Advice to San Diego Homeowners: Sell Now and Rent

[powayseller]

Most people in San Diego should sell their house and rent for the next 5 years or whenever the prices hit bottom.

My idea was validated in the book
Sell Now , by economist John Talbott, a visiting scholar at UCLA Anderson School. We know those guys were years ahead of everyone else in predicting the housing bubble. Talbott gives a lot more detail about the origins and myths of the bubble than I’ve read other places. I’ll post some of his ideas after I finish the book. (I just need to stop reading this site, so I can read the book…)

Back to the point:

Sell your house, cash out to realize the biggest payoff that you may have in your life, and rent until prices drop.

Personally, this is probably the easiest money my husband and I ever made. Our mortgage interest deduction is offset by losing our property tax obligation. We’re also finding that all that money we used to spend at Home Depot to fix up this or that, is staying in our pockets.

This advice, to sell and rent, goes to anyone living in these bubblicious cities.

Any objections?

[Bugs]

I think it very much depends on their position. Someone who’s property taxes and mortgage are based on a pre-1997 $200k purchase price would have a hard time getting back to such a position if they sold out now and hoped for a decline. They’d also have a tough time renting something equivalent at the same payment as their current mortgage.

If this really is the big one coming on right now, who knows when long term financing rates will be this low again? Then there is the prospect of capital gains to consider.

[23109VC]

the people who bought recently, or refinanced and burned up equity (me) – should get out now.

the property tax hike is a big factor. if you bought recently, many areas have horrible tax rates to go along with the inflated prices. i’m looking to move to temecula where the average tax rate is almost 2% on the newer homes. so if you rent, and lose the tax writeoff – you also odn’t pay that nasty propety tax.

although my neighbor, who bought in 1998, paid only $160k for a hosue that is now “worth” $600k. so his taxes and mortgage, which is low – are all dirt cheap. he would probably be ok to ride it out. his house is awesome, awesome pool, great location…kids..moving would be a pain…

but to sell, and cash out..what a big payoff that would be.

[sdrealtor]

If most people in SD sold who would buy their houses?As for the minds at Anderson/UCLA my favorite story comes from a colleague of mine. Those brilliant minds made a presentation to his company 2 months before the last crash in the early 1990’s and said that CA was recession proof and that real estate never went down. Unfortunately, he listened to them and lost everything he had. He’s still trying to recover.

[powayseller]

I will counter each of your arguments. They are the same old ones I hear over and over again, about why you couldn’t possibly sell your house and rent.

First, selling a house is the only tax-free gain I know of. Take the $500K capital gains tax exclusion ($250K for a single person), invest the profit in a CD yielding 5%, and then buy back in when your house is worth half. Heck, you could pay cash for the house in 5 years! Where else can you earn $500K and not pay any taxes on it. I think the government wants us all to sell our homes 🙂

Second, if you stay put, and need to sell for some reason before prices go back up (12 – 15 years?), you would lose all that paper profit. It won’t be there in 5 years.

Third, this is the easiest opportunity to cash out. How many years does you have to save, nice and slow, into that retirement plan, to get the same amount of money you can get by selling your house? In our case, it was about 25 years of saving that equalized our housing profit.

Fourth – the kids argument. I’ve heard that same lame line over and over, that renting is bad for kids. Why? Rent a house in a great location w/ a pool. That’s what we did while we were building. For 2 years we lived in a very desirable area of Poway, called Green Valley. Unfortunately, after we sold the house we built, it was January, and the rental choices were less, so I didn’t get the prime property I wanted. The realtor, who helped me find a rental, told me there’s always a lot more to choose from around the summer, a time when people move. We may stay put, or move in the summer. Either way, wherever we end up by the end of summer, is the house we’ll stay until prices bottom out.

Also – consider that realtors and mortgage brokers have been pushing ARMs because “most people only live in their homes for 2-3 years anyway”. Ok, so owning a house for 2 years is great, but renting for 2 years is not??

