You may feel you somehow lost money and that you are somehow a loser for not making more money, even if you will still net hundreds of thousands of dollars from the sale!
Maybe you harbor this secret thought, “I should have sold my home at the peak. I would have made more money.”
Where would you live?!
If you bought another home at that time, it’s price would have also been at it’s peak, and today you would be in the exact same situation.
Don’t forget that when you buy at the peak of the market your selection of homes stinks. You have to take what you can get. You have to make tons of compromises on the features, location, etc. of the home.
Maybe this thought has flashed across your mind, “I should have sold at the peak, rented and then bought at the bottom.”
Are you nuts!
For that strategy to work;
1) You would have to sell at the top of the market.
There is a helluva a difference between knowing homes are over-priced and knowing when you are at the top of the market.
Many of the economists who today say home prices are too high, have been saying the same thing for years. Sure, they may have been right back then but if you listened to them in 2003 and sold your home, you made a big mistake.
The famous economist Robert Shiller said London home prices were too high in 2003 (?) and they were. Prices declined for a bit and then bounced right back up to still higher levels.
You may think it is rational to sell/rent/buy but the housing market is often irrational and those irrational spots will eat up your rational strategy and spit it out.
2) You would have to buy at the bottom of the market.
Good luck with that, too.
3) Prices would have to fall at least 10%.
When you sell your home, it will cost you perhaps 8% in selling costs – real estate agents, title insurance, escrow fees, etc. Years later when you buy your new home, it will cost you perhaps 2% in buying costs – mortgage costs, title insurance, escrow fees, etc. If you just keep the same home, you wouldn’t have those expenses.
So, between the time you sell and the time you buy, home prices would have to fall 10% for you to break even.
This does not include the cost of moving twice, the disruption to you and your family and the fall in your work productivity during and possibly after the move.
The average correction in recent decades has been 17 percent, when a correction does indeed take place.
4) You will have to put your life on hold until the market bottoms out.
“I’m sorry honey, I know you want to get married [have children, have more children, stop renting, move to a better neighborhood, move to a better school district, have your mother move in, etc.] and buy a home but I can’t buy a home until I know the market has bottomed out. My sell/rent/buy strategy is more important to me than living my life.”
It doesn’t make any sense to improve your landlord’s property. If you own the property you can turn it into your dream home.
When you rent, you don’t have the family stability of owning a home. Your lease may not be renewed.
When you own a home, you are in control of how you improve the home and when you choose to move.
Too Clever By Half
In a previous post, I gave the example of an economist in Washington D.C. who sold his home in 2004 because he knew the market was way too high. Unfortunately for him, he badly mis-timed the market. Prices peaked in 2006 at 38% higher than when he sold! We had a once in a generation bull market for real estate and he missed out on it, big time.
It is extremely unlikely that prices will ever fall 38%. When you add the 10% transaction costs, you see his decision to sell with the idea of buying another similar unit later was a financial disaster.
My guess is that if he ever decides to buy a home, he will badly mis-time that purchase as well. He might throw the entire sell/rent/buy strategy out the window when he gets married and wants to own a home for family and quality of life reasons.
The “Property Ladder” Strategy
The traditional, tried and true “property ladder” strategy is far, far, far more successful.
Buy a home as soon as you can swing it, even if it isn’t your dream home.
If home prices appreciate, which is the normal state of affairs, you aren’t priced out of the market for your future dream home because your current home is also appreciating. If you hadn’t bought that first home, you could have been priced out of the market for your dream home.
If home prices fall, which is very unusual, you are no worse off. What you “lose” when selling your current home, you gain back when you buy your new lower priced dream home.