Over heated markets - Should I sell?

[MrDollarBeard]

I live in a condo in San Diego that I bought in 2009, here are the details:

Market Value: $385K
Original Purchase price: $200K
Original Mortgage Amount: $160K
Interest Rate: 2.875% - The first 7 years was at 3.375% ( I refinanced from 30yr to 15yr last year)
Mortgage Term: 15yrs
Term remaining: 14yrs
Amount remaining on mortgage: $133K
Gross Rents: $2500/mo
Principal and Interest (the P&I of your PITI - should match with the above info): $972.11
Taxes and Insurance (the T&I of your PITI): $208.89
HOA costs: $329
Deferred maintenance notes: n/a

I feel like San Diego is at the top of the real estate cycle and that selling would be the best idea (I can find a place to rent for $1800), but I also feel that the stock market is over heated and wouldn’t want to buy at the top of the market.  Eventually I want to buy a multifamily property to live in and rent out the other units, but I’m not able to find any deals that make sense in this market at this time.  Should I sell and wait on the sidelines waiting for either the stock market or real estate market to crash?  What would you do?

[maizefolk]

Right now it sounds like you're outgoing is almost exactly $1,500/month to live in your condo (about $600 of which is probably principal repayment given your low interest rate and 15 year mortgage). So you're talking about going from a monthly sunk cost of ~$900 to have somewhere to live to ~$1,800.

A couple of questions:

If you live in the condo yourself, what do you mean by gross rent?

Do you expect to spend the rest of your life in San Diego, or are you there for a while and eventually moving somewhere else?

If you think both real estate and the stock market are overheated, what would you do with the quarter million dollar proceeds of the sale?

[MrDollarBeard]

If you live in the condo yourself, what do you mean by gross rent?

The gross rent is what I could get if I rented it (according to rentometer.com). 

Do you expect to spend the rest of your life in San Diego, or are you there for a while and eventually moving somewhere else?

Right now I'm pretty happy in San Diego and have no plans to leave, but I'm not against moving somewhere new.

If you think both real estate and the stock market are overheated, what would you do with the quarter million dollar proceeds of the sale?

That's the thing, I want to have money ready to buy a multifamily property when the real estate market drops and I think the only way to do that is if I sell now and keep my money in savings accounts until the numbers make sense to buy again.

[maizefolk]

Okay, so that's good to know (about being willing to move somewhere new). The risk with the type of maneuver you're proposing is that if prices keep going up, you risk being priced entirely out of the market. If all your friends and family are in San Diego, that's a more worrying risk than if the worst case is that you simply start over somewhere new.

Now the second concern is that, even if San Diego property prices are overheated right now, there is no guarantee they'll crash anytime in the near future, and if they crash, it may not be all the way back down to levels which make buying rental property attractive on a cash flow (rather than price appreciation) basis.

I don't know as much about your local property markets, but I know a bit more about the Bay Area up the coast from you.



People thought prices were already spiking into a bubble before the 2000 tech crash, but even the stock market crash didn't slow the risk of property values. The 2008 crash did have an impact on housing prices, but not as big of one as many people were expecting, and if anyone was waiting around for prices to fall back down to something reasonable, they missed their chance to buy at "less crazy" prices before another crazy round of price appreciation kicked back in.

In your shoes I would be worried about trying to time both the top and the bottom of a future pullback in SD prices, because real estate markets have been behaving in seemingly irrational ways in California for as long as I can remember. Especially with the money from the sale sitting in cash losing value to inflation (call that $7,500/year at 3% inflation with a quarter million dollars in the bank), and effectively an extra $10,000 in living expenses each year you wait for the crash to come (with the risk the rents continue to increase if the markets continue to go up instead of down).

But then again the worst case scenario here is probably just that you spend a few years waiting for the crash at $17,500/year, it doesn't come and you end up living somewhere else where the equity you free up from selling your SD condo might come close to buying a multifamily unit free and clear. In the end it just boils down to your risk tolerance.

[MrDollarBeard]

Thanks for the detailed response maizeman, it's a lot to contemplate. 

What are you invested in?  Mostly the stock market or do you have RE holdings too?  How do you feel about the current stock market situation, can this bull run continue?  What do you think the next 5 years have in store for both the stock market and the California RE market?

[maizefolk]

Sure thing. Right now my investments are essentially entirely in the stock market. If you expand out to my total net worth, I'm about 66% stocks, 19% cash, 13% real estate (equity in my personal residence), and 2% accounts receivable.

I think the stock market is substantially overvalued right now, but I'm not confident enough that it'll crash any time soon. Another potential outcome is that it just plateaus or grows more slowly for a number of years until earnings growth catches up to current valuations. Like you I cannot think of a good alternative investment I'm comfortable with investing in while I waited for a crash, so if I sold my stocks and waited for a crash, the money would all sit in cash and I'd risk ending up further behind.

I think demand for housing in the big coastal cities of California isn't going to go away anytime soon, and neither are the zoning laws that are keeping expansion of the housing supply out there incredibly slow. The biggest risk I can see for prices in California right now would be if mortgage interest raises increase significantly. Generally people buy a house based on the monthly payment they can afford, so higher interest rates would mean many more people wouldn't be able to pay the extremely high prices real estate currently sells for out there.

*shrug* Anyway, that's the opinion of one random person on the internet, take it for what it is worth.