Is It Time to Sell Your House?

In an effort to research the latest ”crisis du jour,” I typically peruse several different financial media websites.  Today when I opened www.cnbc.com, I saw in big, bold letters “Home Prices Fall in May, Erasing Four Years of Gains.”

First of all, the 0.9% drop in home prices in May by itself did not “erase four years of gains.”  It was simply enough of a drop in prices to fall below the average of all home sales in 2004.

The second, and more important, issue to ponder is this: What if the price of your home was listed everyday, just like stocks?

For years Americans have been told - or most have assumed anyway - that the values of our homes would never decline.  It is now obvious that this is just not true.

There have always been people who have been able to take something, make adjustments, updates or major fixes - it does not matter the product - and turn around and get more than their cost of inputs.  This is Capitalism.  Many who can swing a hammer or slosh a paint brush have tried to do this in the housing market over the last several years.  Some, after lots of hard work, money or both, have made good returns doing this.

And yet, just as with the beginning of any “investment bubble,” it got easy, almost too easy.  In 1999, it was easy to make money in the stock market.  In 2003, it was easy to make money in the housing market.  We were all either trying to “flip” or we knew someone who was “flipping.”

It is a basic economic principle that capital flows to where expected returns are the greatest. That works on two levels when it comes to housing.  There are two reasons to buy a house.  Either you think it will have good resale value someday or you have decided that a particular home is your dream home, and therefore has emotional value.  (With emotional value comes the flow of capital to put new countertops in the kitchen, new floors in the bathrooms, a new roof, a new furnace, etc.)  You have an expected return, whether financial or emotional,  that is associated with the house that you have purchased.

Now that the housing market is at a four-year low, are you looking to sell your home?  Are you thinking, “Should we take a look at a different house because ours has lost value?”  No, you wouldn’t do that; it would be ridiculous to do that.  Then why is it that we feel compelled to sell stocks when the stock market is at the lowest point it has been in two years?

In order to be successful investors, we must begin to realized that selling stocks at their lowest point in the last two years (or however many years) would be even MORE ridiculous than selling a house when the markets are down.  Why?  Because the capital markets - stock-based markets - have a dramatically higher expected return over time than houses do.

1. Invest with the future in mind, not the present

2.  Diversify

3.  Be Patient

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