
- The Returns: Capital Gains
- The Returns: Imputed Income
- Calculating Your Total Return
- Onward and Upward to the Stock Market
Buy and Hold, but for How Long?
There's one obvious follow-up question to all this: How long does one hold? Foresight is part of the answer—one holds a home until selling it is profitable, a time in the future that one can easily calculate by studying price movements in a neighborhood. But I'll argue that another, equally influential force goes a long way toward determining buy-and-hold behavior: It is the transaction cost—and, in fact, it's what kept Jennifer and Carlos in their homes long enough for the two to finally get together.
In the U.S., the average homeowner owns a house for between four-and-a-half and seven years. This holding period can be explained in good part by the transaction costs associated with the purchase and sale of a home combined with the expected increase in average home prices. Technically, a transaction cost is the difference between the price a purchaser pays and the net price a seller receives. In this regard, it is similar to a sales tax: It drives a wedge between the price the consumer pays and the price the seller pays. In tax terms, the dynamic is simple and often minimal. Seven cents on the dollar doesn't feel like all that much when you buy a $10 shirt. In the case of residential real estate, however, transaction costs can be substantial and often determine the point at which homeowners feel "free" to sell their properties.
Continuing with the story of Jennifer and Carlos, they were each able to sell their properties for $240,000. Five years earlier, the purchase price in both cases was $200,000, so it looks as if they each cleared $40,000—a 20 percent gain. But if the transaction costs each suffered $20,000, or 10 percent, they each realized only half that amount ($40,000 – $20,000 = $20,000), for a 10 percent gain net of transaction costs. Jennifer and Carlos both did well, but those transaction costs mattered.