With a 2005 purchase, the only way I’d suggest not selling is if you think your household has the means and the interest to stay in place for at least the next 5 years, possibly longer.
Consider the worst case scenario; okay, not the worst scenario, but the scenario that occurs if the underlying premise (return to the long term pricing trend) happens. If the pricing really does return to trend and then overcorrect, as has happened in every other previous cycle, we would be looking at the 50% off peak pricing to occur at the bottom of this cycle. You could be looking at a $300k loss in equity if that happens.
But there is a possibility that such a correction might not be the end of our problems. It’s possible that the next upcycle will be very weak and the upswing won’t reach the peak that occurred this time. If that happened, the market might not reach the $750k level during the next cycle. Instead of being underwater only for the remainder of this cycle you might also end up being underwater throught the entire next cycle, too. Now we’re talking 15 years, not 5.
I doubt many people would give this scenario serious consideration, but it is a possibility. All that has to happen is the specuvestors get scared out or regulated out of the real estate market as a result of stricter lending underwriting criteria, thereby eliminating the most agressive buyers that drove this last cycle.
