Hey everyone, the new episode of Tom Talks is out now! This week we cover the new apartments coming to Hemphill Street, highway expansions in Fort Worth, Captain Kirk’s return to space, elderly people being scammed on dating apps, and whether or not you should sell your house in Fort Worth soon.
Check out the video version on Youtube below!
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Should I Sell my House and Rent for a While?
It’s October 2021 and we have had tremendous appreciation in the Dallas / Fort Worth area since the crash in 2008. In the 12 years since the crash, we’ve seen 100% appreciation in a lot of areas. That’s double the historic average of 4% a year.
This increase in value has many people concerned that the market may crash again soon, and this belief is not without merit. If you missed our podcast on the Federal Reserve impacting the housing market, it’s worth a listen. With the Federal Reserve set to taper back buying Bonds, you can bet your bottom dollar it’ll affect the housing market.
The real question is how much will it be affected? I’ve no crystal ball but I believe I’ve got more insight than most as a local Realtor here. Here is what I know…
- In 2020 there were approx. 1,000 people a day moving to Texas
- In 2021 there are approx. 1,400 people a day moving to Texas
- Texas is pro-business (just ask these guys: Joe Rogan, Tesla, Charles Schwab, Amazon, etc)
- In 2021 we saw a 20% increase in home values across North Texas
- Interest rates are at an all-time low
- County Tax Assessors are becoming bullish with appraisals
- Household Income has Increased
- Foreclosures are coming
Our housing inventory has never been lower as we currently have less than one month’s worth of inventory. In a normal market, we would have 6 months of inventory. We definitely need the market to slow down. However, the mass exodus from California and other states is increasing the demand for housing. When the Federal Reserve stops buying Bonds the banks will have to increase interest rates. If you are borrowing $350k and interest rates go up 1.5% you’re looking at an increase of about $380 per month. Property taxes are increasing as well. In DFW property taxes range from about 1.5-3% of the home-assessed value, with an average of 2.7%. This alone will cause people to reconsider how much they are willing to pay for a house.
If the supply chain starts to catch up material prices will drop, which will allow builders to reduce prices if they need to. I think if Texas had the same problems as California, and we were losing our middle class and population in general, we would have a bigger concern on our hands.
In 2008 the median house price was $138,000 in DFW and prices dropped about 5%. Compare that to California where home values in most major cities dropped by 30% or more. I could see values here dropping as much as 10% because they have been increasing at double the average rate since 2008 and because of the 20% jump in value in the last year. Even in the worst-case scenario, I can’t imagine values dropping more than 20%.
The Math on Renting vs Buying
There are a lot of factors to consider when deciding whether to sell and rent or not purely from an investment standpoint. We’ll take the emotion, stress, and time out of the equation and just look at the money.
Let’s look at an example.
Let’s look at Ernie, the entry-level homeowner, valued at $300,000, and Fred, the family man, with his home valued at $500,000. See what I did there?
Tip: You can get a general idea of what your home is worth from Zillow if you’re in a cookie-cutter home. If you want one of our agents to give you an accurate estimate you can submit a request on our website.
If Ernie (E) and Fred (F) are to sell they will need to know these numbers to calculate their real cost:
- Average yearly principal paid (E) $4,200 / (F) $7,200
- Average yearly interest paid (E) $6,400 / (F) $9,600
- Yearly property taxes (E) $7,800 / (F) $13,000
- Yearly insurance cost (E)$1,800 / (F) $2,200
- Closing Costs (E) $21,000 / (F) $35,000
Tip: You should be able to find your principal and interest breakdown on your mortgage statement. You can also use an online calculator. Your property taxes can be found by going to your county tax assessor’s website. In our example, we used a 2.6% tax rate. Closing costs are typically around 7% when it’s all said and done if you go the traditional route.
Real Yearly Cost of Renting:
Let’s assume you sell today and rent for a year while the market drops 10%. For Ernie, that’s a drop in value of $30,000 and for Fred, it’s $50,000.
Calculating the cost of selling and renting:
Closing Cost + Principle (equity you would have had) + Interest * 20% (this is money you would have saved on taxes) + Rent Cost
Based on current rents for Ernie to rent the same house, it would cost $2,000/mo and Fred $2,500. If we plug our numbers into the formula
Ernie’s Cost to rent for 1 year = $21,000 + $4,200 + $6,400*0.2 + $2,000*12 = $50,480
Fred’s Cost to rent for 1 year = $35,000 + $7,200 + $9,600*0.2 + $2,500*12 = $74,120
Cost if you keep the house:
Drop in Value (10%) + Taxes + Insurance – Principal (equity) + Interest * 80%
Ernie’s Cost to stay and absorb 10% = $30,000 + $7,800 + $1,800 – $4,200 + $6,400 * 0.8 = $40,520
Fred’s Cost to stay and absorb 10% = $50,000 + $13,000 + $2,200 – $7,200 + $9,600 * 0.8 = $65,680
Based on these simple calculations, it makes more sense for Earnie and Fred to stay put if the market drops only 10%. If you think it may drop more than 10% or you can get more than what the home is worth it might make sense to sell.
You’ll also want to consider moving costs if you’re hiring someone. As you pay your loan down more money goes towards principal as well. You may save even more by staying. You’ll also want to consider what interest rates might be when you purchase again.
Who Should Sell
Generally speaking, I do not believe the market will decrease enough to merit selling your house to rent for a year. I think home values will drop approximately 10% and, based on our calculations, you will not break even if you sell your house and rent for a year with this decrease.
If you have been thinking about downsizing this will work in your favor as you’ll take less of a hit on the decline and lock in a better interest rate. If you have a higher interest rate and are not in a position to refinance it might make sense for you as well.
I hope this helps! If you have any questions please feel free to contact us!