My old neighbor, an upwardly mobile professional, has been moving his kids and wife across the country every 2 years, since his kids were born. When things went downhill at Gateway, his Senior VP job wasn’t looking so good anymore and he went back to Chicago. They just completed their 6th new-city move. Oh, and they were homeowners each time. Are their moves sanctioned as a higher quality of moving, because they owned their homes? Would their moves be disdainful and harmful to their kids if they had been renters instead?

The people who say that kids need the stability of the same house: if you had a job offer in another city, would you forego it because you don’t want your kid to live in a different house?

Kids don’t know whether you own or rent, unless you tell them they can’t paint their room. Lighten up – spend a thousand dollars painting their bedrooms. Chances are the landlord will appreciate your nice paint job. (More women list painting as the #1 reason they couldn’t possibly rent. How shortsighted! Paint is much cheaper than the alternative of losing $500K of housing profit. Take the emotion out, people.) For stability, keep them in the same school. From my experience of moving, I found that kids are not even fazed by the move if stay in the same school. I moved twice in Phoenix, and 4 times in SD, keeping the same school. I saw that the kids were excited about each move. My kids find it exciting and wonderful to move. Kids are move like dogs in that regard, always looking for an adventure. If they have to change schools, it can be stressful for a few weeks, so you can avoid changing schools if you wish. Again, mobile career people have kids who change schools frequently.

Fifth – “moving is a pain, I have pets, I have guinea pigs, it’s too much work to pack them all up”. If you give that argument, you probably aren’t in the military. Moving takes a couple weeks: packing and unpacking, getting situated. Definitely hire a moving company to help you out. Yes, it’s a pain, but so is going to the dentist, cleaning out the fireplace, and running up a mountain. Oh, and the dog survived just fine.

Bugs, someone who bought pre-1997 for $200K has an even better reason to sell: take the profit. It’s the oldest investment mantra: take your profits while they’re there. Take the capital gains exclusion, and pay cash for your house in 5 years. You won’t even care what the interest rates are.

I can’t figure out why anyone is still holding on to rapidly depreciating assets. The only reason would be emotional attachment.

If I handed you an envelope with $300K inside, would you take it? Yes. If I told you, this envelope is yours, but you have to move? Now – different story. The thought of moving is not worth several hundred thousand dollars to some people. I’m just mesmerized by this, I can’t figure out why not. Am I superficial, to put a value on a physical structure, to be willing to sell it?

What makes you all so attached to your homes, that you are willing to work 5-10 years of your life to save the money that you could make by just selling your house? I am seriously wondering.

I know this is long, but I hope I covered all the lame arguments about why it’s impossibly difficult to rent. I won’t bore you with all the commentary on the advantages of renting, but here’s a list:
1. no property taxes
2. no maintenance fees. Call landlord when something breaks.
3. renters insurance costs less than homeowners insurance
4. earthquake insurance costs less on a rental (yes, make sure y’all have that earthquake insurance)
5. if you’re just getting into the market, rent is much cheaper than a mortgage
6. I can afford to rent in neighborhoods where I can’t afford to buy
7. No money spent on the constant improvements. No ongoing projects.
8. Husband has more free time, since he’s not gardening, fixing, building, improving, and being a guy in his castle. More time to work on hobbies and spend w/ family.
9. No ties to a depreciating asset.
10. No mortgage, no debt. Financial freedom.

The only reason that I personally would stay in my house is if the house is almost paid off, or paid off. I might still cash out, but would have to handle the adjustment from zero mortgage payments to paying rent.

[powayseller]

You’re right, only the early adopters can make this strategy work. There aren’t enough rental houses to allow everyone to rent. The early bird gets the worm.

Also, make sure your landlord is not too cash-flow-negative. If he can’t afford to carry his property any longer and needs to sell, you’ll have to move again.

