The decline of Tampa Bay area home values has many wondering: should I sell my home now, or should I find a tenant and rent the home until values increase? As of November 2009, we think that the answer depends upon 3 factors:
- are you financially able to sell today?
- do you want rental property in your portfolio?
- do you think homes will be worth more soon?
Are you able to sell today?
The rapid decline has many Tampa homeowners in a bind - if you purchased with less that 20% down during the boom, or if you re-financed since 2003, then chances are you have little or negative equity. Selling at current Tampa values might require you to take a loss and potentially write a check; whereas becoming a landlord might require you to cover the monthly shortfall between the rental income and the true carrying costs.
Add Tampa Rental Property to your Portfolio?
Owning rental property is an important compliment to long-term wealth building, but there are some disadvantages to consider. Are you ready to become a landlord? Do you have the time and temperament to deal with tenants, repairs, damages, attorneys, statutes, vacancies and evictions? Are you aware of the accounting and legal requirements for landlords? Will you maintain separate accounts for deposits? Property taxes will increase when the home is no longer a primary residence and the homestead exemption is removed. You will need to change the homeowners insurance policy to cover tenants. And be advised that homeowner insurance on vacant homes is exceedingly expensive. It is nearly impossible to sell a home while occupied by a tenant, hence you are committing to the property for at least a year regardless of market conditions or your personal circumstances. Since so many homeowners cannot sell and have offered their home for lease, the excess inventory has resulted in lower rents. Maintaining rental property is a long-term strategy and the true carrying costs must be carefully calculated.
Will homes be worth more or less a year from now?
While there is no crystal ball, several economic forecasts indicate a further decline of 20% from today’s homes prices in Tampa. If you are unhappy with current values, how would an additional 20% loss impact your plans? Hence a home worth $200,000 would decline to $160,000 according to current forecasts. While pricing levels will eventually increase and recover, are you prepared to wait years?
What about 2-3 years from now?
While there are many factors impacting real estate values, let’s look at the “ticking time bomb” of adjustable rate mortgages (ARMs). A large percentage of Tampa homebuyers used various flavors of ARMs to buy more home at a lower payment. Most ARMs featured a low initial rate that was fixed for 3 to 5 years, but would thereafter increase to “market” rate plus a 2%-3% margin. Many of these are tied to the LIBOR, a European index that is not controlled the Fed. The last big wave of ARMs was issued at the height of Tampa’s boom market in 2006. Assuming a 3-5 year period of lower/fixed rates, then many of these loans will adjust by 2009-2011. Rather than paying dramatically increased monthly payments for homes that are worth less, many homeowners are opting for foreclosure. The high default rate on these “sub-prime” mortgages, and the resulting “short sales”/ foreclosures are driving Tampa home values down further. As a result, we do not expect to see prices to return to current levels until theses foreclosures work their way through the system and housing inventories decline, maybe by 2013.
Tampa home prices will eventually rebound. Before they increase however, they will drop further. If you are capable of selling now, then be advised that prices may not reach these levels again for a few years. This may be the top of the market until the next cycle begins. There are some good reasons to buy today; and some very good reasons to sell. What are your thoughts? For more insight and advice, contact Team Bohannon today.
- by Dale Bohannon
