Is waiting to sell the best idea?
Originally appeared in Bay Area News Group publications on May 29, 2009
After speaking with homeowners who would like to sell, I’ve observed that many are relying on assumptions that once might have been true, but may no longer be valid. The big question is: What if waiting, as opposed to selling now, turns out to be a mistake?
Some are thinking that the local real estate market will be a lot better within the next few years. If you are one of those waiting for the market to “turn around,” how will you know when that time has arrived?
Changing assumptions
There seems to be an implicit assumption underlying the thinking of many would-be sellers: When the American economy stabilizes, it will bring back hordes of buyers who will compete for houses, thereby pushing up prices.
There are, however, other, more likely scenarios in the works. One is that the current real estate market will languish as it is, with low interest rates and significantly fewer buyers than sellers.
Another possibility is that an improved economy will precipitate a steady increase in mortgage interest rates. We know from experience that higher rates make it more difficult for people to qualify for mortgages, leading to fewer loans and fewer sales – feasibly, a worse plight for sellers than we have today.
A May 23, 2009 online cnnmoney.com article, “Fed’s Kohn: Rates Likely to Remain Near Zero,” referenced Donald Kohn, U.S. Federal Reserve Vice Chairman, saying “in spite of the fragile state of the U.S. economy and the prospect for low rates for a while, the Fed must make plain its plan to pull back its lending when a recovery begins to take hold.” Clearly, the good news of an economic recovery in this country will eventually lead to the bad news of interest rate hikes for consumers.
California’s unemployment rate was 11 per cent in April, an increase from 6.6 per cent the same month a year ago, and much higher than the national average. It could take quite awhile for our state to recover from this debilitating situation. That, coupled with California’s financial crisis, does not suggest a quick turn-around to prosperity and a hot real estate market.
The new normal
“The New Normal,” is a term that has been used by Roger McNamee, in his book of the same name, and by investment strategist, Mohamed El-Erian. The New Normal implies that what is normal is not necessarily a repetition of what happened in the past. The question, of course, is what will this look like in East Bay and Bay Area real estate?
Given the extraordinary problems our economy is encountering, it is not far-fetched to believe that it might take many years until both the country and a majority of Americans return to the relative prosperity we so recently enjoyed. The foreseeable future for most of us could conceivably be a continuation of belt-tightening and caution when it comes to spending.
The above reasoning is contradictory to what may be excessive optimism by those who are waiting for a market that might never return. Am I a pessimist? Not at all. In fact, I am quite confident in the ability of the U.S and California to emerge strong from our present difficulties. The difference between my views and some others is that I do not see evidence that it will happen quickly.
When selling soon might make sense
If you have substantial equity, you have options. One of them is to sell while interest rates are at or near historic lows. Likewise, if you have inherited a property that is free and clear, the same logic holds.
If you will be selling in order to buy another property, you could have a highly favorable outcome in today’s market.
When waiting might make sense
If you bought between 2003 and 2006 and have little, if any, equity, or are “underwater,” selling in the present market may mean writing, instead of receiving, a check in escrow. Your loss will be greater when you factor in the cost of both buying and selling.
Regardless of when you bought, if your payments are affordable and you do not need the money, waiting might be more appealing. This could also be the case if you are renting out the property and your income equals or exceeds your costs (principal and interest on the loan, property taxes, insurance and maintenance).
Final Thoughts
Those who are knowledgeable about the economy and real estate expect interest rates to rise and inflation to increase as our economy stabilizes. Given that set of circumstances and its negative consequences on real estate, it is even more important for you to carefully weigh what is best for you — to sell now or wait.
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