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Is now a good time to sell your home?
By Joel Walsh
If you own a home in a real estate boom market, you are probably richer now
than you ever thought you could be–on paper. Even if your house is in a real
estate market that's rising more modestly, you may still be feeling pretty
flush–on paper. But is it possible to "cash out" your paper wealth?
Assuming you're living in the home you own (if you own investment properties,
stop reading this article now and just go talk with a real estate broker or
investment advisor), you'll have to find new housing if you sell. That's the
point where most people stop thinking about "cashing out" their home's equity.
After all, if you'll just end up spending all that money on another house, why
bother?
The reality is that most homeowners can, in fact, "cash out." For many
homeowners, selling property really will be quite a windfall. Not selling now
might be the biggest financial mistake of their lives. For some, selling would
be an equally bad idea. How do you know which came you fall into?
Selling Your Home: Three Options
If you sell your home then buy a comparable home in the same market, you'll
simply be losing money on the costs involved in real estate transactions. There
are, logically, only three scenarios in which it would be possible to actually
sell your home and not lose your big money on buying another home–and all of
them are better ideas than you might assume:
selling then renting new housing
selling then buying more modestly priced housing
selling then moving to a less expensive market
1. Selling then Renting New Housing
Have you checked what rents are like in your community? According to a recent
New York Times article, in the most price-inflated housing markets–most
prominently, the Bay Area of California, Boston, New York City, and Miami–
renting is now an indisputably better deal, at least in the immediate future.
When you add to the cost of buying a house such "hidden" costs as property
taxes, interest on a mortgage, real estate transaction costs, and maintenance,
owning can easily cost twice as much as renting.
In terms of investment value, housing prices would have to rise far faster
than they are rising now for buying a home in an overheated market to be
anything but a money-loser for about the next ten years, and possibly far
longer. Given that buyers are now stretching themselves thin to buy homes in the
current market, you have to ask: who will be left to buy homes if prices
actually do double? In the long term, San Francisco, Boston, and Manhattan may
compete directly with Hong Kong, London, and other highly desirable cities in a
virtually limitless price war. For now, there aren't enough multi-millionaires
in any of these cities to keep prices going skyward forever.
Of course, some markets are still good for buying your own home. According to
the New York Times, the cutoff point when buying is more expensive than renting
is roughly when it would take more than twenty years' worth of rent to equal the
sales price. Chicago is the biggest market in which the Times says it still
makes sense to own rather than rent, at least if you're staying longer than a
few years. Meanwhile, if you're buying the property as a long-term investment
and will be renting it out, the rent may very well be enough to make up for the
costs of owning.
2. Selling then Buying More Moderately-priced Housing
In the stock markets, you can manage your risk by selling some of a
high-performing stock in case it drops and keeping some of it in case it goes
higher. With housing, the closest thing to hedging your bets is to trade down
for a less expensive property. Housing prices don't always follow people's
tastes exactly, so a less expensive house might actually be more to your liking
than your current home. A "less convenient" street may also be less busy and
therefore more quiet. Or, your home might owe part of its market value to its
proximity to public transportation that you don't use anyway.
3. Selling then Moving to a Less Expensive Market
Moving to a less expensive market might seem like the least practical way to
cash out your home's equity. But don't rule it out completely: you don't have to
move to Nebraska, just to a nearby market. Particularly if your job isn't close
to home now anyway, it might be easy to move from San Francisco to Sacramento or
from Boston to Providence.
Depending on your lifestyle, you could even combine some of the options
above. For instance, if you're retiring, you might sell your home, spend
extended stays in faraway cities you always wanted to visit, and then return to
rent or buy a smaller "empty nest" apartment.
Of course, there are intrinsic benefits to home ownership, such as the
freedom to change the paint or have guests over whenever you wish without
checking your lease. Just don't confuse those intangible benefits with economic
ones. After all, you can't pay the mortgage with intangibles. About the Author
Joel Walsh writes for http://www.bayarearealestateadvisor.com about Bay Area real estate:
bay area real estate: http://www.bayarearealestateadvisor.com
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Some other articles by Joel Walsh | |
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