Sell and rent until market drops?

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Submitted by 23109VC on March 19, 2019 - 7:38am

I live in Temecula but want to move to San Diego.

I own a home in temecuoanthst currently has approx $200k in equity - given current prices.

given all the talk about in pending price reductions one thought I had was to sell my current house and pocket the money and then rent for the next year or two in hopes the prices come down . I’ve looked at houses in San Diego and they’re substantially more expensive Bs Temecula that it would cost too much to get an equivalent house or I would have to move into a condo or something not as nice as my current home.

What is the current consensus here as to whether prices will drop in a San Diego over the next 24 months and how many of you have employed the strategy of selling to lock in equity then Wait for a drop? I know people who timed this perfectly in the last downward cycle ...

I have also started to hear people talking about doing exactly what I am suggesting right now - Just curious what everyone’s thoughts are on that here ?

Thx

Submitted by The-Shoveler on March 19, 2019 - 8:56am.

Risky IMO.

As long as the Fed keep rates reasonable I am not sure economic cycles apply.

We may not see another recession for a long time yet and if we do it is very unlikely we would see anything even close to what we saw last time with foreclosures etc...

2007-8 was an extreme outlier event IMO.

IMO inflation may outstrip your ability to save or keep up with supply/Demand price hikes.

But just my opinion

Submitted by spdrun on March 19, 2019 - 9:11am.

The Fed normally holds steady or even lowers just before a recession. (See 20y plot below.) If anything, the Fed holding steady at 2.5-3% would be a sign of a coming recession.

Rates hit 6.75% just before dot.bomb, hit 5.25% just before the housing skell-dump. Lower and lower each time -- a lower plateau doesn't guarantee an opportunity (aka recession) won't happen...

https://www.macrotrends.net/2015/fed-fun...

Submitted by The-Shoveler on March 19, 2019 - 10:21am.

IMO even 2007-8 housing crash may have been very very different and may not have even occurred if the fed had handled the bailouts differently.

Australia has gone 27 years without a recession.

Maybe we are getting a little better at managing the economy too.

Submitted by phaster on March 19, 2019 - 9:33am.

one other item to consider about selling,... is there an adverse tax consequence

Submitted by zk on March 19, 2019 - 12:00pm.

23109VC wrote:
I know people who timed this perfectly in the last downward cycle ...

jm2c:

The last peak was so massive and so obviously unsustainable that it was a lot easier to profit from than this one might be.

This was the picture in 2005:

https://www.piggington.com/risks

It doesn't look quite like that now.

If I understand your strategy correctly, then for your strategy to work (to work well, anyway), nominal prices must drop. There is, in my maybe-better-informed-than-average-but-no-expert opinion, a decent chance that the downside of this peak (whenever it peaks, whether that's now or in a year or more) will result in a drop in real prices but not nominal prices. Or maybe a small drop in nominal prices.

There's also a decent chance it will result in a significant enough nominal price drop that your strategy will work. All I'm saying is that, while prices are higher than their historical means (by most or all measures), and they will almost certainly revert to historical means, that doesn't necessarily mean that there will be significant nominal price drops. And even if there are, timing them can be tricky.

On the other hand, if you want to move to San Diego, then the importance of how much money you make or lose should be weighed against the importance of moving to San Diego. As a person who thinks San Diego is the best place in the world to live (if I had billions of dollars, I wouldn't move more than a couple of miles), I say it's worth the risk and worth the money.

If you're going to take that risk, now seems (in my opinion) like as good a time as any.

Submitted by FlyerInHi on March 19, 2019 - 1:00pm.

zk wrote:

On the other hand, if you want to move to San Diego, then the importance of how much money you make or lose should be weighed against the importance of moving to San Diego. As a person who thinks San Diego is the best place in the world to live (if I had billions of dollars, I wouldn't move more than a couple of miles), I say it's worth the risk and worth the money.

If you're going to take that risk, now seems (in my opinion) like as good a time as any.

I agree. Seems like he’s not happy where he is now and wants to more to San Diego.

Where are the capitalists who would say “no risk, no rewards” ?

Submitted by FlyerInHi on March 19, 2019 - 1:06pm.

The-Shoveler wrote:
IMO even 2007-8 housing crash may have been very very different and may not have even occurred if the fed had handled the bailouts differently.

