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With 3-Plus Years to Full Housing Recovery, What If You Want to Sell Now?

NEW YORK (TheStreet) -- Yes, home prices have rebounded nicely from the depths of the recession, but in many major markets it could take three or more years to get back to the peak prices of 2007.

That presents the owner who wants to move with some tough choices. But selling now, at a loss, is not necessarily the bad move it looks like at first glance.

The new home-price assessment from Zillow.com says prices in half the nation's largest markets will not get back to pre-recession prices "for another three-plus years." One reason is that as markets slowly return to normal, prices gains have slowed from the double-digit levels of some recent years.

Nationwide, prices rose 6.3% over the most recent 12-month period, still a healthy clip by historical standards. But the pace is expected to slow to 4.2% by early next year. Zillow expects the average home nationwide to hit its pre-recession peak in 2.7 years, but that it will take longer in half the metro areas.

Some will take a lot longer -- including Minneapolis-St. Paul, where the break-even is projected for 2028, another 14.5 years, or Kansas City, Mo., at 12.5 years.  The situation looks even worse if inflation is factored in, because returning to the peak price still means missing out on all the gains that could have been realized since 2007 if the housing crash had not occurred.

Also see: Your Home Investment Has Returned Zero in 10 Years

You could argue, of course, that those peak prices were the results of a bubble, and were therefore unjustified. That may be reassuring to people who bought well before the bubble and realized the peak prices were outlandish, but it's not much solace for anyone who bought when prices were in the stratosphere.

The news isn't uniformly bad. Denver, Pittsburgh, San Jose and Austin have already matched their peak, and Houston, San Francisco and San Antonio are nearly there.

About a third of homes with mortgages have negative equity, which means owners owe more than their homes are worth, says Zillow Chief Economist Stan Humphries.

"But there is a silver lining as we navigate these tricky middle innings of the recovery," he said. "Because home values remain so far below their peak levels in so many areas, it is still possible for buyers to find bargains."

That begs the question: What if you are both a potential buyer and a potential seller?

Many homeowners' gut instinct says to hang in there until the home is worth at least what was paid for it. And many underwater owners have no choice, because they would rely on the sales proceeds to pay off the mortgage.

But in some cases the home, though worth less than was paid, could nonetheless fetch enough to pay off the mortgage balance. That can happen if the owner had made a significant down payment and if years of mortgage payments had shaved the debt.

A homeowner in this position would still lose money on a sale -- perhaps all of the down payment. Other homeowners could tap savings and investments to make up the difference between what the home fetches in a sale and the loan balance.

Also see: Mortgage and Housing Outlook at Midyear Is a Muddle

For these folks, getting out is possible. It might be worth taking a loss on the home to move for a better job or a much more desirable living situation. (Unfortunately, it's not possible to take a tax loss on the sale of a primary residence.)

A homeowner contemplating a money-losing sale should also remember that the next home is likely to be more expensive in two, three or four years than it is now. So what you gain by holding off selling the current home until prices rise may well be offset by having to pay more for the next home.

In a perfect world, the underwater homeowner would sell a home that's not likely to appreciate very fast to buy one that will. This would be like selling a losing stock to buy one with better prospects. On the other hand, it might not make sense to sell a home in a fast-appreciating market to buy one in a slow market.

An owner who really wants to move and just can't make the numbers work out favorably can consider one other option: buying a new home and renting out the old one until conditions improve. While this can look good on paper, very few people can do it, because it generally requires getting enough rent to cover all costs in the old home, including mortgage payments, and having down payment money for the new home and the ability to get another mortgage.

But the homeowner who feels trapped underwater should weigh the options. Though many people will be stuck in their homes until prices recover fully, some can wriggle free, and without a financial catastrophe.

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