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
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 ...."
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Unfinished human, currently v.5.0. Expecting at least 10 more versions. Aspiring adult.