Saturday, April 09, 2005

Is it time to cash in on your home?



Frothy housing prices produce joy about our profits ... and fear over how to protect the gains. These strategies will help you make the right choice.

By Kiplinger's Personal Finance Magazine

Many 21st-century homeowners are feeling as if they’ve won the real-estate lottery. Especially on the East and West coasts, they have seen their home values double, or even triple, over the past five years. There’s just one problem: It’s all on paper. You can’t reap the benefit of all that wild appreciation, or protect it from a blowup in your local housing market, unless you somehow cash out.

A small but growing number of homeowners are doing just that. Karen Davidson Seward took advantage of New York City’s soaring real-estate market to make a move last year to her "dream retreat," a house and barn on nine acres in Lake Placid, N.Y. She paid $250,000 in 1987 to buy a loft in a Tribeca warehouse that had been used to refrigerate cheese. In 2004, after many improvements, it was worth $1.6 million.

The Lake Placid property was a fixer-upper, too, purchased for $65,000. Karen says she has spent another $185,000 to turn the open barn into a winterized living space, complete with plumbing. (Along with her husband, Peter Seward, she did the woodworking -- a talent she’s proud to say she learned from her father.)

"I had spent nearly 20 years paying off the debts associated with getting the loft -- I didn’t save any money," she says. "It became very clear to me after 9/11 that all my eggs were in one basket, and suddenly that investment did not feel secure." Living seven blocks from Ground Zero, Karen had grown weary of the heavy security in her neighborhood. She also felt that there would be no better time than the sizzling market of 2004 to take her profits.

Taxes and real-estate commissions took a healthy bite from the proceeds. But for the first time, 50-year-old Karen has a retirement account, invested mostly in stocks and bonds. She’s put some of her profits aside to invest in more real estate.

Karen, a graphic designer, primarily works from her Lake Placid home (as does Peter, an illustrator), although she makes occasional trips to New York City to meet with clients. "That’s a wonderful balance to being in the wilderness," she says.

For Karen and Peter, who were ready to pull up stakes, the madcap run-up in housing prices was a golden opportunity. And if you live in New York, Southern California or one of the other hyperinflated housing markets that trigger nightmares of bursting bubbles, bailing out soon could prove to be a shrewd financial move, too.

Worries about protecting wealth
We know that for every homeowner who fantasizes about semiretiring on real estate profits, few are truly willing to leave behind friends, extended families, schools and communities. But there’s no denying that many harbor fears and worry over how they can protect the home equity that makes up a large part of their wealth.

There’s no perfect solution. Empty-nesters can cash out and downsize -- and tuck their profits someplace safe -- but they may run into tax snags. Risk-takers can refinance to cash out profits and invest them in the stock market or more real estate. But if your house does fall in value, you could end up with more debt than the place is worth -- and investment losses to boot. "I’d think twice before I had someone dump their home simply for financial reasons," says Gary Schatsky, an Albany, N.Y., financial planner.

The sky is falling?
"Every client who comes into my office asks about buying a condo on spec -- every one," says Benjamin Tobias, a Plantation, Fla., financial planner. "It’s reminiscent of the stock-market bubble in 1999, when every client came in wanting tech stocks."

The indicators of a market top are easy to find, from "get-rich-quick in real estate" seminars filling church basements and hotel conference rooms to a soon-to-debut reality-TV series called Property Ladder. The show will start out chronicling the efforts of Southern Californians to buy, remodel and flip properties for profit. But for the record, we don’t think the national housing market is headed for a crash. A breather, yes, but not a crash.

Rising interest rates will undoubtedly dampen demand. But even if short-term rates rise substantially, mortgage-rate increases (which tend to rise in step with longer-term bonds) will probably be modest. David Berson, chief economist for Fannie Mae, predicts that mortgage rates will rise only one-half to three-fourths of a percentage point this year. And in many markets, recent immigrants, new job seekers and baby boomers looking to buy homes in warmer climates will continue to drive demand. David Lereah, chief economist for the National Association of Realtors, predicts a 5.3% increase nationwide in the median price of a house in 2005.

But real estate is local, and in some markets, returns have been breathtaking. Since 1997, the median price of a house has risen 212% in San Diego (from $185,000 to $578,000) and 157% in New York’s Nassau and Suffolk counties (from $164,000 to $422,000), according to the Realtors group. Such markets are the most vulnerable to a slump, especially if mortgage rates go up more sharply than anticipated or unemployment rises.

A nosedive in prices would not be unprecedented. In the late 1980s and early ’90s, the median price of a house in Los Angeles dropped 20%, and some homeowners in Southern California and the New York metro area saw 30% slips. It took five to seven years for prices to recover. "My older clients who went through that period have a much different view of real estate than my young clients who bought at the bottom and have experienced phenomenal growth," says Scott Leonard, a financial planner in Redondo Beach, Calif. So if you’re afraid your winning lottery ticket may soon expire, you might be looking for a way to cash in.