Australia has gone 27 years without a recession.

Maybe we are getting a little better at managing the economy too.

That’s what Alan Greenspan said. The great moderation.

Housing is dropping in Australia. People are starting to cry.
Australia is a small economy that rode the Chinese economy. Without China, Australia would have underperformed. The Chinese are buying natural resources and English education. And Australian education is shit. My friend at NU Singapore said they don’t hire Australian graduates because they don’t meet high world standards.

Submitted by The-Shoveler on March 19, 2019 - 2:02pm.

There are two great perils to the current Chinese gov.

1) The economy, (the current gov would be unlikely to survive a severe economic downturn), that is why they manage it so carefully.

2) The rural/urban divide (remember Mao).

Maybe we are improving/learning.

Submitted by flu on March 19, 2019 - 3:22pm.

I'm not a big believer in selling a primary home to "make money" unless you already have another home lined up to move into that you bought at a discount or you already have other plans to move out of the area.

So even though you get the $200k capital gains tax benefit....

Why? So you can

..pay about 5-8% closing costs/commission to sell
..pay monthly rent which is probably the same or more than your current mortgage payments (if any), and not have any tax benefits for the rent payments you make (unlike mortgage interest)
..and possibly buy back with a mortgage with a much higher rate and possibly pay higher property taxes

For you to come out ahead, you're assuming that property values will fall more than all those other things above (an other things I didn't list) that are additional cost items you will incur just to break even. My crystal ball isn't so clear and can't say with a high probability that is the case... Doomsayers will say otherwise. But it's certainly not something I would personally do only for a $200k gain..... unless you are totally cash strapped and/or plan on moving to a much lower cost area like Mexico.

I talked about this conundrum with many folks. Yes, when home prices go up, you're really happy because the property value of your primary goes up. You're initial response is "wow, I can sell this place", make a lot of money, and "do something with the extra money"... And then reality hits. Shit, I still need a place to live.... And then reality sucks... Well, shit, that place that I really like now costs a heck of a lot more...And crap, if I buy it now, I need to pay a heck of a lot more in property taxes than I did before....So my exit strategy was... Take advantage of either a low mortgage OR a very awesome equities market so that you can pay off your mortgage...and rent your primary house at the ridiculous high prices the current market conditions allow you to... to maximize your rental income while the going is good....Your rental income across your properties just might more than cover the new mortgage payments of the new home you are thinking about.

Submitted by FlyerInHi on March 19, 2019 - 3:49pm.

The question was that he doesn’t like temecula and wants a strategy to move to San Diego.

Sell,... Live with friends and relatives, or rent something small in temecula, save money and wait for an opportunity in San Diego.

If he keeps the house in temecula, he may never get a chance to move to San Diego. What do risk taking capitalists say about achieving your dream?

Submitted by The-Shoveler on March 19, 2019 - 4:47pm.

Kidd's/Family?

Sell and Wait, Riskily unlikely to pay off as much may you think.

I would not do it unless you just have move out of Temecula.

I did it back in 2005 but I had a second house to move into that I bought in 2002, have upgraded since then.

I would add I did it knowing full well even as extreme as the housing bubble was, it could have turned out VERY different had the fed acted differently.

Submitted by FlyerInHi on March 19, 2019 - 7:09pm.

The-Shoveler wrote:

I would add I did it knowing full well even as extreme as the housing bubble was, it could have turned out VERY different had the fed acted differently.

Had the fed acted differently, we would have had a Great Depression, tech would have gone belly up and California house would have been like Florida or Vegas. People with cash would have gotten even more at the bottom.

So nobody answer the question on how to move to San Diego. What would the capitalist way?

Maybe the OP will tell us, but I’m reading into his post that his capital is locked into the house. Why not trade for a small 1 bedroom or 2 bedroom condo, or rent an apartment. Save money, keep good credit and have the downpayment ready when there’s an opportunity in San Diego. When opportunity strikes, no seller is going to accept an offer contingent on the sale of the Temecula house.
The goal is move to San Diego. What’s the best way to achieve that?

If I were in the OP’s shoes, selling at a high, given that we are 10 years into an expansion, is a risk I would take. You guys are telling him to suck it up and stay in Temecula forever, or until such time he can save enough to buy a house in San Diego, trading up without gap.

