Horrible Journalism “Bubble Sitting” by cnn.com

[powayseller]

Bubble sitting: The pros and cons

Where should I begin? This article has numerous flaws.

First, every person interviewed, even Dean Baker, discourages homeowners from selling now and renting until prices drop.

Second, the experts that are quoted give some strange, and incorrect advice.

WRONG
CEO Robert Toll said “It’s very hard to pick a bottom,” he said.

FACT
It’s easy to pick a bottom. It typically takes several years, and you look for these indicators: inventory drops, months supply is below 4 months and signals a seller’s market, and prices start rising. Someone like Toll, who was in the homebuilding business through several cycles, knows this. It’s obvious why he is not being forthright.

WRONG
“My advice is don’t do it,” Gillespie [CEO of Coldwell Banker] said. “If the Feds stop raising rates, mortgages will start to go down and prices will recover.”

FACT Even if the Fed lowers rates, home prices will keep dropping. The psychology has shifted, and this will be very difficult to turn around. Entry level buyers started getting priced out in 2004 due to high home prices, before interest rates really put the squeeze on them. Once entry level homes were harder to sell, a few quarters later the effect rippled up to the mid-level homes. For housing to have a chance at being saved, the Fed would have to lower rates back to 1%, so current homeowners can refinance into those low rates when their introductory ARM period expires. And that cannot happen, because inflation would go through the roof and the dollar collapse.

SORT OF WRONG
Bernice Ross, CEO of realestatecoach.com, said “If professionals enter a market, they could help support prices, making them less attractive for bubble sitters, not to mention that the entry of professionally investors will indicate that the market has fallen as far as it is likely to go.”

FACT
Professional investors will wait to buy until homes are cash flow positive, i.e. 8-15 x annual rent. We are at 22x rent in SD, I believe.

WRONG
John Bredemeyer, speaking for the Appraisal Institute, said “cashing out and buying later is usually not a good idea – the costs of selling and repurchasing is going to kill you, even if prices do fall.” Then he says some people could try timing the market. His worst advice: “If you’re planning to be there for five years or more, it make sense to buy as soon as possible.”
FACT
If you are planning to stay for 15 years or more AND you have a mortgage that you can afford (consider fully indexed rate if you have one of those exotic loans) AND you don’t mind your house losing a bunch of equity in the next 5 years, ONLY THEN should you buy. It is simply foolish to buy now if you don’t have to! Buying a house today is like buying Lucent in January 2000. And even if you meet all my 3 criteria, why buy “as soon as possible”? Every day your wait, you are saving money as home prices keep dropping.

I really wish Les Christie would have interviewed someone who really understands the real estate market, someone like Rich.

Schahrzad Berkland

[Diego Mamani]

Schahrzad, thank you for sharing the article. I think you make many good points, but I have to disagree about your view that predicting the bottom is easy. If it were possible to time the market, we could make billions with little or no risk.

Market timing, which simply means being able to know when markets peak or bottom, is an impossible dream.

I think Toll’s (the builder) and Bredemayer’s (the appraiser) advice is somewhat biased because of their occupations. However, I agree with the general tone of the article: the house you live in should not be viewed as an investment vehicle. That sort of misguided thinking in the last 5 years resulted in many people buying more house than they could afford, inflating the bubble in the process.

Althugh we know that in areas like S.D. prices are heading down, the process won’t be monotonous: there’ll be drops, flat periods, some reversals (yes, it happens when people think they “see the bottom” and start buying only to see prices drop again). The bottom may be 3 years from now, or may be 15. We will know only after the fact, as has always been the case.

[an]

Diego Mamani, I completely agree with you. It’s impossible to predict/see the bottom/top until you past it. You can see the general movement/direction of the trend. Especially on a slow moving market like the RE market, it’s a little easier to see trend, but it’s still impossible to see the bottom. That still doesn’t make the Toll’s Bro. CEO statement correct though. If you believe that price will revert back to the mean, then even if you wait past the bottom and buy @ 10% above the bottom, I’m pretty sure it’ll be lower than it is today, inflation adjusted.

