The Housing Market Is Smoking Hot: Should You Sell Your Home and Buy Another?

Putting money in your pocket only makes sense if you're going to be able to hold on to those funds.

2020 is one for the record books. The unemployment rate hit record highs, while interest rates hit record lows. The stock market rose to record highs, while the hospitality industry struggled through record-low demand.

You might expect that the uncertainty and recession caused by the coronavirus pandemic would have spurred the worst year ever for the housing market. However, the combination of limited numbers of homes for sale and low mortgage rates have pushed home prices up. According to Redfin, the median four-week home sales price on Sept. 13 was up 13% from 2019. If home prices in your area have surged, you may be tempted to cash in. Before you call a realtor, make sure selling is the right thing to do.

When selling makes sense

It starts like this: You hear a neighbor sold their home for more than you ever imagined possible. Stories begin to spread about astronomical home prices. You can't help but imagine all that money in your bank account and the things you could do with it.

Unless certain situations apply, you may want to slow your roll. There's no point selling if you wind up paying even more for your new place, or stuck with a property that wasn't your first choice because of the limited inventory. Or, worst of all, stuck with nowhere to live.

Here are some of the conditions that might make selling in a red-hot market worthwhile.

1. You don't plan to buy another home

Say you've decided to move to Costa Rica and live on the beach, travel the U.S. in an RV, or sail the southern coast for a few years. Selling your home for a great price makes perfect sense if you don't plan to buy another home right away. Consider tucking the proceeds away in a safe place (preferably one that's FDIC-insured) until you know for certain that your new living arrangement is as wonderful as you hope it will be.

However, if you want to sell your home and purchase another house nearby, you may lose those financial gains as you'll have to pay more for the new house. Prices are up nationwide.

2. You're moving to a less expensive part of the country

Let's face it, it costs more to buy a home in Chicago, Illinois than in Spencer, Iowa. If you're selling in an expensive part of the country and moving to a less expensive area, the red-hot market will likely work in your favor.

Imagine you live in Chicago, and your home was worth $500,000 last year but is currently valued at $565,000. You move to a city like Spencer (or Kalamazoo, Des Moines, Kansas City, McAllen, or another relatively inexpensive area). You find a comparable home for $300,000. In a situation like this, you're money ahead, even after you've paid the moving and closing costs.

3. If current interest rates offset house prices

It makes sense to sell your current home and purchase a new property if the interest rate is low enough to offset the new, higher cost of the property in question. Let's put aside the amount you could sell your current property for and focus only on the cost of your dream home.

Last year, your dream home cost $332,000 and the mortgage lenders you checked were charging around 4.5% in interest. If you put 20% down ($66,400) and take out a 30-year mortgage, your principal and interest payment each month will be $1,345 and you will pay a total of $218,872 in interest over the life of the loan.

After a 13% bump in value, that same home is now priced at $375,000 and it's miraculously back on the market. The interest rate is now at 2.99%. If you purchase it for $375,000, put 20% down, and take out a 30-year mortgage, your monthly principal and interest payment will be $1,263. You'd pay a total of $154,750 in interest over the life of the loan.

The home costs roughly $43,000 more than it did 12 months ago. You'd still have to pay closing costs, but the lower interest rate means you'll pay $64,122 less in interest over the life of the loan.

Should you sell your home?

Buying and selling in a red-hot market is fraught with questions. If you don't plan to buy another home right away, will selling now leave you with enough money to finance what you want to do? If you do plan to buy another home, will you be moving to a less expensive area? Or is the interest rate low enough to offset the higher cost? Bear in mind that you're likely to be able to sell your property much faster than you might buy a new one. Try to factor all the associated costs, as well as realtor and closing fees, into your planning.

It's exciting to see your property values soar. The trick is to keep a cool head and make the best decision for your long-term finances.