Q: We’re only upside down on our mortgage by a very little amount, but definitely want to sell our house. With prices going up, should we wait until we don’t have to short sell or should we just bite the bullet and sell it now? Thanks. George
A: This is an increasingly common challenge that families face now that values are rising. The correct answer lies with you and how aggressive you choose to be. I’m going to look at four different scenarios and a couple of pros and cons of each:
1. You wait to sell as a standard sale when you can get an offer that meets or exceeds what you owe.
- Pro: There’s no credit ding, you can eliminate a big financial burden and it’s a great stress relief.
- Con: Outside of not owning a home, there’s not much wrong with this scenario.
2. You wait to sell as a standard sale and the values don’t get to what you need.
- Pro: You can show the bank that you tried to sell as a standard sale; you can still short sell it afterward and you can stay in your house longer.
- Con: If you wait and later try a short sale, your short sale may not completed until after the Dec. 31, 2013 expiration of the Mortgage Forgiveness Debt Relief Act. That mean the sale could be a taxable event (if you’re not able to claim insolvency) and a credit hit. It also could take a few months to complete.
3. You short sell now and values go up afterward.
- Pro: You’re done and can start rebuilding your credit. You probably would be done before the Mortgage Forgiveness Debt Relief Act expires and you took the least risky approach.
- Con: You could have saved yourself the black mark on your credit; it will take at least two years before you can buy again.
4. You short sell now and home values hold or decline.
- Pro: You made the right call on where the market is headed (see Pro from Scenario 3.)
- Con: You take a credit hit for the short sale and must wait two years until you can buy again.
Now, to answer your question. The Bureau of Economic Analysis just revised its figures two weeks ago on the nation’s first quarter GDP – revising downward to 1.8 percent from the 2.5 percent it reported in April. Projections for second quarter GDP are even lower than that, about 1.5 percent. Economists generally believe that a GDP of 3 percent will stimulate hiring and job growth. In addition, the National Association of Realtors reported that existing home sales increased by 4.2 percent in May, and new home sales rose by 2.1 percent during that same time.
So, if the economy is still sluggish, inventory is increasing and interest rates are going up, I’m seeing an indication that housing prices are going to cool off of the current pace.
In your situation, figure out if you think housing prices will increase enough to cover the amount you owe the banks, real estate agent commissions and closing costs. If you have a $400,000 home, you could easily be looking at needing $25,000 to $30,000 more than what you owe. Is that likely? If not, then a short sale would be the decision.