A: No one we know can truly predict the future of real estate. Real estate economists have been predicting that mortgage interest rates will hit 5 percent for a 30-year fixed rate mortgage since 2012 — and we’re still waiting, which is good news for the millions of home buyers and owners who have purchased or refinanced with some of the lowest interest rates in history over the past couple of years, in particular.
Still, you’re right. If you stay in the same neighborhood, you tend to sell high and buy high or sell low and buy low. If you switch neighborhoods or if you sell a totally redone home and buy a small fixer-upper, you can often make that work in your favor.
For example, if you live in one of the priciest homes in your metro area and buy a home in a less expensive area, you are likely to pocket some cash because your new home will probably cost less than the home you’re selling, even if the home you’re buying is at the top of the market for that neighborhood.
To capitalize on the opportunity, you’d need to buy a home that needs fixing up (so it’s less valued by other buyers who either don’t want to do the work or who are cash poor and can’t afford it). Or you’d have to switch neighborhoods, cities or even states.
Chicago has relatively high housing costs compared to some parts of the country. If you trade a home in Chicago for one that’s in Boise, Idaho, or in Arizona or California, you’ll have to think about the price disparity. If you sell a home in Chicago for $1 million, that will buy you a small, 1,200-square-foot house in Santa Barbara, Calif., but a six-bedroom, four-bath home on a nice lot in Boise.
Which leads us to the next part of your question: What will happen to housing prices going forward?
If the National Association of Realtors is right, there is a serious shortage of homes to buy. The NAR estimates that there are 5.5 million to 6.8 million homes missing, which is one reason that prices are climbing so quickly. Mark Palim, deputy chief economist at Fannie Mae, said the “residential construction report from the Census Bureau showed housing starts increasing by 6.3 percent in June to an annualized pace of 1.64 million units.” However, it will take a number of years to catch up. That means, housing prices are likely to stay where they are or increase over the next few years.
But, and this is a big one, mortgage interest rates have been at all-time lows for a while. The moment that the 30-year fixed-rate loan rises above 3.5 percent, the market pauses. If we see interest rates shoot up for any reason (like inflation rising above expectations, an issue with oil production or shipping, or even due to covid-19), it’s likely that the housing market will respond and owners will have to drop their prices to unload their properties.
Back to you. You could sell your home now at the sky-high price, bank the profit (up to $500,000 would be tax-free for you and your spouse; $250,000 for homeowners who are single) and rent until you either find the right property or decide to move elsewhere. Rents are rising as well, but you would have most of your capital available to you. Or you could sell and buy something new, and enjoy living in a different home, which may rise in value (or not) over the next few years.
We’ve never been the kind of people who have tried to hedge the real estate market. We leave that to the pros. But at the end of the day, if you’re tired of living in your home, or it’s no longer right for you at this stage in your life, you should sell it and move. Because even if you stay there, prices could decline, and you’ll be wishing you made a different decision and locked in some of those profits.
If you can make money on your property, that’s great. But according to the Federal Reserve of St. Louis, Chicago’s home prices still haven’t caught up to where they were in 2006. So, decide what will make you happiest, regardless of whether you’ll make money over the next 10 years or not. And, if you can’t decide, then sell (to bank your profits) and rent until you find the next place you really want to live.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (Fourth Edition). She is also the chief executive of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through the website, BestMoneyMoves.com.
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