More homeowners cashing out

One recent day in sunny Sarasota, Fla., the owner of an 18th-floor condo with picturesque views of the Gulf of Mexico walked into real estate agent Terrence Cook’s office and said, “I’d like to sell it.”

Says Cook of Coldwell Banker: “He’s looking at a double.” As in doubling his money.

But a bigger factor behind the seller’s request to “cash out,” Cook recalls, was a gnawing fear that the overheated Florida housing market may be vulnerable to a price drop. (Cook downplays talk of a real estate bubble.) Rather than risk watching profit melt away if the real estate market turns suddenly chilly — as some economists insist is inevitable — Cook’s client wants to pocket his cash now.

With prices in the hottest housing markets in Florida, California, Nevada, Arizona and New Jersey soaring 20 percent or more in the 12 months ended in March, real estate is increasingly being compared to the frenzied buying of Nasdaq stocks in the late 1990s. The sizzling market - and the riches it is bestowing on homeowners — is prompting real estate investors to address a question stockholders inevitably face when stocks post gargantuan gains: Should I sell and pocket my gains?

To be sure, dumping a house on Main Street in search of profit is a far more complex and emotional decision than selling a winning stock on Wall Street. A stock is just a piece of paper, a dollar amount on an account statement, a ticker symbol. A house is a home, a library of family memories, a roof over one’s head, a status symbol. “It’s your piece of the American pie,” says Walter Molony, a spokesman for the National Association of Realtors, or NAR.

Emotional heartstrings aside, selling a home, no matter how much it has appreciated, is still a business decision that requires thoughtful analysis. “Selling a house is not a $9.95 transaction,” says Lawrence Yun, senior economist at the NAR.

Still, anecdotal evidence suggests that some people have cashed out and many more are thinking about it.

“It is something that we may start to see a little bit more of” as prices keep heading higher, Cook says.

Consider Penny Dorneman. She and her husband recently sold their Connecticut home and moved to Boston. But instead of paying top dollar for another home, they banked their $128,000 profit and rent a $2,885-a-month apartment. “Prices are insane,” says Dorneman, 47. “Is Boston really a 20-times-better place to live than someplace else?”

Art Munson, 64, of Toluca Lake, Calif., also opted to take the money and run. He pocketed an 800 percent gain on the home he lived in for 25 years. He now rents. “Things were getting out of hand with real estate prices,” he says. “I lived through a number of real estate dives, so we decided to take the risk and sell.”

Risk in selling? That’s right.

While selling fast-appreciating real estate may seem like a no-brainer, it is not risk free.

Pros of selling

One benefit of selling in a hot market is you get to transform your home into a winning lottery ticket. A couple can pocket a tax-free gain of $500,000 if they’ve lived in the home two of the past five years. And if prices drop sharply, you’ll be able to get back in the market at lower prices and avoid paying inflated prices to move to a bigger home.

Economists, Realtors and financial planners say cashing out makes the most sense for people moving from high-cost to low-cost markets; retirees looking to bolster their nest eggs; empty-nester parents looking to downsize; and people who truly believe the housing boom will result in a stock market-like bust.

“For people doing it for sound, long-term reasons, it could be the right decision,” says Kurt Brouwer of wealth advisory firm Brouwer & Janachowski.

Another potential plus of selling is you might sidestep financial pain. While housing price drops have historically been far less dramatic than stock losses — (“A Nasdaq-like plunge,” NAR’s Yun says, “has never occurred in the history of housing.”) — there have been a handful of past housing busts in isolated markets that clipped 20 percent off prices and took almost a decade to recover.

Nationwide, however, there has not been one year since 1968 in which the median price of a house declined, the NAR says.

But frothy markets can nose-dive. In Los Angeles, housing prices tumbled 19.5 percent from a peak in 1989 to a low in 1996 after the Southern California economy swooned because of massive layoffs in the defense industry. It took 11 years for prices to get back to their 1989 peak.

Cons of selling

Perhaps the biggest risk of selling, besides having to find another place to buy or paying rent, is selling too early.

“People who listened to bubbleologists (predicting doom) four years ago missed out on huge appreciation,” NAR’s Molony says.

Molony would not rule out future gains for already pricey real estate. He notes that the ingredients required to take the air out of the housing market — economic calamity, a weak job market and expensive borrowing costs — are not present. What’s more, key drivers of housing, such as tight supplies and surging demand from immigrants and well-to-do baby boomers, could keep the housing boom alive longer.

Another downside to selling real estate is that it is far more costly and time consuming than selling a stock. You’ll also lose the tax deduction for mortgage interest.

“The real question,” says Randall Guttery, a professor of real estate at the University of North Texas, “is what do you do with the money” you made from selling your house?

Investment alternatives are slim, he says. The stock market is struggling this year, with the Dow Jones industrial average down 2 percent. And low yields on bonds and money market funds are nothing to get excited about either. That brings us back to real estate.

Says Coldwell Banker’s Cook: “I hate to say you can’t go wrong with real estate, but …”