Submitted by AN on March 19, 2019 - 11:53pm.

Like some others, I wouldn't sell me primary residence unless we experience something like 2008 again. Back then, something that rent $1700 was selling for ~$550k. Today, that $550k house is now about $600k, but the rent of that house is about $2600. So, assuming similar rent to price ratio, price would have to get to at least $760k to even be in the same ball park. That's before we're talking about rent to mortgage payment ratio. In 2008, mortgage rate was ~5% and today, it's <4%. So, if we're talking about mortgage payment to rent, we'd have to get to well over $800k to be in the same ballpark. Because of this, I don't see any major crash. At least nothing that would make it worth the risk in selling and rent.

Supply is still very low. If you want to sell, rent, and hope to buy at a lower price, I would keep an eye on supply. In order for this strategy to work, you have to be pretty sure that price would have to drop enough and in a short period of time. Else, rent would eat away at your lower price saving. Not to mention time and retirement. In 2008, supply spike before price start to fall. That would be what I'd keep my eye on to guess as to when price might fall.

Submitted by temeculaguy on March 20, 2019 - 1:30am.

First off, bless your heart, I remember you from 2007 and this is housing related. Also, thank you for keeping your screen name.

Secondly as I remember, we gave you lots of advice back then and you didn't take it.

But it was fun reading the old posts

https://www.piggington.com/harveston_dow...

You are older and wiser, perhaps the advice will resonate now. You caught the falling knife due to spousal pressure and regretted it within a year. But looks like you hung in there and won anyways.

I'm with the others, I don't see a nominal fall in prices in SD, but I do see an inflation adjusted correction. What AN said is mathematical support for this, the ratios aren't out of whack like they once were in many parts of SD and inventories support his theory as well, plus there is no shadow inventory these days.

If you can afford it, just sell in Temecula and buy in SD. Just know your housing dollar stretches less in that direction than someone going the opposite direction. If you can sell and live super cheap, with family like someone mentioned, then you might be able to time the market. But odds are your rent in SD will cost more than your mortgage in Temecula, so if you are not saving now it will be worse with that move and you will end up eating your profit. Sell and rent worked great in 2006, I'm just not seeing the same math today. I am glad to see you are still with the same wife, her wants and your desire to fulfill them were your downfall last time, but wives are worth it. Reminds me of Michael Dell's high school teacher who invested the money he saved for a new wedding ring for his wife when dell was just starting. He saved to buy a better ring for his wife who married him when he was poor but invested it in dell at the beginning when ot was in a garage. Once it was worth something he sold half of his interest and bought her a 7k ring( his original investment), leaving the remaining investment in the company which ended up being worth some crazy number like 100 mil. So he reminds his wife daily that he hopes she likes her 100 million dollar ring because that is what he lost because she had to have it right then. I made up the numbers from memory so apologies in advance of they are wrong but the sentiment is the same. But again, they are worth it.

Submitted by Hobie on March 20, 2019 - 5:08am.

Don't underestimate the liquid cash burn when getting a new place. 'Fixing' little things like: Paint, flooring, remodel, fixtures, landscape, etc.

Submitted by spdrun on March 20, 2019 - 10:25am.

Unless the place is non-functional, you don't have to do things like landscraping, paint, appliances, and flooring immediately. Live with what's there and enjoy that you have a dry roof over your head. I grew up in a house with a basically original 1950s kitchen (+ newer stove and dishwasher) and it was perfectly usable.

Submitted by FlyerInHi on March 20, 2019 - 12:50pm.

I guess the consensus is no moving to San Diego.

Whatever happened to “you’re not getting any younger, do what makes you happy” ?

What I’m reading from for advise is
1. Don’t sell if you already own.
2. Buy if you want because rent vs buy is still favorable, or the difference is not that great.

At be top before the last recession people said buy before your kids her old, give them the right schools, lifetime memories, etc... Homeowners will never default, mortgages will always be paid before anything else.

Submitted by moneymaker on March 20, 2019 - 1:50pm.

The last housing drop was a sudden one, this time around I am expecting more of a slow fizzle starting this September. Financially it is easier to leave San Diego and go somewhere cheaper than the opposite. A lot of variables to consider, commute,how long before retirement,are you happy where you are. There are always deals to be had, but most of those are bought by the flippers. I'm happy where I am, but that doesn't stop the wife from looking for the bigger better deal. What zip code are you in? Maybe a house swap?

