Sell Your Home or Wait for a Price Rebound?

By Steve Gillman - 2009

Perhaps prices have dropped where you live, so you wonder if you should sell your home now or wait. A decision like this depends on a lot of factors, of course, like whether you have to move, whether you're upside-down on your mortgage, and whether you will be buying another house right away. This latter situation is what this article covers.

Suppose you want to move, and your home will sell for $160,000, but it was worth $175,000 last year. Unfortunately, this is becoming a common scenario in many areas of the country. And if you actually bought the home for $175,000 last year, it's even tougher - none of us like to sell a home at a loss. If you purchased the home for $90,000 years ago, you could more easily accept missing the top of the market.

The temptation in either case is to wait until prices go back up, as they certainly will in time. But to look at this objectively, let's suppose we are at or near the bottom of the market, and within four years prices in your area will be up 20%. We'll also assume you have the option to sell now or wait. In this example, then, your house will be worth about $192,000 in four years. Is it best to sell now or wait four years?

When to Sell Your Home

We're assuming you'll be buying another house immediately. Now, since you could be down-sizing or up-sizing, we'll look at each scenario. For the sake of this example, interest rates are at about 6.5% for your current loan and will be the same for the new mortgage loan.

Scenario One - Downsizing

To reduce your monthly costs, you're considering a condo or a smaller house that will cost about $120,000. If you wait four years to sell your existing home, you'll get $192,000 - $32,000 more than if you sell it right now - but wait! The smaller home also went up 20% so you'll pay $144,000 for it - $24,000 more. But then you made $32,000 more by waiting, right? It seems you'll be $8,000 further ahead if you wait then. Ah, but, it's not that simple - more on why in a moment.

Scenario Two - Upsizing

You want to trade-up to a home that would cost $240,000 right now, but you decide to wait, because even thought you could do it, you hate the idea of taking a loss on your current home. In four years you sell it for $192,000. However, now the nicer home costs $288,000, so even though you got $32,000 more by waiting to sell your home, you had to pay $48,000 more for the new one. It seems you are $16,000 further behind for waiting.

Now for some of the many complications that make these decisions so tough. The examples above don't take into account the difference in payments. In scenario one, you paid $253 more each month on the larger mortgage because you waited (assuming the mortgage is 90% of the value in either case) - $11,000 more over those four years. The real cost of waiting is $35,000 then ($11,000 plus $24,000). This is $3,000 more than the $32,000 you gained, so now it looks like you shouldn't wait, especially when you also consider the higher monthly costs for taxes and utilities you were paying on your existing house.

Now, in scenario two, you were paying $455 more per month (assuming the mortgage is 90% of the value in either case) once you bought the $240,000 house. You pay $48,000 more for the new home, and get only $32,000 more on your current home by waiting, but you also spent $22,000 less on payments during those forty-eight months. Now it seems like you'll be $6,000 further ahead now if you wait.

Unfortunately, it's more complicated than that, and we won't even consider property taxes, real estate sales commissions, and the annual "personal value" you place on being in a nicer home. You see, there will be yet a larger mortgage on the nicer home if you wait. For as long as you live in it (up to the end of the mortgage period), you'll be paying $3,336 more per year than if you bought it when it was $240,000 (again assuming the mortgage is 90% of the value in both cases).

Confusing isn't it? But to simplify, when down-sizing, selling means you immediately reduce your monthly expenses. When trading up, you lock in the equity-appreciation on a bigger investment, and do so with a smaller payment than if you wait. You also get to enjoy that nicer home for those four years, which is worth something, right?. Bottom line: whether the current value is lower or higher than a year ago isn't very relevant to your decision. Sell your home if the time seems right, and as long as you're investing into another house you'll do fine.

Another page to check out:

How to Sell a House - Free e-book now on the pages of this site!

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