Sell house and rent?

[StarTrekDoc]

Absolutely and it sounded to me like OPs husband is trying to avoid being the average Joe. It also didn’t sound like they have kids they are uprooting etc hence my thought cashing out early is worth considering.

Yes -- and it requires a reasonable plan and action items--- it doesn't appear they are at that point, hence the rec -- stay pat.

[Tim]

Just a note: Sometimes moving back home doesn't work out. Home changes from your previous fond memories.

[StarTrekDoc]

I want to give a little more context to why I'm still on the fence:

and I keep telling him we can exit even sooner if we just use part of the $1.5m to pay off his remaining $189k in student loans. He just hates missing out on the "free money" from the state.

and this is the root of the issue -- uncertainty. Make goals, make plans, then take actions based on those goals and plans. The market and job satisfactions can be modifiers into those actions; but you have issues with the goals and plans -- which make actions difficult.

We and entered contract with new home in 2020 for $2M which is today worth $3.5-4M and no way in the affordable/comfortable price range we entered 2 years ago.
We sold old home last year at $1.95M which is now worth $2.8M.

--real estate is all over the place and uncertain.
-wife asked us what's our 'make us move price'. My answer was -- where would we go? We have no goals beyond SoCal. hence -- no 'make us move price' exists at this time.

[JBME]

even with the new information I'd stay put. I'm not sure you have priorities straight if you put as much as you say you did in renovations and he didn't take all of the money he made while killing it and get rid of those student loans.

[bovie]

...a house that we think is overvalued - we would never pay this much for it - we couldn't. It doesn't make sense to us that people are paying this much for these houses.

You've gotten a lot of great advice so far. My take that pretty much just summarizes it: Partner needs to get a grip, try to remove the emotion from this (admittedly emotional) decision, and don't sell until you know when/where/if you are moving.

The numbers and good ol' fashioned common sense strongly support this.

I also just want to specifically point out that your statement above is completely irrelevant--it matters what the market will pay, not what you would pay, or whether it makes sense to you what others are doing.

And if you're afraid that we're in a massive bubble and primed to re-live the GFC tomorrow where your appreciated value will be wiped out, well, we're not. The simple economic reasons for this have been laid out.

You are holding a mortgage on which you currently net a 6% gain by simply making your payments. You'd be hard-pressed to find a new place to live in town that was double the payment and half as nice.

I honestly don't understand how it's even a consideration for you two to sell right now.

[White.Beard.Doc]

I like the reframing I saw some folks mention.

Inflation is 8% per year right now. Your mortgage is less than 3%. If inflation continues at the current rate, and the house goes up at the rate of inflation, then you are earning 5% on the amount you have mortgaged, and 8% on the rest. And you and your partner get to enjoy living in your beautifully renovated house while it earns all that passive growth in your net worth.

Of course, no one knows what will happen with inflation or with real estate prices, but what I laid out above could be just as likely as many other scenarios. We invested in real estate over the years, and inflation and leverage gave us 25% returns, on average, over the years. The results have been amazing!

Once you start to have significant wealth, whether it is tied up in the market, or tied up in real estate, you carry the risk of those investments losing some value. This may be a new phenomenon for the two of you, the feeling of significant wealth. It is time to get comfortable with that risk. That is what it means to be invested in stocks and real estate. Your net worth will fluctuate, but if you invest wisely, despite the fluctuations, over time your wealth will grow.

[Jaqen Haghar MD]

The GFC was caused by people taking out giant, exotic, convoluted loans to pay for houses they clearly couldn’t afford. This drove the market up like crazy. But then the devil eventually called in the margin loans.

The lesson was learned, as it usually is after a specific financial crisis. This is why the the same type of financial crisis rarely repeats in a generation.

Lending standards have been reinforced and are strict during this market rise, and people are buying these homes with cash quite often these days. The market will undoubtedly cool, but the rise is more of a supply-demand issue between well-heeled buyers and sellers, so a true hard crash is pretty unlikely.

The next financial crisis is on the horizon, and it’s likely something none of us have seriously thought of. That’s part of the recipe needed for a big crash.

There is cyclical problem that hasn’t happened in a very long time. So long, that it’s youngest participants have passed away, and it’s memory so distant that it isn’t even a realistic possibility in the minds of the population.

[White.Beard.Doc]

Thinking about your situation a bit more, if you want to get your money out of that house, to reduce the risk of losing some of your equity, that could be a reasonable plan. You sell now and you move to a more modest rental. You then have all of that cash in hand. A correction is coming in the RE market. It always comes to a correction, eventually, and it seems likely that the currently irrational price increases will be followed by a correction.

The correction in RE prices may be a soft landing or a hard landing. No one knows. The risks in selling now are that your rent goes up quite a bit over the next few years. If you consider that risk and you feel that is a lower risk than the risk of losing some of the equity you currently have at today’s prices, then selling is reasonable. It will be quite a hassle to move, potentially multiple times, but only you can determine if the move is worth it to lock in your RE gain.