[Diego Mamani]

That’s very logical, A.N. Problem is, it’s quite possible that what you perceive to be “10% above bottom” may simply be a temporary reversal and that prices will continue dropping for a few more years.

Take So. Cal. after the bubble popped in 1989-90. Prices stabilized somewhat in 1991, and many bought thinking that we had reached bottom. Then prices continued their decline until 1996-97. Only when prices started going up steadily in the summer of 1998 and onwards, we learned that 1996 had been the bottom.

[smfj]

PS,

Haven’t run the numbers to agree fully with your final argument, but you bring up a crucial point:

“If…you have a mortgage that you can afford”

And I would add, that should mean – afford without going into credit card debt to buy groceries and gas, afford without counting on an annual pay raise, afford if you were to face a financial setback (temporary job loss, illness, etc.).

I find it hard to buy into the idea that as a professional in my mid- (ok, late-)twenties, high income for my age bracket, stable profession, virtually no debt, I am priced out of the housing market forever (and I am priced out, and have been for a while, no matter what a mortgage broker would say). It just doesn’t make sense.

I’ve watched too many of my peers get in over their heads in the past few years. Dealing with the headache of having (and finding!) multiple roommates so that they could make their mortgage payment. Sacraficing all the fun stuff, or going into crazy debt to avoid the sacrafice, all for home “ownership” (or in some cases, because they’re convinced they need the tax break, but that’s another rant).

Of course, everyone has different situations, different priorities, and I haven’t always made the best decisions either, but I must say it’s pretty nice that I’m living comfortably, watching my savings build, and I haven’t had to eat Ramen Noodles since college.

[Diego Mamani]

SMFJ, you were priced out, but only temporarily. And, anyways, a single person in her twenties shouldn’t be buying a house. In the last few years we saw many single people buying houses because they thought it was a good investment, or because of the tax break, or because they thought they would be priced out forever. That’s all balloney as we well know.

In any case, soon it’ll be pay back time for you. Once you get married and are ready to settle down, you will have many houses to choose from, and at prices that are lower than today (at least in inflation-adjusted terms). At the same time, your income will be higher as you acquire more skills and experience. The near future looks rosy for you.

[an]

Diego Mamani, I agree about dead cat bounce. the 10% i gave is just arbitrary. My point is that, you don’t know where the bottom is until you’re well past it and on your way up. Same with the top. So that’s why I throw out that 10% number.

[powayseller]

I am willing to be corrected in my assertion that you *can* time the bottom in a real estate market, because it moves slowly and is fairly illiquid. It takes many months for the trend to turn, not minutes as in the stock market.

Please give me data to correct my assertions below.

This is how I plan to time the market. I will watch the data and get the “beat on the street” from a realtor. Two sources: data and anecdotes.

Realtors will be the first to know when the market has turned, when investors come in to start buying properties, and bubble sitters are no longer sitters, but buyers.

Data: months inventory and HAI are the two metrics I will watch. Inventory will fall as sales pick up. Median is a 1-year to 2-year lagging indicator. Secondary, DOM should decrease; the true DOM, and a realtor can tell you if that his happening. Reductions should be fewer, showings will pick up.

Diego Mamani, what data do you have to show that months inventory was falling, then turning up again? Prices are volatile, and can shift a few percent from month to month, so I wouldn’t use prices. Real estate seems to be a slow moving ship. It doesn’t bounce around like stocks do.

From ASU’s report: “As the housing market slows, the entry level sector basically disappears, while the move- up markets garner a larger share of the remaining activity. Thus, it is not unusual to see median prices to be fairly stable or even increase as the move-up market works to be satisfied.” I believe it will work the same in reverse, when the market picks up again. The entry level sector picks up first, and median prices will resume a larger decline.

In conclusion, I believe I can time the real estate market, and make my purchase within a few percent *after* the bottom. I will wait for the bottom to be behind me, but with RE moving so slow, I can wait for 2-3 months, and will have missed less than 5% of the move up.

