The emotion of real estate values can cloud clear thinking, which should tell you that there is almost never a time that waiting to sell a primary residence makes financial sense.
There are many financial reasons to sell a primary residence and move to a home or apartment community that remove the stress, maintenance, and expense of a large home, or to move to a retirement dream home.
So what stops people from deciding to sell and relocate? In this difficult economy, the top reason is very likely a decision to wait until the home’s valuation increases to what it was only two years ago. The next reason is confusion about the cost of carrying the property and delaying the implementation of a change in housing.
“There is almost never a time that waiting to sell a primary residence makes financial sense,” says Rich Arzaga, Cornerstone Wealth Management, San Ramon, CA. "Most people use their gut feeling about when the time is right, but when you put numbers to the decision, the outcome can be eye-opening," says Arzaga.
Get help in putting all of your finances into a format where you can compare the costs of selling now at an appropriate price for the current market against the true carrying costs while you wait for an increase in real estate valuations. Once you create a baseline scenario, running various buy, sell, or wait scenarios can be liberating. Some experts are predicting an 8 to 10 year wait in many markets before real estate values return to their 2006 highs. The present value of that future price may actually be less than the current value of the property. This holds true for residential and investment property.
Often, says Arzaga, waiting turns out to be far more expensive than the back of the napkin calculations most home owners do. That's because owners fail to take into consideration the realities of real estate, the opportunities in a down market, and the time value of money.
Take the case of Anne and Arthur Price from Phoenix, Arizona. At age 59, Anne is close to her early retirement age of 60, and is looking forward to spending more time with her young grandchildren who live with their parents in Denver. Arthur is a business management consultant, does not ever plan to retire, and can do work from anywhere around the country. Over the past five years, they have been aggressively paying down the debt on their home with the goal of living debt free during financial independence. During this time, they have stood by helplessly as their home value dropped 50% to $225,000 from its all-time high of $450,000. They are stunned at the amount of capital lost, and have anxiety about selling it at its current market price. Their choice is to either sell it at the current market price, or wait until prices get back to the original high water mark.
The decision to wait is difficult emotionally because every year they stay in Arizona is one less year with the grandchildren. On the other hand, the idea of losing so much value in the home is hard to stomach. If they decide to wait, they are certain that the market will rebound in the next two or three years, and then they can move forward with the move. There are a couple of fatal mistakes in this approach.
First, their decision to remain in Arizona assumes that the market will rebound soon. If the Price’s target sales price is $450,000, then their home would have to grow by 100% from its current value of $225,000 to achieve their objective. The real estate market does not work the same as the equities market, where stocks have the capacity for quick growth. This type of market appreciation over two or three years has never happened in the history of the real estate market. Even worse, the average annual growth rate for single family homes nationwide since 1948 is under two percent. But let’s assume for a moment that home values rebound, and increase at a healthy five percent each year. It would take 14.2 years to reach the Price’s target sales price. By that time, the grandchildren will be much older, and may not likely be living together with mom and dad anymore. But, let's assume they have the patience for this and have in their sights a sales price of $450,000 as their highest priority. Assuming a five percent appreciation rate for the home, and a four percent inflation rate for the next 14.2 years, the present value of $450,000 in 14.2 years is $258,000. When you factor in the higher difference in the real estate sales fees, the Prices will net about the same as the value of their home in 2009.
Another factor lost in the emotion of waiting for “their price” is the fact that real estate today is less expensive in Denver than it was three years ago, and that real estate will likely be more expensive 14 years from now. By waiting to get their price, the Price family might miss the opportunity to upgrade in a down market, and lose the opportunity to recover some of their loss. Keep in mind that real estate is valued when a willing and able buyer comes to terms with a willing seller. The value of $225,000 is not a loss of 50% because it is simply not a price that anyone would pay today. Too many sellers take the loss of home values personally. They focus on losses they do not control rather than take advantage of decisions they do control.
The emotion of real estate values can cloud clear thinking. Sellers in today’s market would be helped by getting advice from a comprehensive financial advisor who can detail several scenarios for them to help explore the most suitable courses of action.
Rich Arzaga is Founder and President of Cornerstone Wealth Management in San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at UC Berkeley, and teaches the Real Estate Investments course at UC Santa Cruz and UC Berkeley. Rich can be reached at firstname.lastname@example.org or toll free (888) 290-9900.Securities and Investment advice through Associated Securities Corp. (ASC), Member FINRA/SIPC and a registered investment advisor. Additional Advisory and Investment Services offered through Cornerstone Wealth Management Inc., a registered investment advisor not affiliated with ASC. CA Insurance License No. 0D92796