Every week I receive lots of different questions on real estate. Some of these are complex such as how to analyze a large real estate portfolio, while others are more straightforward. I am not an accountant or lawyer and I don’t play one on tv, but I am a real estate professional who has seen different markets from different angles. People often ask me about the real estate and financial markets and what I think will happen. There are economic forecasts that I review, and research I study. I monitor the yield curve, read history, and I review major national and local leading economic indicators.
One specific question which many people are asking surprises me. “Should I sell my home and rent while I wait for a housing correction and then buy again?”
Given how significant the last business cycle was on real estate values, personal finances, and the overall economy, I can understand why many people would ponder this and wonder if they can time the market cycle and harvest their equity while they rent and then buy again.
In addition to having gone through the pain of the last cycle, there are some reasons to rent instead of buying your personal home. These could include lifestyle, budget, timing (particularly with transitions), personal finances, marital and family situations, and a whole host of other reasons. Kevin O’Leary aka, Mr. Wonderful, from the hit ABC show, shark tank, thinks that everyone should rent unless they are married and have children. And while I disagree with Kevin on this (and many other things), renting can be great, and is often necessary for a huge portion of our population to provide a needed affordable option.
Despite all the reasons why someone may choose to rent, one reason that I do not recommend is to try and time the housing market. For every person who seems to time the market just right selling their home to rent so that they can follow the adage buy low and sell high, there are several others who do not fare so well trying to time the real estate market with their personal home. (particularly if you have a family)
Here are 7 things to consider when trying to time the real estate market with your personal home.
1. Your primary home is not an investment in the traditional sense –
While in some ways it may be the best investment you ever make, and for many, it is the biggest financial decision of their lives, it is more akin to a forced savings plan that offers ongoing utility. Most people don’t look at their home as an investment since you must continue to pay out for it every year and so from a cash flow perspective, it is sometimes looked at as a liability and cash outflow. Obviously, if you can generate positive cash flow from your home or have other investment real estate, it is different. There are other costs associated with home ownership as well. And unless you move to a much cheaper area or downsize, you are going to continue to need housing. So, when the equity in your home rises, so do all the homes in your neighborhood.
2. Disruptive to your family –
Moving can be very difficult and downright traumatic for some. Depending on the attitude, age and the distance moving and network, moving is disruptive and requires a lot of change and adjustments. Do you really want to move your family to a rental for an indeterminate amount of time, then move again hopefully at a better cost basis?
3. Transaction costs –
It can cost up to 10% to sell your home. It can be a bit lower, but 10% is a good ballpark figure. And while you may not have quite as much cost to buy, you will still have closing costs and expenses incurred in moving and settling into a new place.
4. Impossible to predict with certainty –
No one has a crystal ball. Even the best “market timers” miss all the time. You are just as likely to miss out on more appreciation than you are to miss out on any adjustments. I have known families in Utah who sold their home a year or more ago to try and capture their equity and get back in at a better time. Home prices went up in Salt Lake County by 10% in 2017. The median home price is hovering right around $350,000 as of right now. They lost out on a lot of appreciation during this past year and a half.
5. Amortization of your loan –
As any mortgage lender or financial planner will tell you, most of the interest you pay for your home loan is weighted up front and as you get closer to the end of your loan, the amount towards principal and interest flip, and you pay less and less interest. By resetting the clock by trying to time the market, you end up paying more mortgage interest upfront and you lose out on that continued amortization of the loan.
6. Momentum –
Do you remember Newton’s first law of motion? Every object will remain at rest or in uniform motion in a straight line unless compelled to change by external forces. Home ownership has been likened to getting on a train. You jump on as soon as you can, and you hold on. If you get off, there is no certainty that you will be able to board again. I have seen people who thought they would sell their home and have all this equity but then are not able to buy a home that they have any interest in living in again because prices have gone up.
7. Other benefits of owning –
In addition to the dollars and sense (pun intended) of home ownership, there are psychological and social benefits of homeownership. People will tend to invest more time and energy into relationships with neighbors and others when they own. In addition, there are a host of positive benefits of homeownership including higher test scores and less in children of homeowners, greater civic engagement, and better health outcomes to name a few.
If homeowners decide to sell their home and rent for whatever reason, I hope the reason isn’t to try and time the market and come out financially ahead. There is a lot of risk to taking this approach and I have seen many more families burned by doing this. It is important to do the right thing and to do it at the right time, but people get too wrapped up with “timing” in real estate, when “time” can be much more important. Those who I have seen do the best are the ones who have held onto assets the longest. Get in, strap on, and hold on. What are your thoughts? I’d love to hear your stories and feedback. You can email me at firstname.lastname@example.org
For this article and more like it as well as to get an instant free home valuation nationwide and see Utah Residential & Commercial MLS Listings that are updated every 5 minutes, check out my website at https://www.harvestparkgroup.com/