Should I stay or should I go now?

[Tone]

I just discovered this site and I am very impressed with all the knowledgable folk around here. I have been suspecting for sometime that housing in So. Cal is in an unsustainable bubble due to exotic loans coupled with out of kilter income to price ratios. I am very pleased that this site has provided the data I was missing to confirm my assumptions.

Anyhow, I was thinking about selling my house. Since I’m a novice with economics and finance, I was wondering if some of you would be kind enough to help out with some advice.

I bought a little two bed/one bath house in Long Beach 5 years ago priced at $220,000. I’ve modernized the kitchen and bath (40k) and I believe it would list (but maybe not sell) at around $550,000. I’ve been thinking about selling it, investing my equity, and renting for a while until prices come down. However, the one thing giving me pause is my refi. I changed my origninal 30 year loan to a 15 year loan at 4.75% in 2003. I should have the house paid off in 11 years. I plan to retire in 15 years.

I want to sell, but I feel I’ll never see a home loan with that low of an interest rate again in my lifetime. And while the housing market most likely will tank in the coming two years, no one knows for sure and how low it will dip. Therefore, I’m thinking of taking the safe rout by staying put and paying my house off. I may not make as much if I sell, but it’s more of a sure thing.

Or is it a sure thing? Am I missing something?

[Bugs]

The things that are going for you are that you bought well and basically can’t get hurt off of your original position. You apparently were smart enough not to pull a lot of cash out at the refi and you’re on track to own your home – no matter what – in 11 more years. Your mortgage payment + taxes + insurance costs are probably a little higher than if you were to pay rent on that house, but not by much.

The things that are going against your are…basically nothing. You know what you have and it ain’t bad. You don’t know for sure if you’ll be able to get into a similar situation by the time this cycle plays out because you don’t know (none of us do) if it will really turn out as badly as we think it might turn out.

One more thing – your alternate investment, whatever it might be, will also involve some risk. It is not unheard of for people to roll that dice and lose. Then where would you be? Even if you can successfully time the market when you re-enter it and pay basically the same price to get back in, what are the chances you’ll get such a great interest rate in the next 10 years?

Only you can know if your situation is working for you right now, but if it is working then why mess with it?

[masayako]

For me, in your shoe, will sell. Cashing in $300k is the oppiortunity of a lifetime. I won’t hold a depreciating home. With $300k at hand, I will have a chance to gain financial freedom.

Just putting $300k in CD for 6 months will earn yourself $1,200 / month.

[SD Realtor]

I would agree with Bugs. However, if you want to do a more involved analysis here are the steps I would take…

1 – If you were to sell your home, take a WORST case look at the sale. You said you think it would list for x $. What did you base that on? Have you looked at solds or actives? Have you looked at the number of expired, cancelled and withdrawns? Make sure you are REALISTIC about what you would fetch NOT what you think it would go for.

2 – Calculate your net, [Sales Price – {Commissions + Closing Costs (use 1% as a swag here) + Prorated Property Tax, and loan payoff)}]

3 – Now as Bugs said, what would you do with the money? Say you played it safe and put it in a CD… So calculate your return on that investment for a few years.

4 – Compare that rate of growth to your CD verses your home on the market if the market were to dip and grow.

5 – Don’t forget to factor in the tax advantages as well you get by keeping the home.

I am not advocating one decision or another. I ALWAYS advocate running numbers though just to see if there IS a major disparity of taking one path verses the other.

If you have any trouble running the numbers I am sure people on this forum will be glad to help you.

[novice1027]

Tone,
I’m pretty much in the same boat as you, but have been in my home 15 yrs. The way I look at it for myself, since I am such a novice at this, and am very conservative with my money. I plan on saving every nickel I can in the next couple of years. If things go the way we all tend to think they will, then I can buy something else, rent my place for a positive cash flow, pay off this house in even shorter time, then the renters can start paying off my new house for me.
But if every thing goes into the toliet, and we all loose our jobs, I can still make my house payment by working at McDonalds.
That’s my uneducation financial opinion.

