Real Estate: Buy, sell, hold?
Every homeowner must adjust to the new realities in real estate. How to think through your three options.
By Cybele Weisser, MONEY Magazine staff writer

NEW YORK (MONEY Magazine) - Signs are a-popping that the era of explosive home-price gains is kaput for at least the next few years.

In the past four months, the median asking price has fallen 5 percent or more in Boston, Cleveland, Los Angeles, Miami, Phoenix and Washington, D.C., reports blogger Ben Engebreth's Housing Tracker Web site, which compiles weekly data on 49 cities.

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Across the United States, the number of existing homes sold fell 1.7 percent in November, while the supply of homes continued to tick higher.

Real estate agents in formerly redhot markets like San Diego and Boston say that open houses are getting little traffic.

"At the height of the frenzy, properties sold after one to three days on the market, with multiple offers," says ReMax realtor Mary Kaljian, whose Los Banos office is 75 miles southeast of San Jose. "Now we are looking at six to eight weeks -- or longer. It's becoming a buyer's market."

The good news is, there aren't a lot of sound reasons to think real estate is ready to bust. Home prices are what economists call "sticky" -- unlike stocks, homes can't be unloaded with the click of a mouse. And huge demographic forces continue to favor real estate: Baby boomers and first-generation Americans are still buying, and demand exceeds supply in many places.

In addition, local job markets remain healthy in most major metro areas, notes David Seiders, chief economist with the National Association of Home Builders.

Here's one big fear: If enough of the many homeowners with adjustible-rate mortgages are forced to sell quickly when faced with interest-rate adjustments that raise their monthly mortgage payments, the rush to sell could intensify any bust in their local market.

In addition, condo-crazed towns like Phoenix and Fort Lauderdale -- where more than 15 percent of recently purchased homes are owned by investors -- could be more vulnerable to steep declines than areas heavy with owner-occupied homes, since investors may be more likely to sell at the first whiff of trouble.

Faced with these realities, what should you do? Here's how to think through your three options. [This article is adapted from the February 2006 issue of MONEY Magazine...for the full text click here.]

Thinking of selling?

Go ahead, sell. If you want to move on in the next year or two, consider selling sooner rather than later. Obviously, don't cut and run in a panic.

But if you're fairly sure you won't want to be in the home -- you're on the cusp of retiring, say, or the kids are leaving the nest --it can't hurt to pocket your gains. "Prices aren't likely to go up from here," says Wellesley College economist Karl Case.

Same goes for investment property you don't think you can afford to hold on to during a sustained period of slow to no growth.

Price it right. Just because the neighbor sold his house for $450,000 six months ago doesn't mean yours can fetch $500,000 today. "In a seller's market, you can push the envelope on pricing," says agent Robert Byrne of Needham, Mass. "But if there's a lot of competition, you need to look like a good value."

Crowd psychology can be crucial, so consider pricing a notch under what comparable homes in your area have sold for lately. "Properties that are undervalued get pushed up to value or above because there will be more than one person interested," Byrne says. "Once buyers get drawn into a negotiation, they get focused on winning the house and often lose track of the price they pay."

Thinking of buying?

Go ahead, buy. Whether the housing market is up, down or sideways shouldn't be the deciding factor for purchasing. "Think of a home as another consumer durable, like a refrigerator," suggests Case. "When you need to buy a new fridge, you think about the service it'll give you, not whether the price is going to go up or down while you own it."

If something in your life is pushing you to buy now -- baby on the way, job transfer -- do so with peace of mind. In a flat market, you're still getting value out of your home simply by living there. Even if prices plummet, all's well as long as you can keep making your mortgage in tough times. "The people who get hurt in a falling market are the ones who need to sell as it's falling," says ReMax chairman Dave Liniger.

Again: Price it right. You no longer need assume a seller's asking price is the final price. But don't expect a slew of fire-sale bargains right away. As long as the local economy is in good shape, sellers are typically in no hurry and can hold on for months before dropping their prices.

"Unless you know from recent comparable sales in the area that something is really mispriced, offering 20 percent less than asking will often just piss off the seller," says New York City real estate consultant Kathy Braddock.

Adds Roy Grimm, a Sedona, Ariz. broker who only represents buyers: "If something is priced well, I'm delighted to settle at 3 percent to 4 percent off the asking price."

Thinking of staying put?

Cash out with caution. When interest rates were low and home prices soaring, you could cash out a big chunk of equity and get much of it back (on paper, at least) within a few months. Kiss that good-bye. If you're going to borrow against the value of your home in the near future, make sure it's for things that create long-term value, like a child's education, not a TV.

Don't bet your retirement on the ranch. Pouring your savings into real estate instead of stocks may have seemed smart when home prices were soaring in the double digits. But historically, real estate has appreciated at a lower rate than stocks -- 5 percent to 6 percent a year, only a percentage point or two above the rate of inflation.

All the equity you've accrued over the past few years won't suddenly disappear, but you should temper your expectations for how much more you'll see in the future.

Don't over-renovate. In a soft market, a top-shelf renovation isn't going to pay for itself. There's nothing wrong with buying a high-tech European dishwasher if you like and can afford it, but do so for yourself, not because you think it'll add $5,000 to the value of your home.

Make sensible improvements to your home -- and then sit back and relax. "Enjoying your house and community," says Gabriel of USC, "is the most important, legitimate reason to be a homeowner."

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This article is adapted from the February 2006 issue of MONEY Magazine...for the full text click hereTop of page

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