Author Topic: Sell home in hot market?  (Read 4466 times)

EJ

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Sell home in hot market?
« on: August 12, 2013, 07:52:28 AM »
Situation:
Need to move in next two years out of our starter home (location, growing family, schools etc.).  We have already concluded we are moving – the question I need the Mustachian community’s help with is WHEN should we move?  Housing market is incredibly hot around us now (1 month absorption rate) but that is also true for the house we buy.

Facts:
•   Owe $260k on mortgage @ 3.75%
•   Current home would sell for approx. $300k
•   10% down payment saved for next home

Options:
1.   Sell current home now in hot market and put 10+% down on new house (4.625% rate with no PMI)

     Risk: Have to buy home in hot market as well - have 3.75% rate now - new home will have higher PITI

     Reward: sell home and capture equity and lock in a rate under 5% on the next home.

2.   Wait 1-2 years to sell in order to build up more cash for down payment. Would have 20% in 18 months for down payment.

     Risk: rates rise and/or housing market softens and we have a tough time selling/lose equity on this home.  I realize nobody knows the answer to this but wanted to      point out the risk

     Reward: low payment at low rate now and can save a lot of cash over the next 1-2 years to get to 20%

It boils down to the question of are we risking much by moving now or do these risks present themselves any time you sell and need to buy a new home?

Want to be sure I'm not missing anything - thanks in advance for your input.

daverobev

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Re: Sell home in hot market?
« Reply #1 on: August 12, 2013, 11:01:05 AM »
If rates go up, prices will fall.

I'd say defer it. You save plenty in the mean time, and who knows what will happen. Don't buy before you need.

olivia

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Re: Sell home in hot market?
« Reply #2 on: August 12, 2013, 11:07:53 AM »
I would hold out.  $40k is not a crazy amount of money, and that's not taking into account closing costs for your old house and your new house, moving costs, etc. 

If it was a much larger amount you would net it might make more sense.  I have a friend who is considering selling their house because the value has more than doubled since they bought it.  (They're in the suburbs of San Francisco and housing prices have skyrocketed in their area.)  In that scenario, I think it makes a ton of sense to sell. 

Mr.Macinstache

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Re: Sell home in hot market?
« Reply #3 on: August 12, 2013, 11:18:13 AM »
If you have to buy in a hot market, that negates the gain really. Unless you are going to downsize, then its not a bad idea.

Hunny156

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Re: Sell home in hot market?
« Reply #4 on: August 12, 2013, 11:47:47 AM »
Research the area and figure out if you are in a bubble that might pop, or if this is just a supply/demand scenario.

Either way, this is a decision that is not to be rushed.  I remember feeling that sense of urgency not too long ago, and buying a property just b/c I believed the hype.  "Prices are never going back down, they aren't making any more land so you need to get in before you are permanently locked out", etc.

Do what's best for you and if the plan is 2 years, then you'll be in a much better financial situation in 2 years.  Good luck!

seattlecyclone

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Re: Sell home in hot market?
« Reply #5 on: August 12, 2013, 01:47:25 PM »
I think you may want to start looking now. Don't be in a huge hurry to buy, but be open to the first house you find that would meet your needs for a reasonable price.

I'm making the following assumptions for my calculations:
* A house of the size, location, and quality you're looking for is currently in the $450k price range, meaning your current 10% down payment savings is worth about $45k.
* You're saving for your down payment in a savings account that pays negligible interest (but also won't go down in value over two years).
* Your current mortgage is a 30-year fixed rate mortgage that you started paying off five years ago. Your monthly payments are in the neighborhood of $1350/month, and you plan to make no more than the required payments on this loan (meaning you'll owe about $246k in two years if you keep paying this mortgage).
* In addition to your mortgage payment, you can afford to save $2,500/month toward your next house. This is based off of your estimate that you could get up to a 20% down payment in 18 months.

If you sold now, you might net $15k on your current house after paying back the bank, realtors, local excise taxes, and other closing costs. Add that to your $45k you already have saved for a down payment and you'll have to borrow about $390k to buy that new $450k house. You're already paying $3,850/month between your current mortgage and your savings for your next house, so why not get a 15-year mortgage at 3.5% instead of a 30-year loan at 4.625%? The required payments on this mortgage are $2,788/month. If you keep putting the full $3,850 toward your house like a good Mustachian, your mortgage balance will be down to about $320k in two years.

