Does the declining real estate market make it a good time to trade up?

I've heard real estate agents arguing that the weak real estate market makes it a good time to "trade up" and buy a more expensive home.

Keller Williams Realty founder Gary Keller makes the argument this way:

Falling home prices are a great opportunity for move up buyers. Even though your home sale price may be lower, the smaller loss at sale can be compensated by greater savings at purchase. If home prices dropped by 5 percent, here's what it could look like if you decided to trade up:

Old home price = $200,000

Sell at $190,000 = $10,000 less

New home price = $400,000

Buy at $380,000 = $20,000 savings

I'm not so sure. In fact, I think that's a ridiculous argument. First, those numbers are based on a rear-view look at where home prices were at the height of a bubble. That has no bearing on the realities of the current market. You're not "saving" anything. Second, selling a home will likely require you to pay a real estate agent 5% -- plus any legal fees, moving expenses, time that could have been spent working, etc. Plus, you'll have closing costs when you buy your new home -- and with closing costs on the rise, that's a significant chunk of change -- an average of $3,118 in 2008.

The larger point is that while real estate appreciation has been great for home owners over the long run, the home you live in is not an investment -- it's an expense. Unless you really need a larger home, you're better off staying in a smaller home and investing the money. If you think real estate is a good investment, consider a real estate investment trust or rental property that can generate cash flow.

Of course selling a trade-up as a sound financial decision is a great deal for the agent: He can make money selling your house and helping you buy a new one instead of earning nothing.

But it's a much better deal for him than it is for you.

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