Submitted by temeculaguy on March 20, 2019 - 11:40pm.

Sd was listed in some study as the 7th least affordable of the 50 largest metros. LA and SF being the worst. That still doesn't mean the quote from Keynes from a century ago isn't true today "the market can stay irrational longer than you can stay solvent."

We saw this with the great recession, SD did not have the 50% declines experienced elsewhere so it probably wont next time either. It pains me to say but brian has a point, if it makes you happy and you can afford it, just sell there and buy where you want.

Submitted by AN on March 21, 2019 - 10:12am.

temeculaguy wrote:
Sd was listed in some study as the 7th least affordable of the 50 largest metros. LA and SF being the worst. That still doesn't mean the quote from Keynes from a century ago isn't true today "the market can stay irrational longer than you can stay solvent."

This is assuming that currently, what we have is irrational. I think it's far from it. In my previous example, a 3/2 house in MM is going for about $600k today. Rent for such house would be about $2600-2800/month, depending on when you rent (summer vs winter). Assuming you have 20% down, mortgage of the house at 4% interest rate would be $2291/month (P&I). PITI would be $3386/month. But principal is you paying off your loan. So, we should compare ITI vs rent instead. Which would put you at $2695. Now, if you take in tax deduction, ITI - tax deduction = $2249/month. Which means, if you're buying the house as a primary residence, it's still cheaper to buy today than rent the same house.

In order for ITI - tax deduction to be about $2700/month, price would have to push to $800k at 4% rate or rate would have to be @ 6% with $600k price.

Submitted by The-Shoveler on March 21, 2019 - 10:23am.

I would also argue that SD Job prospects seem to keep expanding with apple and amazon etc... expanding in the area.

Sell and buy what you want maybe makes sense, sell and wait, risky IMO.

Submitted by AN on March 21, 2019 - 10:35am.

The-Shoveler wrote:
I would also argue that SD Job prospects seem to keep expanding with apple and amazon etc... expanding in the area.

Sell and buy what you want maybe makes sense, sell and wait, risky IMO.

Exactly. Not to mention the many tech/biotech startups around town. All you need is a couple of them to blow up like Illumina did and it'll surpass both Apple and Amazon in term of employment demand.

Apple might grab a lot of headline w/ their 1200 employees growth, but I'm sure Illumina have a lot more than that and keep on growing everyday.

Submitted by flu on March 21, 2019 - 10:57am.

There is some slowdown in the higher proceed homes...Things aren't moving as fast and there is so e wiggle room on price. But that might be because sellers are still asking a lot and maybe can still afford to keep it on the market longer.....

It feels like any sort of correction will be a long drawn out slow trickle...
.
I can't speak for other industry, but tech still seems to be doing quite well. There has been some impact to H1B sponsorship and that has driven up wages for tech workers well qualified imho.

Submitted by FlyerInHi on March 21, 2019 - 11:53am.

The-Shoveler wrote:
I would also argue that SD Job prospects seem to keep expanding with apple and amazon etc... expanding in the area.

Sell and buy what you want maybe makes sense, sell and wait, risky IMO.

How does that answer the question of wanting to move from Temecula to San Diego?

Assuming that the OP must sell in order to buy, would you recommend selling in Temecula now and buying immediately in San Diego? Contigent offers are likely to be rejected, so one must sell first in order to buy, whenever that might be.

Let’s say somewhere were moving from the east coast to San Diego, and that person has to sell back there to have cash to buy in San Diego. When would you advise to buy? Obviously, that person would have to rent temporarily.

Submitted by The-Shoveler on March 21, 2019 - 4:38pm.

I don't want to get stuck in endless respond loop here.

I am just saying IMO selling with the intent of waiting several years (or a good length of time) for the next large housing price drop probably won't work out as well as you may be planning.

And you may end up chasing the market higher.

Submitted by flu on March 21, 2019 - 5:17pm.

I no longer a believer that most people have the financial acumen to time the market well, either buying stuff the low end or selling at the high. A lot of this is sheer damn luck.

As such, financial strategies meant to capitalize on single one time events, imho, are doomed to fail for most people for two reasons

1. You could predict wrong on the outcome of the one time Hail Mary event that may or may not happen the way you think, no matter how smart you think you are.

