With the real estate market on fire, I’ve received a few questions about whether or not it makes sense to sell a home today, buy one, downsize, or even rent for a period of time (if not indefinitely). We also recorded a podcast about this very topic last week, which can be heard on iTunes (search for The CA$H Podcast) or you can click here to watch it on YouTube.
It depends on how long you plan on staying in the new home. Whenever you buy, there are costs that go into purchasing, such as the cost to buy furniture, decorate, and so on. When people move from an apartment to a house, there’s almost always more space in the house than there was in the apartment, so these costs can get pretty high.
From there, the big question you have to ask yourself is whether or not you’re going to stay in the home for a long period of time. I like to use seven years as a rule-of-thumb. If you don’t think you’ll stay for seven years, then the odds are against you making money on the house when you sell it and move again.
Why? Well, when you sell a home, you’re typically going to pay anywhere between 6-7% for realtor fees, plus another 1-2% for closing costs on the financing. So, whatever you think you’d realistically sell your home for, take -9% off the top, subtract the potential costs to furnish the home, and there’s your break-even (probably right around 10-12%).
The real estate market is booming right now. People are leaving cities and apartments to get away from the congestion and closeness to other people. COVID-19 has freaked a lot of people out and they’d rather have their own place, with their own space, somewhere in the ‘burbs where they don’t have to worry about breathing someone else’s air.
But this demand will eventually slow down and burn out. When it does, we also have to worry about the potential for lengthy unemployment rates and whether or not people will be able to afford their home payments in the intermediate term.
I get it. Interest rates are hovering near historic lows, so you want to buy when the rates are cheap. But keep in mind, interest rates aren’t like the stock market, and don’t let anyone tell you otherwise. When the stock market bottoms, it starts to rise in a matter of weeks, then a recovery can last months. With interest rates, the bottoming process can take years! So, don’t be in a rush to buy because of low interest rates. They could get lower!
Bottom line, waiting to buy might make sense, unless you have a growing family, need more space for an office at home, can’t find something to rent that meets your needs and/or know for a fact that you’re going to stick around in the new home for a long period of time.
It’s important to keep in mind that we could be near a top in the real estate market. The probabilities are high that we’d reach a top at some point this decade, which would make the “seven-year rule-of-thumb” potentially shorter if you buy near the top. Remember 2008? If not, ask someone who does and how long it took to see their home prices break-even.
If you already own a home, it usually makes sense to buy a new home instead of renting. That being said, there are some reasons why it could make sense. Are there potential changes coming up in your life, such as the kids moving out and becoming an empty nester for the first time? Are you thinking of moving out of state? Is it possible (or even probable) that you might get a divorce, or do you think you might move again within the next few years (see the seven-year-rule above)?
The reasons above are all great reasons to take advantage of the booming real estate market. In a perfect world, you want to sell when everyone else is buying!
If you’re already a homeowner, ask yourself these questions before buying a new home:
There are situations when someone wants to buy a home, but they’re also going to experience a change in income (say, they’re going to retire). In that case, if you don’t already have your home paid off – and if you’re going to need to finance the home – then it helps to show earned income. Of course, if you’ve saved enough for retirement, this might not be a problem at all.
If you’re not sure what your next goal is and you don’t need the space you have today, it might make sense to sell, rent for a year or two, and then buy later on in the future. Think about it…
If the housing market is booming, then you’d be selling at a great price today. If the market starts to struggle as a result of the economic fallout from the Coronavirus through 2021 and 2022, then you could always take your cash and buy again later, potentially at lower prices. Furthermore, when you’re ready to buy again, you don’t have to worry about selling a house, waiting for a buyer, making contingency offers on a new house (contingent upon selling yours) when you live in an apartment. You can just… move out!
Bottom line, I think our society has labeled renting to be a “bad thing” when in reality, it can make a lot of financial sense, all depending on your personal situation.
So, at the end of the day, whether you want to stay where you are or buy a new home all depends on your personal goals, future desires, and plans for “what’s next.” As long as you think logically instead of emotionally, and answer all the questions above honestly, you can make a decision that is not only fulfilling, but financially intelligent as well!Categories: Adam Koos, CFP®, CMT®, Educational Articles