- 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
Transaction Costs (Greatly) Influence Holding Periods
I've gone through the pain of moving several times during my marriage, so I can attest to the fact that transaction costs can be significant. Today, based on average realtor fees, we can set the initial transaction cost at around 6 percent. Any financing involved in the transaction adds some costs (bankers and lawyers need to get paid, too). And you can also throw in moving expenses as well as the psychological costs to the family members who are moving. (Psychological costs might be hard to calculate, but they do exist.) Putting all this together, we can make a reasoned estimate that the transaction costs involved in purchasing residential real estate could easily exceed 10 percent of a home price in general.
So if a family moves, how long will it take before the price appreciation of their new house makes up for the transaction costs incurred in selling their old one? Well, since 1960, the median house price has gained an average of 5.6 percent per year. This means that the transaction cost of an initial purchase and move, using the estimates we just made, is equivalent to at least one year's worth of home appreciation (5.6 percent) and probably two years or more. Viewed this way, one can safely argue that, unless forced to move by circumstances, any move a homeowner makes based purely on investment considerations requires a holding period long enough to attain returns that at least make up for the original transaction costs.
Here it would seem that upward-trending home prices are the true friend of the homeowner; they will systematically, and in a relatively short period of time, compensate for transaction costs incurred. But what if home prices in an area are going down? Should homeowners in the neighborhood panic? The answer, based on the data and personal experience, is more than likely a big "No."