Is It Best to Stay Put Or Pocket Some Profits?

Question: My husband and I bought our home three years ago for $465,000, and the same model house around the corner, which is very comparable to our house, just sold for $1,050,000. I live in an area that is growing rapidly, and my home is in a development with large lots -- something that is hard to find here in Northern California. We are considering selling our home and either buying a smaller home and having a very small mortgage or renting -- we hope that the market will slow and we can buy again when it is more of a buyer's market. What types of questions do I need to ask myself to make sure that no matter what we do, we don't regret our decision in the future? Our goal is to be better off financially than we are now, but I'm scared that if we will sell now we might regret it. Do you know of any fortune tellers who can tell me what the market is going to do?

Randi: Any honest fortune teller would examine the lines in your palms, gaze soulfully into your eyes and reveal that no one knows what the real-estate market is going to do. But I can tell you this much free of charge: It isn't going to keep going up by leaps and bounds forever. Prices might rise more slowly, or level off, or fall.

In Contra Costa County, where you live, the median house price in July was about $656,000, or nearly double the level of six years earlier, according to the California Association of Realtors.

So you're asking yourself the right fundamental question: Should I find a way to take some of my profits off the table? For most people, the answer is probably no. Moving is complicated and expensive. You never know whether you're selling at the top of the market or missing another 10% rise. And many homes contain memories more precious than any capital gain. But if you have the inclination to move and would be comfortable in a less-expensive home, it's definitely worth considering. If you can live mortgage-free and perhaps pay off other debt as well, you will be in much better shape to cope with any future loss of income or unexpected expense. But make sure to add up all the costs of selling and moving before you commit yourself. If you use an agent to sell your house, you'll probably have to pay 5% to 6% in commissions. A new house might also require new furnishings and repairs.

Another word of caution: Even if a comparable home near you sold for more than $1 million, you won't necessarily get such a fancy price. Your neighbor may have been lucky to find exactly the right eager buyer at the right time. The inventory of available homes may have grown, as it has generally in California. (The good news: As of July, the unsold inventory in the Bay Area as a whole was extremely low, enough to last only 1.1 months at the current sales rate, down from an already slim 3.4 months a year earlier, according to the Realtors association. But the situation in your neighborhood may not match that of the Bay Area as a whole.)

Ask a few agents to give you an estimate of the price range for your home. Unlike fortune tellers, they give free consultations in the hope of getting a commission if they eventually sell the house. Ask them to cite recent sales prices for similar homes. Agents tend to be congenital optimists, though, so don't believe them if they tell you that prices in your neighborhood will keep rising forever.

Write to James R. Hagerty at bob.hagerty@wsj.com