Monday, March 21, 2011

Should I Wait Till Prices Rise Or Does Selling My House Now Make Sense?

Many people are of the impression that waiting for six months to a year will result in a more stable market and a higher property value. This may not be entirely true, depending on how much equity you are expecting on your property. Looking at past real estate trends, the average number of years homeowners must wait may be longer than you think. Here are a few things to think about when deciding the right time to sell your home.

Do You Have a Choice?

Often people don’t have a choice in the matter. So, the first thing you should do is to assess whether you are able to withstand either staying in your home or selling it right away. If you are facing a new job that would require relocation and maintaining two households is not practical, then it may be a good idea to sell your home now, regardless of the current value. On the other hand, if the reason you would like to sell is in your hands, such as retirement, then you may want to wait a few years till the value matures and the return on your investment is stronger than it is today.

History Helps Us Gauge The Future

To understand where we are headed, it’s important to understand the history. With respect to the real estate industry, the lending market has seen significant changes over the past ten years and this intense shift in trends has affected the housing market of today.

Specifically, a closer look at the market between 2001 and 2006 reveals that buyers were getting into homes with little to no money down, regardless of bad credit with some buyers actually falsely reporting the amount of money they earned per month. Still, these buyers were qualified for loans by most lenders and the end result was an influx of homeowners who couldn’t afford their homes.

In hindsight, that housing phenomenon, which is a thing of the past now, was a trend that redefined the housing market, as we know it today.

By early 2007 the national “mortgage meltdown” occurred. Lending institutions realized the loan programs and application parameters were way too lax, causing far more damage than they had anticipated. As a result of the loans that were being approved without much consideration of buyers’ qualifications, homes were over valued and sellers had no equity plus couldn’t afford payments. Further they were losing their properties and even today many people are suffering the mortgage meltdown because of those lending trends.

Looking At The Here And Now

Lending institutions today process “full documentation” loans, something that is far different from the overly lenient loans of the previous decade. The level of detail and depth that goes into researching applicants’ qualifications now, is much higher than before. Lenders now perform detailed background checks, making sure that your salary is what you say it is, checking tax returns and references and also carefully reviewing your credit history. Very importantly, buyers that are getting into homes through loans obtained from lending institutions are people who can actually afford the home. This never mattered before.

Keeping this very important fact in mind, it makes sense then that the only way for prices to go back up is for buyers to have a higher income. Based on this, many homeowners’ expectations that their property will miraculously gain 20% to 30% of value on the market within the next year or so are unrealistic. Unless they suddenly experience a significant jump in income, the chance that their properties will gain that much value is next to impossible. The average annual income increase these days is around three to five percent.

Once our market is completely at the bottom in terms of prices, we can expect home prices to rise to somewhere in the 3-5% range, which is about the same as the average salary increase.

What Does This Mean Exactly?

The best way to illustrate how this plays out in terms of property value versus time needed to increase the value, is through this example:

With a property valued currently at about $450k, the homeowners are looking to retrieve at least $600k on it when they sell, the value of the home when they purchased it during the housing market boom. Their misconception is that the home’s value will return to its original purchase price value, within a year or so.

Given that property value increases coincide with the job market and wages earned, based on a 5% appreciation per year – on the $450k property it would take about six years for it to reach the hopeful $600k value again. So, to get to that price, the homeowners would have to hold on to the property until 2017 before they sell. Not a mere six months to a year.
Prior to making any decisions about whether to sell now or later – it makes sound financial sense to begin looking at your options today. Consult with your real estate agent to ascertain where you stand in the market today, how your home’s value compares to your expectations of when you sell it and when would be the best time for you to sell.