Made a profit on your home? Be careful! Owners who gain $100,000 equity on their properties typically overpay $12,000 for their next, study shows

According to a recent study, homeowners who make a profit on their property are more likely to overpay for their next one because they are encouraged by their profits.

Data shows that those who acquired about $100,000 in equity on their home were likely to overpay about $12,000 for their next one.

An increase in home equity — the market value of a homeowner’s share of their property — can occur as owners pay off their mortgages, but also as the value of their home rises.

And the greater the increase in equity, the more the owner is expected to overpay. For every dollar they earn while owning a home, the study suggested they would pay 7.9 cents more than the market value for their next home.

Homeowners with more money can pay a premium to close a new deal faster, according to the study. Pictured is a “for sale” sign outside a home in Albany, California

The study – written by economists at UCLA and Brigham Young University – attributes the overpayment in the next property to two factors.

Firstly, those who make more profit on their house will have more money and therefore more choice as to which house to buy. Researchers said this means they’re more likely to find a home they love and are willing to overpay for.

They may therefore be willing to use that money to scare off other potential buyers and close the deal as quickly as possible.

Second, a buyer with more equity will have the luxury of overpaying for their next home to avoid having to research whether it’s a wise purchase, the study claims.

Using data from Zillow Transactions and Assessments between 1996 and 2021, it found that the average ‘household’ lived in a home for six and a half years before selling and experienced an average capital gain of $86,244, which translated into a too many paid $6,899. at their next home.

Home equity gains were therefore used to overpay for the next house – which then led to a lower return on that investment in the future.

“There is a strong positive correlation between the capital gain a household realizes on their property sold and the perceived price premium on their property purchased,” the report said.

“We find that for every dollar of exogenous capital gain a seller receives, he overpays 7.9 cents for his next home,” the authors wrote.

A home for sale outside of a home for sale in Scarsdale, New York

Western states such as Washington, California and Utah fared the worst as the average home lost $74,300, $59,600 and $37,700 respectively

Gregor Schubert, an economist at UCLA Anderson School of Management, and co-author of the paper, told The Wall Street Journal that those who have made money selling a house should not buy their next house too quickly.

“If you’re trying to close quickly,” Schubert told The Journal, “and you’ve made enough money off your old house to afford it, a higher offer might get you that result — but that comes with the price.” that you get less. probably resell the house at a high profit.”

But experts recently warned that many Americans are facing a negative equity time bomb — which occurs when a person’s outstanding mortgage balance exceeds the value of their property — and is caused by falling home prices.

In a strong market, homes should appreciate in value over time, meaning borrowers have little risk of falling into negative equity.

However, when prices start to fall and interest rates rise, those with small down payments are most at risk of going “underwater.”

Falling into negative equity can make it difficult to sell or refinance a home, leaving many feeling trapped in their ownership. The issue spiraled into crisis during the financial crash of 2008, when house prices plummeted overnight.