[rankandfile]

Can you supersize that #1 combo for me please?

[novice1027]

sure, and don’t I look cute with my little hat?

[powayseller]

I agree with Bugs and masayoko. I see both points of view. You’re on your way to living in a paid-off house, a goal we all should strive for before retirement. Who wants a mortgage or rent payment in retirement? You could open a line of credit for a rainy day. OTOH, selling would get you enough monthly income from a CD to cover the rent. This house-selling money is almost like winning the lottery. You may have ideas for investing some of that money now.

Another consideration is whether you would want or need to sell in the next few years due to a job move or loss. If there is a chance you would be moving, or that your job would be affected by a real estate downturn, you would probably get more money for your house now, than in a few years.

[Anonymous]

Chris Johnston

If it were me in your shoes, and I liked where I lived, I would not sell. Stay put, and pay off your place. I am one of the biggest bears around, but in your situation I think things are a bit different. You are too late in this stage of your life to be taking a chance like that.

Even if you convert your place to a rental, then move back into it later, there is still risk in that. If you get stuck with several months with no tenant, or get a deadbeat tenant that you cannot get out, it would put you in too tight of a situation.

I am trying to time the market to some degree, however I would not have sold my house late last year if I was content to live in it for the rest of my life. My decision was made as follows. Even if we get a 30% drop, which would be the largest of all time, most of your equity will still be preserved.

Should you decide to sell, I do think there is a fair chance of rates still being low in a few years due to the fed fighting off a nasty recession that will be generated by the real estate sell off that is starting. They will have to stimulate things strongly with monetary policy. I am a bond trader, and have noticed that the 30 year is holding up very well right at the moment in the face of alot of things that should otherwise be driving it downward.

What does this mean? It means foreigners are buying bonds again which bodes well for rates staying reasonably low.

[waiting hawk]

naw man pay it off. Rent it to someone else when you want another place and sell it in the next bubble. This is not once in a lifetime. Plus, kinda late to sell. I read an article about long beach and stuff is sittin.

[powayseller]

Did foreigners cut back on bond purchases for a while? China has to recycle every single dollar they get from us, back into Treasury bonds, because if they exchange the US$ for yuan, the renminmbi (name of the yuan currency) will appreciate. So if foreign purchases declined for a while, which country cut back? Is there a Federal Flow of Funds report which tells us?

Does anyone know what happened to sdrealtor? Maybe he’s on vacation?

[(former)FormerSanDiegan]

Why Sell ?

With a 4.75% loan of less than 200K, you are living in Long Beach at Oklahoma City prices. If you like where you live, why on earth would you sell ?

Sure you could sell and pocket $275 k or so and nearly cover your rent at today’s prices. OR you could hold on and in 11 years be paying less for housing than your gardener.

[no_such_reality]

Interest is under $1000.

On your loan, the interest portion is less than $1000/month. Assuming you refi’d the whole $260,000 into the loan, the payment may be pushing $2000, but half of that is principle.

Where are you going to live for $1000 a month?

If you like it or can rent it, keep it. Prices may come down, but you won’t care. If you crunch price to income ratio, they’re still high, but even as they come down to reality, by 2011, the price at bottom will still be higher than the price you paid, both in nominal and inflation adjusted dollars.

[sdrealtor]

I’m still here just really enjoying my Summer with the family. There is lots of good advice going around this board from conflicting viewpoints and I think it is a much better place than it was a few months ago when I arrived. Lots of well educated new posters around bringing great insights. I also bel”i”eve (thats for you Kitty!) that we are all being a little nicer to each other and taking the time to open our minds to other competing perspectives which is what I felt was really lacking. We all learn so much more when we open ourselves up to understanding that which we dont agree with. I’d like to think I had a role in that. Now onto World Peace!

[sdduuuude]

Also, keep in mind is that if you sell and buy later, you lose that transaction cost. Then there is the new taxable value at a higher rate. And you have a great loan. And you have to move – into a rental, maybe into another rental, then maybe another, then into a newly purchased house, which may be 6 years away.

I’m not seeing “sell” here.

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