I’m puzzled about your friend’s story regarding the UCLA Anderson Forecast. They’re one of the most respected economists in California.

According to the Los Angeles Business Journal, “The UCLA Anderson Forecast has provided forecasts for the state and national economies for the past 50 years. The forecast predicted both the seriousness of the early-1990s downturn and the strength of the state economy’s rebound since 1993”.

[FormerOwner]

My wife and I live up in Temecula and recently did exactly what PowaySeller did – sold our house, put the money in CD’s, and we’re now renting a house. I actually like the house we’re renting better than the one we owned (this was an unexpected bonus). I completely agree with everything PowaySeller said and I would also add a few more reasons why I think real estate is overvalued in So Cal:
1) Go to Google and search on “peak oil”. I am convinced that energy (especially oil) prices are on a long term up-trend which will cause property values in outlying areas / areas with no public transportation to fall substantially as the cost of commuting continues to rise.
2) There are a LOT of people who overextended themselves with home equity loans and ARM’s on the hope that “when the value increases, I’ll just refinance”. When they all have to sell under duress or get foreclosed, this will start downward spiral in prices.
3) Much of the job growth in the last 5 years has been in the housing/construction/real estate/mortgage industries. These people buy houses, which increases their income, which allows them to buy more expensive houses. When this cycle reverses itself, it will drastically reduce demand.
4) The economy is not nearly as strong as Dubyah would have us believe. Most of the non-housing related jobs created in the last 5 years are either temporary jobs or low-pay service jobs that don’t pay enough to buy a shack in So Cal. We don’t make anything in this country anymore and we’re losing more and more industries to foreign countries every year. We are drowning in debt as a nation – government agencies (federal/state) as well as individuals/corporations. The debt levels have increased risk enormously. Not to mention all of the Social Security/pension/retiree health care issues on the horizon. The list goes on. We’re living in the last days of the Roman Empire and we’re overdue for a correction IMHO.

[powayseller]

FormerOwner, welcome! Regarding point #2, someone told me yesterday that his friend kept refinancing his house to pull out cash to pay the mortgage. The last time he took out $200K, and that would make his mortgage payments and pay other bills for 2 years. His plan: in 2 years, when his house is worth $1.5mil, do another cash-out refi.

Can you believe this spending plan?

How many people are living like this, depending on rising home equity to pay their mortgages!

[sdappraiser]

“Take the emotion out, people.” Direct quote from Powayseller.

I’ve followed your logic for awhile. You are very emotional about the path and decisions you’ve made. To the point where you spend hours on a blog trying to convince others that you’ve made the right decision for you and your family. From what I have read, it really appears that you are desperately seeking validation.

“Personally, this is probably the easiest money my husband and I ever made.”

Now you are an investment guru? It is one thing to discuss and debate new ideas, but now your starting threads titled “Advice to San Diego: Sell now and rent”

Seriously, take some of that easy money you made and spend some time with the family. Only time will tell if you have made the right decision.

What IS your motive?

[zk]

“The thought of moving is not worth several hundred thousand dollars to some people. I’m just mesmerized by this, I can’t figure out why not.”

It seems to me that you’ve confused your forecast with the actual future. If the future were certain (and it involved prices dropping 50%), and moving meant several hundred thousand dollars free and clear, I think almost all people (who are not wealthy) would move if they had the option.

The people who don’t want to sell and rent feel that way because they know that the future of nominal home prices in San Diego can’t be predicted with the certainty that you apparently believe it can. They are (rightly) concerned about the possibility that prices may stay level (or go up, or go down but not enough), in which case you can forget about intangibles and emotions. They’ve lost their low-interest-rate loan, their lower property tax basis, real estate commissions, moving costs, and the time and effort spent moving.

[powayseller]

My motive is helping people.

Every person who sells now trades in potential bankruptcy for financial security.

This is the greatest gift I can give.

