Dave Friedman is Co-Founder and CEO of Knox Financial, the smart and frictionless way to turn a home into an investment property.
When you’re in the business of helping people build wealth through real estate, one common question you get from homeowners considering a move is, “Is this a good year to sell my home?”
In response to this question, this is what I have to say about 2021, a year that is widely considered to be a strong seller’s market: Don’t sell your home! Here’s why:
First off, many homeowners will see significant financial benefits if they hold on to the home they’re moving out of and convert it into an investment property. Low interest rates coupled with the double-bottom-line financial benefits you get from both rent payments and the appreciation of your home’s value make investment properties an attractive investment.
For homeowners who are still considering selling because their real estate agent says that it’s a seller’s market, I’d argue that selling during a “seller’s market” is often a terrible idea. To understand why, consider three factors that determine home prices: interest rates, housing supply and housing demand.
• Interest rates: Mortgage interest rates remain very low, which essentially allows people to purchase more home for the same monthly mortgage payment. While mortgage rates will likely tick up slightly in the next year, almost no one anticipates a substantial change for quite some time. The Federal Reserve has said as much.
• Housing supply: Inventory in the housing market is at half the level it was a year ago. If supply does increase, it will take months for it to increase meaningfully. Building materials are as expensive as they ever were, and so are builders. So, we’re unlikely to see a lot of new inventory show up soon.
• Housing demand: On the demand side, we’re seeing signals of pent-up demand from the number of offers being placed on each home. Lots of offers beget bidding wars that drive up prices even more. When the house down the block has a bidding war, the apparent value of yours goes up.
With low interest rates, low housing supply and high housing demand, home prices will, by all logic, continue to rise. If you sell your home now, you’re almost certainly losing out on the appreciation in your home’s value that you’ll see if you hold on to your home. To give a bit more context, consider this hypothetical example:
Imagine that in 2020 the average home in America went up in value 7% and the average homeowner with a mortgage saw an equity increase of over 25%. With this in mind, let’s say you owned a home at the end of 2019 that was worth $400,000 and you had $100,000 of equity in the home. In this case, if you decided to hold the home until the end of 2020, you could have seen your home go up in value by around 7% to $428,000 and your equity position in the home increase by around 25% to $125,000. If you sold your home at the end of 2019, you wouldn’t have reaped the benefits of this growth.
Or, to put this in stock market terms, let’s say you own a few shares of stock of a company that’s doing great. The stock value has been going up and up. All the conditions that allowed the company’s shares to grow in value indicate they’ll persist for a long time to come. You probably wouldn’t sell that stock. So, why would you sell a house that you own?
In a strong seller’s market, like the one we’re seeing in 2021, I encourage homeowners to be patient. Let other people sell first. All along the way, they’ll be setting new benchmarks for the highest price per square foot or the highest price for similar properties. Then, when the market has gone up and up and up, and only if you have to sell, that’s the time.
Markets move through something of a sine, cosine pattern from a seller’s market to a buyer’s market and back again. Unlike the stock market where you can see a company’s trading value plummet in a matter of minutes, housing market shifts generally take months or years. Prices aren’t rising one day and falling the next. They rise steadily, and the time to sell is when the curve flattens a bit. You get the benefits of the ramp up in price that came before you.
How will you know when it is time? Watch inventory. As inventories fall, prices are probably going up. When inventories are not falling as fast anymore or holding steady near a multi-year low, that’s a decent time to sell — even a few months later.
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