What if you wait two years to buy?

Let's suppose you wait two years, and also suppose house prices go up 10% in that time. Your current $300k house will sell for $330k with a remaining mortgage balance of about $246k. Selling then might net you $55k after expenses. You will also have saved up $105k toward a down payment. Your new house will now be worth $495k (up from $450k), but the increased value of your old home coupled with your increased savings by waiting will mean you need to borrow about $335k to buy that house. This is less than the $390k you would borrow if you bought now, but more than the $320k you'll have left on your mortgage in two years if you bought now and continued plowing your savings into your mortgage.

What if house prices go down by 10% instead? Your current house will be worth $270k with a remaining mortgage balance of $246k. You'll probably net less than $5k from that sale. I'll assume you just break even. Your new house will now be worth $405k. Your $105k savings means you'll have to borrow $300k to buy the new house.

If you wait and prices go up, you'll have a higher mortgage balance in two years compared to if you bought right now. If you wait and prices go down, you'll have a lower mortgage balance compared to if you bought right now. However, pretty much nobody expects interest rates to be as low in two years as they are now. If you wait and prices go up, you'll borrow more and pay more interest per dollar borrowed. This would not be ideal. If you wait and prices go down, you'll borrow less but you may still find yourself paying just as much interest (or more!) over the life of your loan, and you'll face the additional risk of finding it harder to sell your current house.

Given all that, I would say your best option financially would probably be to buy soon to lock in today's interest rates. I think the risk of higher interest rates in the future dominates any risk from price fluctuations.

Hamster

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Re: Sell home in hot market?
« Reply #6 on: August 12, 2013, 02:16:40 PM »
(4.625% rate with no PMI)
Would you be able to get a better rate if you did pay PMI? Remember you can get rid of the PMI when your Loan to Value ratio hits 80%. The interest rate is with you until you refinance, sell, or pay it off.

Want to be sure I'm not missing anything - thanks in advance for your input.
I know you said you've already decided you will move. The other consideration is whether you could move and minimize housing costs by reassessing how much house you "need". If you buy a less expensive house, then that is a guaranteed savings -  purchase price, taxes, possibliy utilities, etc. Versus speculating on when to buy/sell which is a bit of a crapshoot as to timing the real estate and mortgage markets.

Research the area and figure out if guess whether you are in a bubble that might pop, or if this is just a supply/demand scenario.
Just wanted to fix that. There is no way to be certain where the market will be in 2 years. If there was, we wouldn't have bubbles.

Hunny156

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Re: Sell home in hot market?
« Reply #7 on: August 12, 2013, 04:26:30 PM »

Research the area and figure out if guess whether you are in a bubble that might pop, or if this is just a supply/demand scenario.
Just wanted to fix that. There is no way to be certain where the market will be in 2 years. If there was, we wouldn't have bubbles.

Valid point.  What I was trying to say was to make an educated guess.  I'm in a situation now where I've watched my house skyrocket 20% over the summer, and it made me very nervous that it was a bubble.  After doing some extensive research, I've seen areas further north, with similar housing, easily selling for the same or more $$.  This helped allay my fears and confirm what is causing the run-up in values.

Of course, it could still be a bubble, but my research leads me to believe that this is a supply & demand issue, along w/a desirable location.  Now I'm trying to maximize that equity, but I'm not in a rush either.  Maybe it will go up another 20% while I wait... ;)

sol

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Re: Sell home in hot market?
« Reply #8 on: August 12, 2013, 04:54:59 PM »
All things being equal, I think waiting is the better course of action.

Possible exception: you're selling a cheap house and buying a really expensive house, so uniform appreciation is going to hurt more than the benefits of the larger downpayment.

Example:  if you're saving (or building equity at) $30k/year for a down payment and a 300k house goes up 10% in one year, you're still way better off waiting because the new house is now worth 330k and your 20% down has only gone up 6k, so you're getting a (30k-6k=) 24k head start on that mortgage.