Eleanor Blank, 67, and her husband, Bruce, 70, had planned to time the sale of their Mediterranean-style tract house to his retirement, this spring, from his job as a pharmacist at health care giant Kaiser Permanente. Buy with prices soaring in Thousand Oaks, their tony suburb in the hills northwest of Los Angeles, the couple decided to cash out early. Last May their four-bedroom home sold for a little more then $1 million - an eye-popping 86 percent more than they paid for it only three years before. Explains Eleanor: "We thought we should capitalize on the price we had and not take the chance it would fall."
Profit-hungry homeowners across the country are seizing similar opportunities. Since 1997, when housing's upward spiral began, the median price of a home has increased by a whopping 47 percent, even after adjusting for overall U.S. inflation. Values have risen still more dramatically - some might say ridiculously - in parts of Florida, the Northeast, and the Southwest. The median price in Phoenix jumped 55 percent in just a year, the National Association of Realtors reported last fall.
Can the market go still higher? The short answer is yes. Should you expect that? No - it's always better to be prudent. Is it time for you to sell your house? This short answer's a little longer: only if you have some cheaper place to go. Yet for people with a workable exit plan, or the will to hatch one, there may be no time like the present to make that other American dream - a windfall for retirement - a happy reality. Judging whether moving is the right decision for you is what this article is all about.
First, let's cut through both the go-go hype of real-estate speculators and some economists' prophecies of imminent gloom. Here's the time-tested truth about all markets: no one, not even billionaire investor Warren Buffett, can predict with any precision when prices will rise and fall or how far they will move. For example, Dean Baker, codirector of the Center for Economic and Policy Research in Washington, D.C., is among the gloomiest of housing economists. He makes a strong case that current prices are unsustainable, and expects the $18.5 trillion housing market to give back almost $5 trillion of its recent $6.5 trillion gain, shrinking the entire U.S. economy. Yes, Baker's dark tale of the future inclues a recession, and time could prove him correct. The thing is, he's been forecasting disaster for almost four years, even as the unprecedented home boom kept getting bigger.
Indeed, prices have increased so fast for so long that regular warnings of a bubble in housing carry about as much urgency as a foghorn. Only in July, when federal reserve chairman Alan Greenspan told Congress there's "froth" in some locales, if not nationwide, did a note of pessimism become more or less official: we are floating on bubbles, and bubbles don't last forever.
Fortunately, you don't need a Baker or a Greenspan to decide whether to sell your property. While a home isn't just any asset, as with any investment what matters most in assessing it are your own costs and goals. What did you pay to acquire it? Can you afford it, or is upkeep dragging you down? Do you want to keep it, or would you rather move? If you did cash out, what's the smallest gain you'd accept? (Remember that the cost of changing homes, from Realtor fees to moving expenses, can sap 10 percent of sale proceeds.) And, most important, if you sold your house tomorrow and settled elsewhere, how munch would you actually end up with as profit?
For those counting on selling the homestead to boost their retirement funds, the impulse to get while the getting's good may be enormouse. But when too many people take a speculator's stance - "Let's put out the FOR SALE sign and see if we get any nibbles" - markets by definition shift in favor of buyers, price gains halt, and talk of the bubble bursting follows.
"People shouldn't panic or change their plans substantially just because prices might fall," says Edward Leamer, an economist at UCLA Anderson Forecast, who foresees mostly stagnation - not disaster - for housing. "In most places prices will get stuck and wait for the economy to catch up with valuations."
Whatever the experts predict for nationwide trends, what's said of politics and the best produce really is true of real estate: it's all local. So those folks planning to pull up stakes need to care about just two places: where they are and where they're heading. Differences from city to city can be stark. For example, median prices in Miami and Las Vegas - popular sites for vacation homes - climbed about 90 percent between 2002 and last June. Yet in the same period prices rose less than 7 percent in Indianapolis. In fact, homes are undervalued in 78 of 299 U.S. markets, according to Richard DeKaser, chief economist for National City Corp., a Cleveland-based bank.
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DeKaser factors in incomes, population density, and particular strengths (like San Diego beaches) or weaknesses (like New York City schools) in making his calculations. He calls a fifth of the nation's largest markets "extremely overvalued," with prices at least 30 percent above where they should be. Half of those locales are likely to see significant price declines, he says. Others might simply stop inflating. (See the box below for more from his study.)
Given that no one really knows if housing prices will continue to rise at a heady pace, glide to what economists call a soft landing, or come to a crashing halt, it's wise to prepare for the worst while hoping for the best. And the worst may be something you can ride out. When home prices go south, they tend to decline gradually for year as properties sit unsold and sellers scale back their expectations. That's what happened from 1995 to 1999 in Honolulu, where the prices sagged by 20 percent as Japanese investors bailed. Such declines are a far cry from the kind of beakneck plunge stockholders experienced in 2000, when the bull market's collapse vaporized $7 trillion - and 80 percent of the value of some stocks - in a matter of months. Then again, as Dean Baker points out, the recent real estate run-up is unprecedented, and its end could be as well.
Whether you move or not, now is a good time to secure fixed-rate financing. Average interest rates on the benchmark 30-year mortgage have crept only about 0.65 percent at press time, but for homeowners with adjustable-rate mortgages, Baker urges action. "If at all possible, what you want to do is lock in that low rate."
For homeowners looking to sell in the hottest markets, there are only two ways to pull in a big profit: move to a smaller home in the same town or find a bargain in a cheaper locale. Before moving, check out the cost of groceries, insurance, utilities, and property taxes in any location you're considering. Property taxes in particular can turn a cheap house into a painful monthly payment.
Warren R. Bland, author of Retire in Style: 60 Outstanding Places Across the USA and Canada (Next Decade, 2005), says folks in overheated markets who are nearing retirement should at least think about moving out of town. College towns offer good public transportation and cultural amenities and are usually cheaper than big cities, he notes. Or maybe you prefer lounging close to the beach? Florida may be sky-high, but Corpus Christi, Texas is undervalued by DeKaser's criteria.
If, after doing the math, you decide to sell but are convinced your taret locale is overpriced, consider selling and then renting while things cool off. Steven Enright, a financial planner in Old Tappan, New Jersey, has several clients who locked in profits this way while waiting for condominium prices in Florida to fall. "You don't want to buy into a bubble," he says.
Bland, 64, and his wife, Sarah, 62, have spent more than two years avoiding that trap. In 2003 they sold their home of 25 years in the Brentwood section of Los Angeles and rented a house in nearby Studio City, parking bout $760,000 in profit in certificates of deposit. Interest on those CDs pretty much pays their rent.
Although Bland figures the Brentwood house is worth about $200,000 more today than when it sold, he has no regrets. "You don't want to be too greedy," he says. He and Sarah are considering a move to Ithica, New York, or Oregon this year and aim to buy a house for less than $400,000.
Dennis Draper, 59, a registered nurse, sees his situation a bit differently. He belives his tiny Baltimore home sits "in a bubble within a bubble," a neighborhood whose renaissance is on track whether citywide prices - 28 percent helium by DeKaser's estimate - hold up or not. Draper may sell in a few years, but for now he's watching and waiting, looking for that little bit extra. Condominiums and a supermarket on tap nearby, as well as revitalized row of Victorian homes one block away, are fueling his optimism.
Draper things he can do better than the $96,000 appraisal he got last year. That's tripple the price he paid in 1987 for the brick box on a block once cruised by drug dealers. "I've sat here like a lunatic for 19 years," he says. "What's a few more?"
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