Price cuts: should I sell my house during a recession or wait for recovery? A case study

I am not an economist. I cannot predict if we have entered or will enter a recession. But it's hard to ignore the news talking about it (I call it "noise"). Recently I have been approached by a friend who is considered selling their house in order to "take the money and run". So the question became: with the tides turning, mortgage interest rates rising, demand dropping, supply rising, and price cuts increasing, should they hold off on selling the house until the economy turns around? Read on to learn my case study response from the 2008 recession.

Let's meet Sam for this case study

The following case study will not consider all possible angles of homeownership motivation, asset diversification, inflation, equity building, real estate cycles, personal non-financial preferences, or any other number of factors that go into a decision sell a piece of real estate.

What the following case study will consider is one specific journey that may either resonate with other people on their FIRE journey or provide an illustrative way to look at a problem and assess possible outcomes using your own circumstances.

This is the story of a solo individual, named Sam. Sam does not crave homeownership. They previously lived in a residential home that they purchased in Denver, Colorado but moved abroad 2 years ago. Since then, they have been renting the Denver house out to tenants. The rent covers all of the expenses and turns a small profit each month. The profit is mostly reinvested into the property through repairs or improvements. The Denver house is Sam's only piece of real estate that they own. Sam has been listening to FIRE podcasts (like ChooseFI) and decided that they prefer renting their primary residence rather than buying. Their monthly outflows for their current rent are roughly equal to the monthly outflows they would have if they owned the property that they live in (this is not relevant to the case study but I know someone will ask about it anyway).

Sam recently put some spreadsheets together to track their net wealth and discovered that the Denver house represents 50% of their net wealth due to substantial growth in the housing market. Sam is deeply uncomfortable with 50% of their wealth being tied up in a single asset, and feels that to be able to reach their FIRE goal and live off of their wealth 15 years in the future, they should sell the Denver property. They plan to invest the cash proceeds into the VTI index fund (which can be easily purchased  in 5 minutes on platforms like Schwab, Vanguard, and more). Sam feels more diversified owning VTI as it is a pool of 3,000+ companies versus 1 house in Denver Colorado. 

As Sam has already decided that they want to sell the Denver house, they now face the psychological burden of "an impending recession" (according to the news). They have read in the news that they missed the chance to sell high, and will get a lower price if they list now, either by having to cut the price or having to offer seller concessions to the buyer (or both). Sam's question becomes "should I wait it out since I missed my chance? Should I keep the house a bit longer since it isn't costing me any money to hold onto it?"

Since none of us can predict the future, let's go back to 2008 and put ourselves in the shoes of sellers that may have been asking similar questions after experiencing price cuts, but without any knowledge of what the future would hold. ​

brb going to 2008.

The 2008 recession in a nutshell

I'm not an economist. I don't have lots of smart things to talk about regarding the 2008 recession and housing. I do recommend reading the book The Big Short which was insightful for me. But in a nutshell, 2007 was the peak of US housing prices across most of the country. When the recession hit in 2008, most housing prices across the US tanked by 15% or more (in some places 40% or more). Denver actually experienced some price increases or simple stagnation, depending on the neighborhood. By the end of 2012, the recession was considered "over" meaning that the general sentiment was positive (if you can correlate general sentiment with what the news would proclaim at the time since people are generally effected psychologically with whatever the news is saying). In Denver specifically, housing prices had recovered to their 2007 prices (the first city in the nation to do so). It was not a smooth ride back up though, with 2009 and 2010 facing lots of ups and downs.

Researching public pricing records

I set out to find a sample of properties in Denver, including the neighborhood the Sam owns a house in. I was looking for houses that sold around 2009 and that we can reasonably assume experienced significant price cuts or seller concessions at the time. But I was also looking for houses that sold again sometime 2-4 years later. Giving me data on the "waiting it out". The goal was to find out "if Sam had sold in 2009 and invested the proceeds into VTI would they have been better off compared to waiting a few years, selling, and then investing the proceeds into VTI?". I have not provided the exact addresses I found so as not to invade the privacy of these random homeowners. 

The table below is more important but here is some flavor to the columns:

• Column A was the last known sale price showing in the Zillow public records aggregator and while it was not relevant to my case study, I knew some people might want to know this information. It shows how much prices dropped or otherwise stagnated prior to the sale in 2008/2009. As mentioned above, some neighborhoods actually experienced price increases.
• Column B is what we can reasonably assume was "the bottom price" this seller experienced, most likely taking price cuts to arrive at the final sale figure (many of those price cuts are even recorded in the public accounts I viewed which confirmed my assumption).
• Column C was the price the property sold for a few years later. In many of these instances, the seller still experienced price cuts to their listings between 2010 and 2013. I chose a variety of years to broaden the illustration. It's important to note that we do not actually know the psychology at play during these sales and many of these were not people that "waited it out to sell". They simply sold in both time slots I was researching and therefore gave me pricing in the windows I wanted. 
• Things get feisty in Column D which is the value of Column B if it had been dumped in VTI and never touched.
• Column E is the value of Column C if it had been dumped in VTI and never touched. Note that Column C has later investment dates than Column B so it has less "time in the market" than Column D.
• Column F was not relevant to my case study but is a current reference price for people that would want to know this information. While Zillow Zestimates are not reliable, they give us something to look at which is better than nothing.

Interpreting the outcomes

In all cases except the first one, the seller was better off selling in the "worst time" being 2008/2009 and gaining on "time in the market" with their VTI investment rather than waiting a few years (aka "timing the market").

I can't tell Sam what the right answer is because I can't predict the future. But in response to Sam being psychologically hesitant to sell now, I say "You are weighing a number of factors in whether selling the house is right for you, and what you'll do with the money. Looking at the evidence in Denver during the 2008 recession, if the sellers had sold early and low, and invested the proceeds in VTI, then they would have turned out just fine even after suffering price cuts". Tying this back to our original introduction to Sam: this case study only ends this way if Sam actually invests the sales proceeds from the Denver house into VTI (or another broad based index fund of their choice). If Sam plans to take the proceeds and invest in another residential real estate property (as example) or spend the cash traveling the world in luxury, then this analysis and it outcomes are irrelevant. 

Astute readers will also note that while home prices today seem eye wateringlyy high, they are very disappointing when set next to the returns on VTI.

"BUT you're not factoring in ...."

If I missed one, drop a comment below or send me an email explaining a) what I missed and b) how it would significantly change the outcome of the analysis. You have to keep in mind, this was simply a "should I wait it out" question and nothing more. This was not a blog about "renting vs buying" the roof over your head. However, I am doing that case study with real numbers so subscribe to blog notifications below to get notified when it's posted.

1. ​I did not factor in any mortgage payoff so you could say I just assumed the seller had the mortgage paid off. This was just for simplification and would not move the needle.​
2. I did not factor in any taxes, which in many cases could be true if there was either a) a loss or b) the gain qualified for the primary residence exemption (which Sam will qualify for).
3. I did not factor in any home improvements someone likely spent money on to encourage a sale in a down market, since that is unpredictable.
4. I had to use January start and December end dates for investing in VTI since I couldn't start an investment in other times of the year with the tool I used www.portfoliovisualizer.com
5. I don't really mind that "this isn't the 2008 crisis" and "this is totally different" because this is simply an illustration of "time in the market" vs "timing the market". That's it. The economic factors surrounding housing price cuts or the depths of the cuts (3% vs 15%) would not significantly change the outcomes. What would significantly change the outcomes of this analysis would be a situation in the past where housing prices rebounded faster than the S&P 500. I'm not aware of that ever happening or being likely to happen.

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