[powayseller]

zk – owning real estate in San Diego is very risky. Did you read Rich’s June 7 Voice article? Wow, talk about a parabolic price spike in SD housing! What percentage correction do you expect?

Do you think that the 2000-2006 real estate bubble is the only asset bubble in the history of the world which does not correct?

Read about asset bubbles. The same fear and greed permeate them all: fear of missing out, greed to get in. They all pop. Every one.

Perhaps some people cannot afford to rent at current rents, because their income doesn’t allow it. Their mortgage is less than rents. Or their home is paid off. Those people ought to stay in their homes. Everyone else: Sell Now.

[zk]

I’ve read all of Rich’s articles, and hundreds more on the San Diego real estate market. I’ve also read quite a bit about asset bubbles. I understand they all pop (by definition).

Do I think that the 2000-2006 real estate bubble is the only asset bubble in the history of the world which does not correct? Of course I don’t. But this bubble could correct without nominal prices dropping. And, for someone selling, renting, and buying again, nominal prices are what count.

The spike Rich illustrates in his June 7 voice article is a spike in the ratio of home prices to per-capita income. For this ratio to return to normal, there has to be a drop in nominal prices, or an increase in wages, or some combination thereof. The question is: how much of each will occur? If most or all of the correction comes in the form of increased wages, then someone who sold, rented, and bought again will not have made several hundred thousand dollars for his trouble. And, as I said, they’ve paid maybe 30k or 50k in real estate commissions, increased their property tax by several thousand dollars a year, paid to move at least twice, and will probably have to borrow at higher interest rates the next time.

Do I think most or all of the correction will come in the form of higher wages? I think that there’s a good chance that it won’t. But I don’t think it’s anywhere near the sure thing that you make it out to be.

[PD]

History has a nasty habit of repeating itself. The chances that the market will correct outwiegh the chances that it will not.

The consequences that zk outlined in the event the market does not depreciate are certainly true. However zk’s points also ignore the benefits of having sold.

I now have a significant amount of cash that is earning me money. Instead of this money sitting in my house, it is working for me, increasing my net worth.

We are saving hundreds a month in gas as my husband’s commute has been cut by 95% (This may not benefit some as they may want to stay in their neighborhood).

Most people who choose to rent can rent a house that is equal to or better than the one they sold for LESS money. This is more money in your pocket.

Renters do not have to pay for upkeep. This can translate into thousands.

So, if prices stay flat, it may not benefit me significantly to have sold (adding in added expenses like seller’s fees etc, and subtracting money gained like earnings etc).

But if prices go down…. HOMERUN!!!

If a person isn’t living in their dream home, they have the chance to get it when this all over… if they sell now.

Powayseller is showing her compassion for those poor souls who may be about to find their finances slaughtered.

[lendingbubblecontinues]

Let’s say one sold their house (cost basis 150K) for 500K and pocketed 300K but then later “had” to buy that same house back for a MILLION dollars. The taxes question seems pretty insignificant when you consider that 300K would cover the roughly $8500 a year differential in taxes for a VERY long time (35 years or so, not including growth on that money).

I’d be interested in learning of an asset bubble in the U.S. that corrected without nominal prices dropping. Perhaps there have been many? I don’t know. Can anyone enlighten us?

Finally, Powayseller…kudos to you. I sold my second house in 2003 (early, some would say, but due to a job change and move, it was the only real option) and the 1800% return I experienced on my down payment (in just 2 years)proved very helpful in getting me to where I am today. Good things can and do come from ignoring the MSM and those with a vested interest in seeing you make financial mistakes, er buying your “starter home” for 800K.

Powayseller simply has the anti-cry of the real estate machine’s “buy now or be priced out forever” hoax. I would hope that those questioning powayseller’s motives would look equally hard at the real estate brokers and loan officers who made the opposite plea.

P.S. If by “forever” the real estate machine meant “until 2007” please accept my apologies. I completely mis-understood what you were trying to say 😉

[Author]

Posts