Sell high, buy low
Cheryl and Mark Shirey were sitting on a $1-million profit in their 1942 Craftsman-style home in Newport Beach, Calif. They purchased it in 1985 for "a couple hundred thousand" and renovated several times.

"We knew it would happen sooner or later with real estate in California." In August, the Shireys sold for $1.2 million and moved to Boise, Idaho, where $500,000 bought a similar Craftsman-style home.

"For the first time in my life, I am not working," says Cheryl, who gave up her sales job and now spends more time with the couple’s three teenage children. Mark returns to California every other week to help run a pest-control business he owns there. Together, the family has more time to enjoy Boise’s outdoorsy lifestyle, including mountain biking, trout fishing and skiing. "I have no stress anymore," says Cheryl. "I’m not driving on the freeway in bumper-to-bumper traffic."

Jim and Jen Compher made a similar transition. Their Fairfax, Va., townhouse, bought in 2000 for $176,000, had nearly doubled in value when Jen, a special-ed teacher in the Fairfax County school system, decided to stay home with their twins, born in 2003. To make it work financially, they refinanced with a low-rate 3/1 adjustable-rate mortgage to hold down their monthly out-of-pocket costs. But that was a "ticking time bomb," says Jim. After three years, the rate was sure to go up and no doubt bust their one-income budget.

A move to Florida solved the dilemma. Jim, a Web-site designer, found a new job with Northrop Grumman in Orlando. The Comphers promptly sold their townhouse this past December -- the value had jumped to $377,000 -- and moved to Oviedo, 15 miles outside of Orlando. Their new home is bigger, sits on a kid-friendly cul-de-sac, has a big backyard with a pool -- and cost just $299,000. "It’s the Leave-It-to-Beaver experience," Jim says. Their $1,700 mortgage payment is about the same as it was in Virginia, but with a 30-year fixed-rate mortgage, there’s no hurry for Jen to return to the work force. A bonus: Jim traded an hour-plus slog to work in Virginia for a 15-minute commute.

Homeowners in pricey markets are sometimes stunned by what their money will buy elsewhere. Linda Sherrer, a Jacksonville, Fla., real estate agent, recently helped dozens of homeowners relocate from Santa Barbara, Calif. The $650,000-to-$700,000 (California) homes her clients sold "are our $110,000 homes here, with linoleum floors in the kitchen," Sherrer says. "When they saw our $650,000 homes, they couldn’t believe the granite and marble."

The only wrinkle: When you’re used to expensive real estate, it’s easy to pay too much in another market. "Everything looks so cheap that you’re not as careful as you ought to be," says Al Stinson, chief financial officer of Fidelity National Financial, in Jacksonville. He says that he probably overpaid when he traded a 3,400-square-foot house in Santa Barbara for a similar-size house in Jacksonville that cost about one-third as much. (But not to worry: He still sold it for a profit when he traded up a year later.)

Cash out and downsize
Who else might want to seize the opportunity to take profits? Anyone with more house . . .

16 Comments:

At 12:07 PM, Anonymous Anonymous said...

I have a real problem with articles like this. It feeds the illusion that it is easy for average folks to cash out their home equity and profit from this Real Estate bubble. The vast majority of Americans are going to get burned. The bubble is not just located in a few blue states but is a national.

Why should a handful of luck folks profit so handsomely???

 
At 3:33 PM, Anonymous Anonymous said...

I believe that the true deception of the Greenspan Fed is to indirectly tax the average home owner. The more a property value or assessment rises the more the home owner feels rich(on paper). However, in the end the home owner ends up paying higher property taxes to its local goverment. Include the high cost of gas and its taxes associated to the price and you've got the perfect hidden taxes that the government needs so badly from all these average joe's.

 
At 10:37 AM, Anonymous Anonymous said...

( I believe that the true deception of the Greenspan Fed is to indirectly tax the average home owner.)

The average home owner is taxed less than others. he pays less than his fair share of taxes. The renter pays for it, since he cannot deduct any of the interest on mortgage payments, that a house buyer can.

 
At 1:11 AM, Anonymous Anonymous said...

Hey. I'm looking for a couple of good fly patterns for medium to slow water streams. Any comments?
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At 1:17 AM, Anonymous Justin said...

Hello. Just looking for some good fly patterns for still water lakes. Any comments?
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At 2:06 AM, Anonymous Justin said...

Hey. I'm looking for a couple of good fly patterns for medium to slow water streams. Any comments?
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At 4:14 PM, Anonymous ideas opportunities said...

You gave me an interesting idea. Thx.

Steve @
http://www.lifeincome.org

 
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