Saturday, November 27, 2004

Don't fear 'bubble burst' in prime areas


Steve McLinden, Bankrate.com

Dear Steve,

Is it wise for me to hold on to my home that has already tripled or even quadrupled in value since the year 2000? Or is it wiser to sell now while the real estate market is hot and pocket the huge profits now when I can? I live in a hot market, Brevard County, Florida.
-- Sam

Dear Sam,
This is a very common question these days, especially from folks in Florida, Southern California and other coastal areas, as well as in vibrant areas of the Southwest such as Phoenix and Las Vegas.

Although you don't say whether you plan to move out of the market, the tenor of your letter indicates you're probably staying. And that always begs the question of what you'll do for replacement housing.

If you like where you are, intend to stick around awhile and can make your mortgage payment without much pain, you just might want to stay put. In other words, you might make off with a huge profit from a sale, but if you want a similar home locally and all the quality-of-life benefits you've enjoyed, you'll probably be spending those profits and then some to get one.

If you plan to downsize to a less-expensive location nearby but aren't ready to give up that fast-appreciating home, you have a three-year window where you can retain it and rent it out without sacrificing the generous capital gains tax exemption ($250,000 for just you or up to $500,000 if you are married and filing jointly) from the sale. The big condition is that you must have owned and occupied the place as your principal residence an aggregate of two of the five years before it sold. Miss those requirements and you'll be paying about 15 percent capital gains tax.

Even with the rash of violent weather this year in Florida, demand for quality housing is not likely to abate there. Historically, home values have rebounded vigorously after major hurricanes because there's always enormous demand, both domestically and internationally, for prime coastal-area property. Sure, more skittish homeowners are putting their homes on the market now and lot of closings got delayed due to damage, but sales figures and Realtors indicate demand will remain brisk when all the dust settles.

If you truly fear getting caught in a so-called housing bubble and must sell for peace of mind, the best way to put those profits to work in replacement housing would be to move to a market where values are lower. But first, realize that even if you remain in your current home, and values were to somehow drop slightly over the next few years -- which seems very unlikely, by the way -- you'd still retain a lot of value in a highly desirable location. The odds are greater that you'll continue to see good gains in the next few years, though perhaps not at the racehorse rates that have occurred recently. Still, the forces of supply and demand remain heavily in your favor.

Congratulations on your good fortune and good luck with your decision.


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