Selling Underwater Home - Discretionary Move

[Alw1977]

Hi all! We are in need of some unbiased advice to decide if/when we should sell our underwater home and come out of pocket approx. $30K to get into our "dream" home/neighborhood. We purchased in 2006 and our market was hit hard by the crash. We purchased in '06 for $468k and we'd probably sell now for $370k. Huge loss, we'd need to come out of pocket with about $30K cash to make it happen.

On the new house, we'd only have enough to put about 5% down after paying to get out of our current home, BUT we'd be buying in the most sought-after neighborhood in our county while prices are still manageable. Desired homes in this neighborhood go under contract in 2-7 days after listing. So, even though we are losing on one side, we are getting into a neighborhood where values are up 6% in the last 12 months and rising.

This is a discretionary move, done for two main reasons: (i) best school district in county (ie, no need for private schools), and (ii) our current neighborhood has no place for kids to ride bikes and run around, no playgrounds, etc. and 90% of the neighbors are from a foreign country and speak a different language (plus very closed off to outsiders). It's honestly not where I want my kids to spend their childhood. Thoughts are that we are under 40, can always make more $ but kids are only kids once.

Thoughts - I am trying to view this as a business deal. We made a bad deal 7 years ago, and now need to exit the market. Ideas on the wisdom of buying and doing a corporate rental for 1-2 years on current home until market improves/principal paid down more? Is this just really stupid? I can't imagine staying where we are for another 10 years to recover our investment to this point - we really aren't happy.

Thanks!

[Alw1977]

Approx $380K. We would need to use an agent (we will get a higher offer and will sell more quickly - the reality of our market), so commission would be around 4%

[ua_guy]

Now is a horrible time to buy. If you buy at market rates today, you are making the same mistake you made in 2006 by buying a home at the height of the market. While that's not a "sin" per-se, it sounds like the location/neighborhood was a compromise at that time, and it's grown to a point where you feel it's untenable. Make sure you are not making any compromises if you buy a home at today's prices.

My advice would be to wait until the market cools off. I believe this "bubble" to be temporary. It has to be. The real-estate market is very much in recovery still. People who purchased 6-7-8 years ago are just starting to reach a point where they are paying down their underwater mortgages, or where they are able to absorb a small loss to get out. Housing inventory is constrained because buyers are tentative. Many still can't afford to move, or are being cautious. This means high prices for the houses that are for sale, and it's made possible by low interest rates. On a monthly payment, people can afford "more" house when rates are low, so they are more willing to be competitive when buying, and also sellers are able to command higher prices. Interest rates will rise slightly. Inventory will rise too as people get back on their feet.

Interest rates are beginning to rise already as the economy recovers. This is a good thing. The Fed isn't providing free money to banks anymore. Even as the real-estate market begins to cool as interest rates rise, and the "move season" comes to a close this fall, time is on your side. A more normal market is coming.

You mentioned a 6% rise in prices in your dream neighborhood. This is great for the people that live there, as they saw an increase in paper equity. It's horrible for you, who has to front additional down payment and interest/payment to be able to afford that increase in your purchase price. You want to buy low--wait for a chill in the market, or find a distressed buyer.

Secondly-- You will receive well-intentioned advise on here. The answer on whether or not you should make the move is likely to be "no" from this crowd. You owe too much, you don't have enough down/money going into the purchase, and you are probably cutting deeply into savings and/or retirement to complete this "business decision."

That said, happiness is an investment. Only you know if this outlay is worth it. I can tell you from my perspective that market timing is not optimal and that you might get a better deal later on.

You want to be selling now, not buying. You mentioned renting your current home for 1-2 years as a hedge against the cash outlay to get out. That only makes sense if you are able to get into something cheaper so that you are able to recover the money you spent getting into your new home. Ideally you need to sell your current home now, rent something cheaply for 1-2 years, and keep a line in the real-estate market, waiting for the right purchase to come along.

$0.02...

[HappySaver]

I have less of a problem with the loss you're going to take on your current home, than with the fact that you only have 5% to put down on the next home. If you had said you had 20% I would say go for it and don't sweat the loss.

If you really want to leave your current neighborhood, then sell and move even if you need to rent. But you should not confuse the need to leave a neighborhood with the desire to buy into another, very expensive, neighborhood.

[Wino]

Unless you're in Detroit, housing prices should be rebounding. I suggest you stay at least another one or two years until you are not underwater. $30K in one year is take home of $2500 per month (maybe $3300 to $3800 before taxes). Why not pay an additional $2500 per month instead? It will increase your equity, bring your head above water sooner, and if the value goes up, you can recoup the money when you sell.

[scfr]

Thoughts - I am trying to view this as a business deal.

Then wait until you can put 20% down (no PMI, lower interest rate, less chance that you'll end up underwater again). What are you willing to do to make that happen? What if you squeezed every last possible penny out of your budget for a year or two while paying down the mortgage on your existing home, and lowered your sights to a somewhat cramped house in a better school district instead of a dream house in the best school district?

[asmom]

It sounds like you are about about to make another bad deal by trying to justify an emotional decision as a business one. Here is what (I thought) we learned over the past few years:

1. Home values are not always guaranteed to go up.
2. You are not always guaranteed a higher or even a steady income.
3. Put down at least 20% down payment on a home.

If you want to leave your current home, then okay. Personally I would wait until I don't have to come out of pocket to do it. One more year and you can save a little more towards a down payment while decreasing the amount you have to pay to get out of your current place. 12 months could save you thousands of dollars.

P.S. I doubt your kids are suffering as much as you think they are.

[Alw1977]

Thanks to all for the reality check. We have decided to wait until late 2014 or spring 2015 to move. Agree that the preferred course is to put down as much as possible on a new home, so we will save towards that.

[scfr]

Thanks to all for the reality check. We have decided to wait until late 2014 or spring 2015 to move. Agree that the preferred course is to put down as much as possible on a new home, so we will save towards that.

Please keep us posted on your savings progress!

[siggy_freud]

I think you made the right choice. You're okay with taking a bath on $30k for this new home but are the homes in the area you want to buy in likely to appreciate 30k in the next year?