The red-hot housing market is sparking homeowners’ stress over whether now is the time to sell a house.
Home prices hit another record this summer. Housing inventory remains low, while potential buyers are duking it out in bidding wars.
Those looking to capitalize on the frenzy need to be careful and calculate several variables before making a decision. There are many ancillary costs that come with selling your home and significant tax issues that can erode profits. Moreover, a happy seller can quickly turn into a frustrated buyer if the next living place isn’t already set.
Len Kiefer, deputy chief economist at mortgage giant Freddie Mac, said a first step for homeowners is to calculate the “sunk costs’’ they incurred when they bought their house.
“If you purchase a home, there could be pretty substantial costs associated with that: transaction fees, taxes, closing costs, if you get a mortgage—these things all come with the cost of buying a home,” he said. “In general, the shorter your time in the home, the less time you have to make up for those costs.”
Closing costs typically average 2% to 5% of the loan amount, according to the Mortgage Bankers Association, but a lot depends on the borrower and the loan product. Freddie Mac estimates closing costs on a $356,700 home—the median home price as of August 2021, per the National Association of Realtors—could cost a homeowner more than $8,600.
Dave Schoen, a 56-year-old college preparatory tutor on New York’s Long Island, is among the group of Americans feeling pressure to sell.
He and his wife are fielding inquiries about selling the home they just bought three years ago. They said one investor offered them $200,000 more than what they paid.
So far, Mr. Schoen hasn’t sold. He is concerned about several things, including finding an affordable new home.
“It might be the time to make a move, but again, there’s a lot of uncertainty and we’re not really sure of the right move,” he said.
“‘Make sure you’re taking into account everything you’re going to spend when you move.’”
Those tempted to sell within a few years of purchase should also calculate what costs they will be able to recoup quickly, if at all, said Cynthia Meyer, financial planner and founder of Real Life Planning. Ms. Meyer said there are obvious outlays such as Realtor fees and other closing costs, which could eat into gains. Some buyers forget other costs, too, such as paying for new furnishings when moving into a house.
“Make sure you’re taking into account everything you’re going to spend when you move,” she said.
Ms. Meyer recommends curious homeowners tally the cost of the home purchase in one column, including down payment and home renovation. Then, in another column, add up the potential costs of selling the existing home: things including how much you would pay to move houses, Realtor fees, advertising, home staging and more. If these things exceed the potential profit from selling your current home, you have some further thinking to do—or may need to spend more time in the home.
Keep the calculator out to sort tax issues, which housing specialists say are among the most common pitfalls for sellers. Different state and local tax rules, incomes and time lived in a home all can erode profit.
Many sellers are aware of the home-sellers’ tax exemption, which allows sellers to avoid or lower capital-gains taxes on home sales by exempting up to $500,000 of profit. Still, the exemption has many stipulations. For example, single tax filers must have owned and lived in the house for at least 24 months of the past five years. In addition, a couple must have lived in the house for the same period, and at least one of the spouses must have owned it for 24 months of the past five years.
Meeting those requirements, and qualifying for the exemption, could mean waiting to sell, or trading off the potential gains offered by putting the house on the market.
Home prices in Austin have drastically increased since Chris Schorre, a marketing consultant, and his wife bought their home in Texas’s capital city 19 years ago.
Despite the housing boom in Mr. Schorre’s area and the near-constant interest in their home—“We get offers from investors, one every week, I would say,” he said—the couple said they aren’t considering selling soon. He said that is largely because the couple wouldn’t be able to find a similar home in their area in their budget.
Mr. Schorre also said he is looked into the “perplexing” tax issue and decided that in his own personal situation, the benefits of the home-sellers’ tax exemption would be partially offset by the capital gains they would then pay.
Those bent on selling should keep careful track of home-renovation costs and the paper proof for those upgrades, said Andrew Ragusa, chief executive and broker of REMI Realty in Plainview, N.Y.
“If you have the receipts for all the work you’ve done, bring that to your accountant and say ‘This is how much I spent on adding value,’” he said. “At that point, those expenses are written off.”
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For those who haven’t already lined up a new place to live after selling, many will find that the same housing boom that raised the price of their current home has also raised the cost of a prospective next one. Mr. Kiefer points out the calculation will be different for those considering selling investment properties or vacation homes, as they likely won’t have the problem of then finding a new primary residence.
Freddie Mac’s Mr. Kiefer cautions that owners should carefully assess whether it is more cost effective to buy or to rent, which they can compute on their own with the calculator tool on Freddie Mac’s website. Sellers who are nearing retirement, emptying the nest or otherwise considering downsizing may find additional incentive to move up their timelines, capture the gains sooner and rent for a few years, he said.
If a seller knows for certain that they will be in a certain place for an extended time—say 10 years—then there is more than enough time to recoup costs. The Mortgage Bankers Association recommends people consider staying in their primary homes for at least three to five years. This means that even for homeowners with regrets, like those who recently bought houses sight unseen or impulsively moved to less-populated areas during the pandemic, may find it s most cost effective to stay put for the time being.
“When you do the calculation, that benefit starts to tip toward homeownership for that period,” Mr. Kiefer says.
Write to Julia Carpenter at Julia.Carpenter@wsj.com
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