If you brought a wad of cash with you from the sale of your old house, chances are pretty good you overpaid for your new place.
By how much? That's anyone's guess. But a new study published by UCLA's Anderson School of Management sheds some light.
Per a writeup on the university's website, the study found that "sellers who had collected large equity gains on their previous home overpaid by about 2% on average for their first subsequent home purchases." That might not sound like much, but it adds up: That 2% would equal $6,000 on a $300,000 house, for example.
Moreover, "the overpayments rose with the size of the windfalls, by an average (of) 7.9 cents for every dollar in equity gain the buyer had collected."
Not only do local buyers with fat wallets overspend, but they also drive up prices for everyone else, the study says.
That last part doesn't quite square with the popular wisdom that cash-heavy buyers, moving from high-cost markets to less-expensive places, are responsible for making houses more expensive for other buyers. That does happen, but the UCLA research found that equity-rich local movers drive up neighborhood prices by even more than out-of-towners.
Both fat-cat local buyers and their outlander cousins "voluntarily" overpay, the study found, because they don't verify the actual market values of their next homes before buying them. That information is readily available, but they don't take advantage of it.
"It looks as if they don't put in as much time and effort to get the right valuation," says assistant professor of finance Gregor Schubert, one of the study's three co-authors.
On the other hand, buyers who brought less equity to the deal -- the report didn't offer a cutoff point between "lots" of equity and "less" -- were the least likely to significantly overpay. And local buyers who lived in their old homes for longer periods (again, no definition given for "longer") were unlikely to overpay, probably because they were more attuned to local market conditions.
Nevertheless, the study puts a big dent in the thesis that people who move from, say, high-priced New York to a smaller, cheaper market are responsible for making housing more costly for everyone. Such transplants are even blamed for driving locals out of the market entirely.
They do pay more than necessary, the study said, but locals who made a bundle not only do the same, but the impact of locals overpaying lasts for six months before the market catches up.
The study covered some 3.1 million sales between 1996 and 2021 in which the seller bought another residence within nine months. On average, sellers moved from a place they'd lived for 6 1/2 years and collected a gain-on-sale of $86,244.
Though some sellers moved down the housing ladder, most bought larger, more expensive houses with more bells and whistles -- especially if they made out like bandits from their previous home's sale. Many of them seemed to use that newfound wealth as a substitute for doing the research about their next place.
"They choose to overpay and remain ignorant about the price rather than pay the effort costs necessary to become informed," the study said, noting that the impact extends to nearby properties. "Households with large equity gains that move into an area drive up their new neighbors' home prices by approximately the same amounts that they overpaid."
The lesson, obviously, is to do your homework, especially if you'd like to bank more of your equity. For starters, it's a good idea to work with a local agent who specializes in the particular neighborhoods where you want to live. Many agents practice exclusively in a particular community.
Absent that, look for the agent who books the most sales in your market. Generally, those who sell the most houses are the ones working the market day in and day out (backed by a supporting team of folks who handle the paperwork).
You should be presented with information on comparables: recently sold houses that are similar to the ones you are considering. Compare their prices to that of the place you want, but also pay attention to the trend line -- are prices moving up, going down or remaining steady? And look at asking prices for similar places that are still on the market -- again with a trend line.
In all cases, make sure your agent uses the most up-to-date figures. That will mean some work on the agent's part -- most published statistics are months old, and markets can turn on a dime -- but a good one will have gone the extra mile before you even ask.