[Dont_know_mind]

There is cyclical problem that hasn’t happened in a very long time. So long, that it’s youngest participants have passed away, and it’s memory so distant that it isn’t even a realistic possibility in the minds of the population.

Did you mean war in Europe or more generally conflict between democratic states and totalitarian ones ?

Do you think Xi is similar to Putin?
I’ve been thinking about that lately and what that means if anything. What do you think of China and how that impacts on the Ukraine war?

Sorry to derail thread slightly OP, but another reason to be in cash! (jk). Compared to now, 2008, everyone seemed optimistic, maybe even euphoric. China was going to take over the world, in a good way.

[Dont_know_mind]

Thinking about your situation a bit more, if you want to get your money out of that house, to reduce the risk of losing some of your equity, that could be a reasonable plan. You sell now and you move to a more modest rental. You then have all of that cash in hand. A correction is coming in the RE market. It always comes to a correction, eventually, and it seems likely that the currently irrational price increases will be followed by a correction.

The correction in RE prices may be a soft landing or a hard landing. No one knows. The risks in selling now are that your rent goes up quite a bit over the next few years. If you consider that risk and you feel that is a lower risk than the risk of losing some of the equity you currently have at today’s prices, then selling is reasonable. It will be quite a hassle to move, potentially multiple times, but only you can determine if the move is worth it to lock in your RE gain.

That’s the classic market timing dilemma:
involves being short relative to a neutral position (eg owning a house to live in for a lot of people), due to a combination of myopic risk aversion (fear of a bear market) and belief in overvaluation- and hence implicit belief in reversion to the mean. This combination results in the participant being short an asset (relative to the desired allocation) and foregoing the return of that asset for the period. But I guess this is why we get the risk premium for owning the asset- we take risk! So I guess it hinges on when mean reversion occurs.

What has seriously stuffed me up a few times in the past is when things have moved to a new higher mean. So I am super paranoid about mean reversion as an argument in being short anything with a positive expected real return over time. Also, I feel a lot of the time, it’s often myopic risk aversion and mental accounting tricking me.

The prospect theory articles are some of my favourite finance articles (refers to stocks, but applies to all risk assets, including real estate):

https://www.nber.org/system/files/wo...4369/w4369.pdf

http://piotr-evdokimov.com/bt.pdf

I revisit them from time to time when I’m trying to figure out if my gut feeling is onto something or being tricked (again).

[StarTrekDoc]

One can really get into the weeds of timing and risk of bubble vs real estate correction in the new location vs bubble risk at a vhcol. ...at the end of the day, it's timing and time out of market if one sells and intention to return to market in 'near' future.

ultimately op and spouse need to get together an set goals then make financial decisions

[CordMcNally]

If you want to sell and move to a LCOL area then it makes sense. If you want to sell and rent in the same area then that doesn’t make as much sense to me. At that point, you’re just gambling. If housing prices collapse then I’d bet the stock market will be going down, too. I’d continue with the mortgage you have at the rate you have if you’re not changing your actual location.

[AR]

-wife asked us what's our 'make us move price'. My answer was -- where would we go? We have no goals beyond SoCal. hence -- no 'make us move price' exists at this time.

Of course it does. It is an amount that no one would actually pay, but there is absolutely and amount of money someone could pay you to get you to clear out in a week. I'm confident 20 million would do it. I'm also confident that is more than it would actually take.

[StarTrekDoc]

True there's probably a setpoint. We just don't have one set and really don't want one. I'm sure if theres a knock at the door with such an offer we'd be game. Same chance of us getting a lottery ticket winner too

[Jaqen Haghar MD]

Did you mean war in Europe or more generally conflict between democratic states and totalitarian ones ?

Do you think Xi is similar to Putin?
I’ve been thinking about that lately and what that means if anything. What do you think of China and how that impacts on the Ukraine war?

Sorry to derail thread slightly OP, but another reason to be in cash! (jk). Compared to now, 2008, everyone seemed optimistic, maybe even euphoric. China was going to take over the world, in a good way.

I think we are about due for a real global dust-up at some point in the future.
I think Xi is more calculating and realistic than Putin. Putin is caught in a bit a a loop of 1950s propaganda in his head. He longs for Soviet glory. He’s ruthless, but personally sensitive and easily swayed by emotion and perceived disrespect.

Xi is more practical and calculating, but knows that in the end, The US is standing in China’s way, long term.

China will play the smart, long game, knowing that economic success is the foundation to global power. The war in Ukraine is likely beneficial to them, as it consumes western resources and draws us closer to direct conflict away from them.

It would be best to let the US exhaust some of its effort and resources on a broad European conflict and/or direct conflict with Russia, before staking their claim to the Pacific and asserting itself fully, while the US is partially distracted and spread thin. Then it will be a win either way. They get that sphere entirely outright, or we fight about it, and the fight is inevitable anyways.

Sun Tzu would say, when equally matched or superior.. attack. They are not quite there, but they are catching up fast.

Hard to plan for these things financially though, too many variables and potential actions and unintended reactions.