Q         When should I sell? Can I wait and get a higher price later?

A         Isn't this really the $64,000 question?  Since none of us have a crystal ball, we recommend you look at the following questions and answer them as honestly as you can to put you and your family in the best possible position for the days ahead.

-           Economics 101 teaches us the Law of Supply and Demand.  Please note this is a law, much like the Law of Gravity.  Failure to recognize it can be harmful to one's health!  The Law of Supply and Demand tells us that prices are a result of supply, in real estate the number of homes (and perhaps more significantly, the number of distressed homes) for sale.  And the relationship of that supply to demand, in real estate this is the number of people who are actually buying. 

• Knowing that supply has grown drastically over the past few years, and that all projections are that the subprime mortgage foreclosures are just now peaking, and it takes 18-30 months for those defaults to be foreclosed on, and then to come on the market and ultimately sell . . . when do you project we will see the peak of supply?
• Are you aware of what happened to many of those subprime, and other, borrowers who are not currently facing foreclosures?
• If you knew that they typically fell into 2 separate and distinct categories we need to be aware of, #1 those who re financed into option arm type loans where their payment is artificially pushed lower, typically for 5-7 years, with the balance of the true payment simply being added to their loan balance each month, and #2 they sold and got out.  Typically, those sales were to borrowers who had accessed "100% financing" type products.  Would either or both of those cause you concern?
• What percentage of the people who are now paying $2500/mo to live in a home they paid $300k for 3 years ago will continue to stay in that situation when they have no money out of pocket and they could, in many cases, move across the street, and rent an identical property for half or less of their mortgage payment?  Do you know this is so prevalent that there already exists a term, "walk aways," to describe this phenomenon?
• What about their "credit score," aren't they afraid to ruin it?  Ask your parents what their "credit score" was when they bought their first home.  What do you think you will find?  If you guessed that there was no such thing, then ask these questions:  did banks really used to require 20% down on all mortgages and only lend to people that actually had jobs and real (not stated) incomes?  How many defaults and foreclosures happened then?  What happened to the number of foreclosures when lenders got away from requiring people to have things like down payments and jobs?  Does "credit scoring" sound like a real winner to you?  Do you think it will stick around? 
• Even if credit scoring does stay around, how do lenders make money?  Yes, obviously, by making loans.  If we are now living in a nation where almost everyone's credit score is dropping and lenders want to continue to lend, won't they have to adjust their requirements?  So are the "walk aways" either betting on this or just planning to rent for long enough that the hit to their score goes away?
• What about all those option arms?  What percentage of the people who refinanced a few years ago for $300k, who will owe $350k in a few more years, on a house that is currently worth $240k will NOT default when the peak of those loan adjustments occur in late 2011, and early 2012?  If they default at that time, and we know it will take 18-30 months for those defaults to work through the system . . . when will supply, particularly highly motivated institutional supply (the people who say we need to just get it sold at any price) hit the market and how long will it take to go away?
• Don't like the supply side of The Law of Supply and Demand?  Let's take a look at demand.  How many people are rushing to jump into home ownership when every news story talks about a lengthy, deep recession, job cuts, unemployment, global economic tragedies, etc?
• How much demand exists as lenders now are requiring people to actually verify incomes and 100% financing is rapidly becoming a thing of the past?  How many people have stable, secure, sufficient income, reasonable credit and 5, 10, 20% or more to actually put down?  Can they sell their stocks and get the money?  Sorry bad attempt at humor!
• How long will it be before lenders work through all the challenges they currently face and again anxiously give loans to would be borrowers with no jobs and no money?

Q Should I just rent the property?

A It depends, typically the real cost of owning residential real estate is approx 1.1% of the value of the property per month in a flat market.  Rather than use that rule of thumb let's figure it out:

• How much is my current mortgage payment?
• Will it change?
• What are my monthly taxes and insurance expenses?  (Remember to account for non owner occupied changes)
• Will they change?
• What can I rent the property for?  (Will this remain constant if the economy softens?)
• What will it cost me to get it rented, how quickly can I do it and what will property management cost me either in terms of the value of my time or a fee to a professional? (Use an average of ½ the first months rent + 8-10% of the monthly rental income if you don't have any better data) 
• What is a reasonable vacancy rate?  (Use 5-10% of the monthly rental rate if you don't have any better data)
• What utilities will I as the owner be required to maintain and pay for?
• What are the deferred maintenance issues I need to account for?  These are things like the real cost of renting the home for a few years and then selling a home with older, more dated kitchens, baths, roofs, etc
• What will damages and credit losses cost me?
• Who will perform lawn care, etc?  (Careful in requiring tenants to do this for liability purposes)
• If I had all my equity out, and I invested it in something that went up in value, how much would I gain per month?
• If I keep the property, how much will the value change per month?

Now add up these numbers to see your true cost of holding the property.  Can you rent it for enough to make sense?  Very few residential properties can be converted to income properties while maintaining fiscal responsibility.

Q         If things are this ugly now, why would I move?

A         Are you and your family happy in your current property, or are you settling?  Making the move today would do what for you and those you care about?  What's that worth?  Or is it like the MasterCard commercials "priceless?"  If you are moving are you moving up into a price range with even fewer capable buyers where you will negotiate an even better deal?  Have you considered selling now and working with a competent, knowledgeable Realtor (yeah we know they are hard to find) who will let you know 6-12 months before your market reaches a bottom?  If you sold now, invested your equity in debt reduction or something else you felt comfortable with, and then also invested the difference between your new monthly rent and what the mortgage would have been had you bought, how much will you have in 3, 5, 10+ years?  If prices obey The Law of Supply and Demand, what will those savings do for you when the time does come to buy?

Q         Where's the silver lining?

A         For every seller that sells, there must, by definition, be a buyer who buys.  As prices drop sellers loose and buyers win.  As prices rose sellers won and buyers lost.  Nationally, since 1900, excepting the last Great Depression, real estate cycles have typically averaged about 5-7 years +/- with about 2/3 of that time spent on the up side of the cycle and 1/3 on the down.  The last Great Depression didn't see prices correct as far as we already have seen in most of the country.  Yet it still took many markets until 1940 and beyond to return to where prices had been in 1929.

If you are somewhat thick skinned and not afraid to have your toes stepped on, or feet literally smashed, and you are ok with a splash of cold water in your face.  Check out the recent article regarding "The American Dream."  You can find it copied below or by going to www.smashedfeet.com and looking in the archives under September 2, 2008