Aug. 26, 2011

Sell Now or Wait: A Hawaii Homeowners Dilemma

Whether the subject is the housing market, gold bullion or internet stocks, the psychology of investors often traces a disturbingly familiar pattern. When houses (or stocks, or bars of gold) are hot, many investors simply cannot wait to get their hands on them, and in many cases money is no object and objective methods of valuation are amply ignored. While a great many people can (and do) make money through buying and selling in such overheated markets, those left holding the bag after the bubble has burst are the ones who experience true pain and steep financial losses.

The run up in the Hawaii housing market that has been experienced over the past few years, and the housing recession we now find ourselves in, is a prime example of this type of investor mentality.  During the boom years, many people who already owned their primary residence branched out into the world of real estate investment. In some cases this meant buying up abandoned houses in depressed areas, rehabbing them and reselling them at a profit. In other cases this form of investment simply consisted of buying condos or homes in the pre construction phase, in the hopes of selling them for a profit after they were finally built.

While this strategy paid off for many Hawaii real estate investors, and many people became immensely rich betting on the boom, others saw their fortunes change rapidly when prices began to stagnate and in some cases decline sharply. While the pain was great for all such investors, the financial woes were often magnified by the amount of leverage used to make the deals.  The recent downtown in residential real estate prices has found many real estate investors and house flippers owing more on their property than those homes and condos are worth. This untenable situation has led to record numbers of foreclosures and rising bankruptcies in the areas hardest hit, including many parts of California and the greater Las Vegas region. 

This same scenario is being lived out on a smaller scale by many homeowners who purchased their properties at what turned out to be the peak of the market.  The reasons why home buyers bought at the peak are many-in some cases it was simply a matter of bad timing, while in other cases home buyers felt compelled to purchase now because they feared that prices would rise even higher. Unfortunately many of those who purchased at the peak of the real estate market also financed their purchases with little or no money down, resulting in very little equity to fall back on in the case of the current downturn. 

Many of those homeowners are now faced with the dilemma of whether to sell those homes in the midst of the current downturn, or try to hold on in hopes of better times ahead. Of course each situation is different, and this important decision is one that every homeowner will need to make for him or herself. Those who find themselves owing more than the current value of the property may be forced to sell even in the face of falling prices, especially if an adjusting mortgage interest rate has made the payments un affordable.

Those homeowners with some built up equity on their side may have a bit more flexibility, but they too will have some hard choices to make. In some cases, such as an imminent move or the need to downsize, those homeowners m; also be forced to take what they can and move on. Those who do not have an immediate need to move can choose to hang on in hopes of better prices down the road, but they should be aware that the road back can be a long and rocky one. While downturns in the housing market tend to be much less steep than drops in the stock market, those periods of depressed prices can last an uncomfortably longtime. Recent downturns in the housing market, both in California and elsewhere, have lasted for many years, during which time the average selling price of a home declined year after year. This means that those will homes to sell may have to wait a longtime before recouping the value of their biggest investment.

Posted in selling
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