Smart Buying
Time to Move On?
Dramatic price drops are unlikely, but many homeowners are taking their profits anyway.
By Pat Mertz Esswein, Associate Editor
Dave Lindorff
From Kiplinger's Personal Finance magazine, November 2005
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Even more significant are indications that fewer people are able to afford houses in some areas. Although interest rates on 30-year fixed-rate mortgages remain low, about one-third of all new mortgages in 2005 have been adjustable-rate loans -- some interest-only. The lower initial payments on many ARMs is the only way some buyers can afford the higher prices.
Another telltale indicator of a market peak: Rents have begun rising nationwide, with the biggest gains in the hottest markets, according to Global Real Analytics, in San Francisco. Rents had fallen as buyers flocked to the housing market. But homes have become so expensive that an increasing number of would-be buyers have decided to remain tenants instead, helping to push up rents. John Carrig, a financial planner in Deerfield Beach, Fla., says that he has seen this phenomenon before, when he lived in New York City. "Home sales zoomed up, and rentals didn't," says Carrig. "Then the housing market cooled off, and rentals moved up."
Selling your home and becoming a renter is one way to cash in on the appreciation. But that doesn't always make sense if you're still deducting mortgage interest, along with property taxes, on your tax return. Plus, it's difficult to time a market peak.
If the numbers make sense, there are ways to cash in and continue to be a homeowner. You could downsize, relocate to a less expensive area or put your profits into a bigger place or a vacation home. Just remember that in any situation, selling can be an expensive proposition, with real estate commissions and other fees as well as possible tax consequences. If you've lived in your house for less than two years, profit from the sale doesn't qualify for the tax exemption of $250,000 for a single taxpayer and $500,000 for a married couple. And if your profits exceed those amounts, you'll have to cough up capital-gains taxes.
More for less
Financial planners agree that you are likely to regret trading in a home for a less-attractive quality of life just to safeguard your equity. Many retirees avoid that trap by moving to a low-cost area, often getting more space and amenities for less money.
John and Vicki Pochodylo are doing just that. Now in their mid fifties, the Pochodylos have just begun the process of building a retirement home near Asheville, N.C., for $200,000 less than they expect to get when they sell their present home in Scottsdale, Ariz., one of the nation's hottest markets. They hope to move within the next year, when John, a financial planner, turns 58, and use the money they make on the home sale to pay for health insurance until he and Vicki qualify for medicare.
Moving to a less expensive house "can be the perfect strategy," says William Stanton, a financial planner with JPMorgan Private Client Services, in New York City. "You can capitalize on the bubble and still have a real estate asset." And you don't have to move across the country, either. Last year, Walter Hope, the 44-year-old manager of a Weichert Realty office in northeast Philadelphia, discovered that houses on the block where he lived, in the city's Mayfair section, had doubled in price since he bought a three-bedroom brick rowhouse in 1999 for $60,000. By January of this year, prices in the neighborhood had gone up another $20,000. "We're selling," Hope told his wife, Karen, 34. She looked at the numbers and agreed.
The Hopes got their asking price of $140,000, then bought a similar home a mile and a half away in Wissinoming, a less expensive and more integrated neighborhood, for $75,000. The Hopes, who are white, are happy to live in an area that's more racially diverse than their previous neighborhood. And they're happy that they could use the profits from the sale of their house to pay off debts and invest in the stock market.