05 Feb 2009

Should You Sell Your House and Move Into an Apartment?

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A Free Advice reader wrote and told me he was planning on downsizing by selling his current house, moving into an apartment, and then buying a smaller house once he found a good bargain. He wanted to know if there were any snags with this plan, given my economic outlook. Here is what I said:

I definitely agree that downsizing your basic monthly expenses is a
great thing to do, and so in that respect getting into (first) a lower
rental payment and then (second) a lower mortgage payment, is a great idea.

I think it’s also true that buying and selling a house might be more difficult as time goes on, because of all the interventions in the bank sector. Just to give you an example, if the government forces banks to take a haircut (what a cute term) on their mortgages for people who make less than blah-blah per year, well heck if I’m a bank I don’t think I’m going to want to give out mortgages to poor people in the future. The government might just come in a knock off 20% of the principal again.

So because of that stuff, it’s true that if you are going to sell at some point, you might want to hurry up and get out of Dodge while the rules are still being obeyed.

My only concern is that there could be serious price inflation over the next few years. In that scenario, you wouldn’t want the major inflation to hit while you were in between houses with your money sitting in bank CDs or something.

I don’t mean to patronize you but let me just make sure you get what I’m saying: Using big scary numbers, let’s say that over the next 3 years, all prices and wages roughly double. In that case, you actually would do well to have a big fat mortgage on a nice house, because your monthly mortgage payments (assuming you have a fixed-rate mortgage) are going to stay the same, while your income will rise. It’s not so much that you welcome the inflation, but it is a big hedge for you to have a secured, fixed-rate loan denominated in dollars, if the dollar tanks.

Now if you were able to sell your current house, and then buy the smaller house, before any of the poop hits the fan, you would be fine, because you’d have that cushion with your second mortgage. But if the major inflation hit while you were in between houses–and you had your equity from your first house tied up in things that didn’t respond well to the rising prices, like bonds–then you could really take a hit.

So what is the result of all this hand-wringing? I would mention the possibility of renting out your current house while you live in an apartment. So long as you can rent it for more than you have to pay in rent in your apartment, you are still reducing your monthly expenses, even if you can’t rent it out for enough to cover the mortgage payment. This way, if serious inflation hits while you are still in your apartment, you will still have a big mortgage that becomes relatively lighter when the dollar takes a beating.

It’s a huge decision, obviously, and it would be bad if you got stuck with your first house and couldn’t find a buyer when you wanted to buy your second one. If you can sell it now and are happy with the price you get, maybe that’s the overall wisest thing.

But if you list it and find that only vultures are making you low-ball offers, you should seriously consider hanging on to it and renting it out while you move into the apartment.


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