Do you sell your home now or wait?
September 01, 2008

Sell the home now or wait until the real estate market comes back?

That is the question…

by Susan J. Templeton

What if a homeowner wants to sell his or her house sometime soon but does not want to settle for a lower price due to market conditions over the last 24 months? The answer to this tricky question depends on a few things: Homeowners looking to upgrade and buy a more expensive house are in the driver’s seat, because less expensive homes haven’t fallen as much in value than the more expensive ones. So, in trading up, the homeowner is getting a lot more house for the money.

However, downsizing requires decisions, because there are really only two choices: holding on to the home in hopes the real estate market will come back or selling and incurring the loss.

No matter what choice is made, a homeowner will come out ahead in the long run by selling now. There are three reasons why:

  1. The home will not appreciate back to the value it was 24 months ago for five to ten years or maybe longer.

  2. The carrying costs of holding on to an expensive home until it comes back in value outweigh the benefits of selling.

  3. There are other investments a homeowner can make with proceeds which are most likely to appreciate faster than the real estate market as a whole.

How soon will the real estate market take to come back? What if it falls even further? The home may never regain its price of two years ago. There are several reasons why.

  1. The housing bubble happened because of easy credit and low interest rates. Many would say the bubble was the fault of aggressive mortgage brokers and the banks that looked the other way. Also banks could sell off mortgages to avoid the risk of defaults.

  2. Changes have been made in the financial system to prevent such a scenario from happening again. Mortgage brokers now are regulated and henceforth, banks are and will be more cautious. With today’s inflation, all bets are that interest rates will be going up which means mortgage rates will rise, too. Unfortunately, there are no facts or current research to support an increase in real estate prices in the near future, and there certainly won’t be another real estate bubble.

  3. One additional reason the real estate market won’t bounce back immediately is that as baby boomers age (the oldest of the boomers are 62 already) and downsize to smaller homes, there are fewer younger adults to purchase these homes. That will not change for a very long time.

If a house depreciates by 20 percent due to this market crisis, it would have to appreciate by 25 percent to recoup its value. For example, a $1 million home that is now only worth $800,000 will have to grow by 25 percent to get back the value of 18 months ago. The carrying costs of a $1 million dollar house are almost double that of a $2 million home considering real estate taxes, utilities, upkeep, and landscaping. And, there are emotional costs of staying put in a home when the desire is strong to be in the next home.

A good idea for people unsure what to do is to evaluate the home as if it were part of an investment portfolio. If there is a change in the fundamentals of an investment, the investor sells and moves on to better opportunities, right? The same should be true for a home.

Most economists and investment strategists agree that the best returns over the next five years will be in a diversified portfolio of securities which can include U.S., international and emerging market stocks and alternative investments. Expectations are for a 10 to 12 percent annualized return. Expectations are roughly half of that for real estate. However, for those who want a truer hedge on their losses, there are some closed-end real estate residential trusts that invest in residential properties and are selling at hefty discounts to their underlying value.

Assume that your home has depreciated by 20% and will go up by 20% (the 20% appreciation is a high assumption) in the next five years. Then assume the stock market will go up 5% a year over the next five years (a low assumption). The owner will still increase overall wealth by selling now, buying a downsized home and investing the remaining funds in the stock market.

Susan Templeton

September 2008