How to Determine the Health of Your Housing Market
Your personal financial situation clearly is an important factor in deciding whether and when to sell your house, but the state of your local housing market may also influence your decision. Check out the following discussion for the lowdown on the housing market and how it affects your sale.
Selling your home in a depressed housing market
No one likes to lose money. If you scraped and saved for years for the down payment to buy a home, finding out your house is worth less than the amount you paid for it can be quite a blow. Between the decline in the market value of your home and the selling costs, you may possibly even lose your entire invested down payment. And you thought the stock market was risky!
In the worst cases we’ve seen, some homeowners find themselves upside down, which simply means the mortgage on the house exceeds the amount for which the house can be sold. In other words, upside-down homeowners literally have to pay money to sell their houses because they’ve lost more than their original down payment. Ouch! (This happened to more folks during the severe financial crisis of 2008, which clobbered home values in many parts of the country.)
When deciding whether to sell in a depressed market, consider these factors.
If you still have adequate equity
Although your local real estate market may have recently declined, if you’ve owned your house long enough or made a large enough down payment, you still may be able to net a good deal of cash by selling. If you can make enough money to enable yourself to buy another home, we say don’t sweat the fact that your local real estate market may currently be depressed. As long as the sale fits in with your overall financial situation, sell your house and get on with your life!
All real estate markets go through up cycles and down cycles. Over the long term, however, housing prices tend to increase. So, if you sell a house or two during a down market, odds are you’ll also sell a house or two during better market conditions. And if you’re staying in the same area or moving to another depressed housing market, you’re simply trading one reduced-price house for another. If you’re moving to a more expensive market or a market currently doing better than the one you’re leaving, be sure that spending more on housing doesn’t compromise your long-term personal and financial goals.
If you lack enough money to buy your next home
Sometimes homeowners find themselves in a situation where, if they sell, they won’t have enough money to buy their next home. If you find yourself in such a circumstance, first clarify whether you want or need to sell:
- If you want to sell but don’t need to and can avoid selling for a while, we say wait it out. Otherwise, if you sell and then don’t have adequate money to buy your next home, you may find yourself in the unfortunate position of being a renter when the local real estate market turns the corner and starts improving again. So you’ll have sold low and later be forced to buy high. You’ll need to have an even greater down payment to get back into the market, or you’ll be forced to buy a more modest house.
- If you need to sell, you have a tougher road ahead of you. You must hope that the real estate market where you buy won’t rocket ahead while you’re trying to accumulate a larger down payment. However, you may also want to look into methods for buying a home with a smaller down payment. For example, a benevolent family member may help you out, the person selling you your new home may lend you some money, or you may decide to take out one of the low-down-payment loans that some mortgage lenders offer. If prices do rise at a fast rate, you can either set your sights on a different market or lower your expectations for the kind of home you’re going to buy.
If you must move or relocate and don’t want to sell in a depressed market, you can rent out your home until the market turns around. Be sure you understand the tax consequences of this arrangement. Before becoming a landlord, consider your ability to deal with the hassles that come with the territory. You must also educate yourself on local rent-control ordinances and compare your property’s monthly expenses with the rental income that you’ll collect. If you’re going to lose money each month, the constant cash drain may handicap your future ability to save, in addition to increasing your total losses on the property.
Selling during a strong market
What could be better than selling your house during a time of rising or already elevated home prices? If you can afford the transaction costs of selling your current house and buying another home, and if the costs of the new home fit within your budget and financial goals, go for it.
Just be careful of two things:
- Don’t get greedy and grossly overprice your house. You may end up getting less from the sale than you expected, and the sale is likely to take much longer than if you’d priced the property fairly. If you price your house too high, when you finally drop the price to the right range, you may face lower offers because your house has the stigma of being old on the market.
- Necessity being the mother of invention, the housing recovery, beginning in 2010, fostered a potentially risky but sometimes profitable pricing strategy. But beware, this strategy will only work during a sustained period of very low supply and very high demand. It entails pricing the home well below the apparent market value. The purpose is to create an auction atmosphere and attract so many buyers that they will bid the price well above the low list price and, hopefully, above the price you’d hoped to obtain. The danger with this strategy is that it doesn’t always work. You may only receive one offer at or even below the listed price. If so, then this is likely the actual market value of your home. While you are never obligated to accept an offer, whether at list price or even well above, you can create hard feelings and, therefore, troubled negotiations by turning down offers at the asking price.
- If you’re staying in your current strong market or moving to another strong market, be careful about timing the sale of your current house and the purchase of your next one. For example, you probably don’t want to sell and then spend months bidding unsuccessfully on other homes. You may get stuck renting for a while and need to make an additional move; such costs can eat up the cash from your recent sale and interfere with your ability to afford your next home.