If you're a homeowner, you're probably familiar with the way that advertising and marketing campaigns target you with strategies designed to have you take advantage of the increase in your home's value. Some companies, such as the Ditech division of General Motors'
Now, as prudent Fools, you've probably resisted most of these appeals. When interest rates were falling, you may well have taken advantage of lower borrowing costs to refinance your mortgage. However, many of you probably just refinanced the amount of outstanding principal left on your original mortgage; and even if you refinanced for a higher amount, you probably took the extra cash and did something productive with it, such as doing remodeling work that would enhance the value of your home.
On the other hand, you may have looked in awe at the prices your neighbors got when they sold their homes. For those who have lived in rapidly appreciating areas for a while, the astronomical prices that buyers have been paying may seem unimaginable. As homes have become less affordable for many, an increasing number of current homeowners would never be able to live where they do now if they hadn't bought their home when prices were far more reasonable. Now that housing prices appear to have peaked, you may be wondering whether you should get out while the getting's good and sell your house.
Where will you go?
Of course, selling your home isn't quite the same as selling a stock or a mutual fund. For one thing, while online stockbrokers like E*Trade
Perhaps the biggest problem with the idea of selling your home is that you have to find another place to live. For many, the alternatives aren't terribly appealing. If you live in a particularly expensive part of the country, such as Los Angeles, San Francisco, New York, or Washington, D.C., then you could move to a more affordable city. For instance, recent statistics released by the National Association of Home Builders put Indianapolis, Detroit, and Buffalo at the top of its Housing Opportunity Index. Unless you can transfer within your current employer, however, finding a new job that compares favorably with what you earn now can be difficult or impossible. Furthermore, setting aside financial considerations, you have to ask yourself: Do you really want to give up the social network you've spent years putting together and strike out to a place where you may not know anyone? It's quite possible that you would conclude that staying in an expensive location is worth it for the cultural and social opportunities unique to that city.
Trading down
Another alternative for homeowners interested in cashing in their profits is to move into a smaller living space, either by buying a condominium or smaller house or by renting a house or apartment. Even though buying a condo doesn't take you completely out of the real-estate market, you may find less expensive homes than your current home. Keep in mind that for the most part, if you're selling your current home because you think prices are artificially high, then the price you pay for a condo is likely to be artificially high as well. Similarly, while renting lets you avoid having to make a mortgage payment every month, rents in popular areas can be high as well, especially in areas in which young prospective homebuyers have to rent until they can obtain financing to buy.
Trading down by definition also involves giving up something that makes your existing home more valuable. Usually, that includes some combination of your home's size, location, and quality. Depending on your circumstances, it may actually be beneficial for you to give up some of these things. For instance, if you maintained your family home for your kids as they were growing up, you may no longer need that extra space once your kids have grown and left home. If you are retiring from your job, then you won't benefit from the convenience of living near your place of work, and you may prefer to move toward areas with more recreational activities.
If you trade down in hopes of buying back a similar house after prices have fallen, however, you're essentially trying to time the housing market in the same way that frequent traders time the stock market. You might get lucky and end up ahead. On the other hand, you might spend a lot of money in rent only to discover that housing prices stay constant or keep moving up.
Your home is only partially an investment. Although a home represents the largest asset many people ever own, it also has an intangible value that reflects the owner's personality and way of living. Although financial considerations are part of any decision to choose where you want to live, you simply can't ignore the non-financial aspects without running the risk of making yourself unhappy for the sake of making money.
Related articles:
- The Wrong Side of a Real Estate Slump
- 24 Years Old, $2 Million in the Hole
- Tips for Apartment Hunters
For more thoughts about common financial planning topics, check out Motley Fool GreenLight. You'll find valuable discussions and insight about things that are important to you, along with practical advice that will save you money. Check it out free with a 30-day trial.
Fool contributor Dan Caplinger left the sun and sky-high prices of southern California for colder, cheaper spaces. He thinks it was the right decision, but ask him again in January. He doesn't own shares of any companies mentioned in this article. The Fool's disclosure policy protects you like the roof over your head.
