Financial Reference

I don’t know if you’ve seen the new show on TLC called “Flip This House.” I haven’t, but I think I can figure out the premise: someone purchases a house, puts some elbow-grease into it, and tries to sell it for a profit — an amazingly common theme in this crazy time.

Every time I open a newspaper or magazine (or watch TV) I hear about how much people have made in real estate or how dumb they are for investing in real estate right now. For example, last month’s Money magazine featured condo flippers. Some people are buying condos that won’t be built for years with extreme leverage. This is crazier than being a tech speculator in the late 90s. At least the techies were not as leveraged, had a market to sell into when the crash came, and didn’t have to pay huge transaction fees.

But the really strange real estate conversation is: should you sell your home and rent? It belies the real change in philosophy towards housing: people are looking at their homes as an investment rather than a place to live. Yes, housing is overpriced, but people should not be selling their houses because they think they are overpriced because:

(1) The transaction costs can eat away at any difference between the price and true value of the home.
(2) Even if the housing market is overvalued, that does not mean that after you sell, the value of your house will decrease. Trying to time a market — even if it’s overvalued — is hard.
(3) There are other reasons to own a home rather than rent — like freedom, attachment, and pride of ownership.

Even though real estate is probably overpriced, you shouldn’t sell your house to rent. Instead of looking at a house as a sure road to riches, if you see it as a place to live, you’ll be much happier with your return.