2. In waiting for that one time event and doing nothing in the meantime, you are giving up a lot of opportunity that could add up and cost you a fortune over time.

A good example of this was my stupid decision to sell a good percentage of my stocks right before Mr. Trump became President Trump thinking his election was going to crater the economy for a long long time. I was correct for about 1 week, and then the markets bounced right back as if it was a non event... Fortunately I got right back into it my investments and kept a consistent buy and hold for the long term and regular monthly drip drip drip contribution to index funds both pre and post tax contributions...and those long term, small decision that didn't count on a big bang event ended up being some of the better decisions. Of course there were optimizations to those decisions that were made to take advantage of short term changes....For example, moving more money invested the damr index funds into 529 college savings plan when the administration changed the tax law for 529 plans and investing less in after tax investment plans into the same index funds to saving on capital gains taxes. But that was about it.

Submitted by thejq on March 21, 2019 - 6:52pm.

AN wrote:
In my previous example, a 3/2 house in MM is going for about $600k today. Rent for such house would be about $2600-2800/month, depending on when you rent (summer vs winter). Assuming you have 20% down, mortgage of the house at 4% interest rate would be $2291/month (P&I). PITI would be $3386/month. But principal is you paying off your loan. So, we should compare ITI vs rent instead. Which would put you at $2695. Now, if you take in tax deduction, ITI - tax deduction = $2249/month. Which means, if you're buying the house as a primary residence, it's still cheaper to buy today than rent the same house.

In order for ITI - tax deduction to be about $2700/month, price would have to push to $800k at 4% rate or rate would have to be @ 6% with $600k price.

While I agree with your reasoning for owning a house, the logic behind your math is flawed. Right now you can deduct $24K as standard deduction, so only if your SALT + mortgage is more than that, you can use itemized deduction. Even if so, the benefit of that is the additional amount over $24K, when comparing to renting, not 100% as in your math.

If timing is hard, and you think the market maybe in a slow down trend, personally I think it's better to wait for the market to drop before selling and buying. For example, if your equity today is $200K and house is $400K and you are looking to buy a $600K house, your loan will be $400K. If the whole market goes down 25% (hypothetically), your equity is halved at $100K, but the house you want to buy is now $450K, so your loan will be $350K. And you also pay less in tax/insurance and have accumulated some more $$$ while waiting.

Submitted by AN on March 21, 2019 - 8:12pm.

thejq wrote:

While I agree with your reasoning for owning a house, the logic behind your math is flawed. Right now you can deduct $24K as standard deduction, so only if your SALT + mortgage is more than that, you can use itemized deduction. Even if so, the benefit of that is the additional amount over $24K, when comparing to renting, not 100% as in your math.

My bad, I forgot about the new tax law. My number was from my excel sheet I have that calculate this base on the older tax law. So, even if you take out the tax benefit, you're still looking at ~$2700 for ITI vs $2600-2800 for rent. So, depending on your tax rate, the tax benefit would vary.

What make you think price would drop 25%? I think that would put ITI well below rent.

To put the numbers into perspective, at the bottom of the last crash, ITI for houses around my area were about the same as rent. So, for you to expect ITI to fall below rent, then you're expecting price to fall below where it did at the last crash when comparing ITI vs rent. I just don't see that happening.

Submitted by flu on March 21, 2019 - 8:22pm.

Side question: does anyone else think that in SD there is a lack of available housing to rent?

I'm asking because I recently listed a condo at what I thought was at market price , and I've gotten like 19 responses in the last 48 hours, all asking if they could go see the place in a hurry.

I don't think my asking price is low or below market so it was kinda surprising. I asked a few folks why are they looking to move, and many of them said they have no choice...The homes they currently live in, the owners want to sell and are not planning to renew their leases. And the ones that are continuing to lease are raising rent prices by quite a bit. I'm wondering if there's a shortage of rentals.

Submitted by thejq on March 21, 2019 - 9:24pm.

AN wrote:

What make you think price would drop 25%? I think that would put ITI well below rent.

Oh no, I'm not saying it would. It's just a math exercise to prove that it's better to sell and buy when the market is lower than trying to maximize your equity to sell and buy at the top of the market.

I hope it drops 25%, but I don't it happen in the near future.

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