Should Homeowner Sell at a Loss or Wait it Out?

Matthew Haines is the founder of PropertyShark.com. He is a guest contributor to the Developments blog. Read his full bio. Like many Americans my brother has been caught up in the housing crisis. He and his wife need to move from Maine to Lawrence, Kan. for graduate school. Their question: Do they sell their house at a $50,000 loss, or do they try to rent it out at a break-even rate for a year and... [more]

Matthew Haines is the founder of PropertyShark.com. He is a guest contributor to the Developments blog. Read his full bio. Like many Americans my brother has been caught up in the housing crisis. He and his wife need to move from Maine to Lawrence, Kan. for graduate school. Their question: Do they sell their house at a $50,000 loss, or do they try to rent it out at a break-even rate for a year and try to sell it when the housing market will hopefully be stronger? They bought the house two years ago in Cape Elizabeth, Maine, when the market was strong. Maine didn’t really experience the run-up other markets experienced. And it didn’t experience the fall-off either–until October of last year, when the stock market crashed, prices remained flat or only slightly down. Since then prices have been in freefall. Cape Elizabeth is a suburb of Portland. It’s right on the ocean and its public schools have some of the best scores in Maine. Two years ago there were just three houses on the market in Cape Elizabeth under $300K. Now there are 15. The agent representing my brother’s house originally suggested pricing it at $475,000, and now it sits on market at $375,000. My brother reports that they’ve gotten the same number of lookers at the lower price, but there are simply no buyers. All of the lookers, he says, are relocating from somewhere else to Portland, and all of them have a house somewhere else that they are trying to sell or rent. He asked me for advice, and my first reaction was to quote real estate broker Alison Rogers, “if my crystal ball were working, if I really knew, I’d be so busy getting rich that I’d be too busy to talk to you.” But after some thought I decided I had some solid advice to give him. I don’t think prices are going up any time soon. What will probably happen is that the number of transactions will rise to normal levels. (I’m not talking about sales of foreclosed properties or post-bubble markets like Phoenix or Fort Myers, Fla.) When that happens it will take less time on average to sell a house and prices will be more consistent in comparison to comparable properties. In other words, liquidity will return to the market. The big hindrance to prices rising will be banks and the appraisal process. The crux of the problem is that appraisals are based mostly on previously closed transactions–contracts that were signed in the previous six to 12 months. In an appraisers’ world, the starting point for valuing a house is what it was worth last year. There are methods for factoring in a rate of overall market appreciation or depreciation. Of course in recent years there was an excess of optimism in factoring in appreciation–a key enabler for the current mess. So now banks and appraisers have swung to the conservative side, and it is going to be very hard to get an appraisal (or a lending decision) next year that gives a higher value than what is strictly indicated by today’s sale prices. The only market change the appraisers and banks will be willing to factor in will be further depreciation. If a buyer wants to pay more than the appraised value, the buyer is going to have to put up 100% of that money. And making that more difficult, banks are requiring buyers to put down more cash anyway. Yesterday’s 3% down is today’s 10%, and yesterday’s 10% is 20%. So my advice to my brother is that it is unlikely that prices are going to go up very much, if at all in the next year or two. However, I do think it is likely that prices will be more consistent and predictable. In my brother’s case that’s an important consideration. His house isn’t typical for its neighborhood. It’s significantly bigger. That hurts him in two ways. Atypical houses may just not find a buyer in this market. Not only is there a dearth of buyers, the scarce few are being cautious and avoiding homes that are unusual and potentially difficult to resell. Second, a bigger house would typically get purchased by someone trading up. Those buyers are less active right now because they can’t sell their own houses. First-time buyers, the ones most active right now, are less likely to want the largest house in the neighborhood. So ultimately my advice to anyone in my brother’s predicament would be: If your house is typical for its neighborhood, and especially if it’s a starter house, sell now, take your losses, and move on with life. If your house is atypical, or if it’s a larger house suitable for a trade-up purchase, waiting until next year might make sense. But in the end my opinion is that anyone who claims to really know where the market is going is a fool–either for thinking they know or for sharing that knowledge with the rest of us. [less]