I would love to hear any arguments against this.

[Nancy_s soothsayer]

I’m not one to brag –just could not help it… I was able to time the market with pure luck on my side.

I bought a San Diego house in April 1996 after asking for a deep discount from the seller who could not unload the house after sitting vacant on the market more than 6 months (asking price: $160,000, paid $133,000). I bought at dip of the market.

I sold the same house in October 2005 for $500K – sold at near top of the market. The house was fully paid when I sold, so all proceeds from sale was pure equity/profit. I thank my lucky stars and my guardian angel (of course) for the perfect market timing.

[Diego Mamani]

Asianautica: I know what you mean, whether it’s bottom plus 10%, or x%, we’ll be in the dark until a long period has elapsed.

Powayseller: Your dictum I believe I can time the real estate market is a precious little gem! Now, seriously, the last time the market hit bottom was 1996, but we didn’t know that until the 1998 summer house buying season was over. Perhaps it took until the spring of 1999 for smart people to realize that 1996 had been the bottom. And even then, no one was 100% sure because appreciation in 1998-2001 wasn’t as steady as in 2002-2005. And you are telling us that you will know for sure when the bottom was only 2-3 months after the fact? That’s tantamount to claiming supernatural powers. You should run your ideas by John Talbott, but he’ll probably tell you the same thing.

Medieval chemists dreamed of manufacturing gold (didn’t work). Some time later, physicists dreamed of building perpetual moving machines (didn’t work). Today we dream of being able to time the real estate market. And that’s fine, as long as we know that it’s just a dream.

Have a good weekend.

[powayseller]

Why did it take you 2 years to realize the bottom had occured? This is like Alan Greenspan telling people you cannot recognize a bubble until AFTER it has popped. Perhaps back then people were relying on the median, which, as I said before, is a 1 – 2 year lagging indicator. Why are you so upset with my dictum? Timing a crawling asset’s price movement is not even related to making gold out of thin air, but more like making wool from sheep. It’s just a logical thing.

I think you are having such a hard time because we have been fed such poor information about real estate cycles. Nobody educates us about real estate cycles. They are infrequent, usually occuring only once every few decades, in a few cities. Few people have become experts at figuring them out. Furthermore, the MLS is relatively new, and doesn’t allow us to go back in time to look up the data we would really like, to prove our points.

I would love to chart months inventory from 1995 – 1996, and I am sure we would see a steady decrease in that measurement. I would also love to talk to realtors of that time, who would surely tell us that activity picked up in the summer of 1996, as investors came back in the market, and people got excited again about buying homes. During this time, the median would KEEP DROPPING, because the increase of activity in the low end would make the median pick up in the downward direction. As we know, the newspapers report the median. The median didn’t show prices picked up for 2 years, so that makes sense it would be 1998 before the public was aware of the shift.

Again, to prove all this, we would need the actual data. But from what we see today on the way down, my method definitely works on the way down. And that’s why I am so convinved, based on the logic, that it will work on the way up. I will use this method to time the real estate market for myself, and yes, if I had known about this method before May 2006, I would have made a ton of money in real estate. The market softened in 2004, so had I known about this method back in 2000, I would have been buying real estate until the March of 2004, when inventory was at 3,000 and started creeping up (months inventory went up). By June 04 inventory was 6,000, and by Sept 04 it was 12,000. Using months inventory, you would not be buying after March 04, selling instead.

I hope this has been helpful. The greatest disservice done to the public has been the use of the median, which has made everyone believe they cannot time the real estate market, when in reality, it is very easy to time. You just have to stop using the median.

Schahrzad Berkland

[Daniel]

Schahrzad,

You’re on to something, but I think (like others here do) that you’re overestimating your skills. What you’re right about is that timing the RE market should be easier than timing the stock market, because RE moves much more slowly. But it’s still not a cakewalk.

Let me give you an example: the London propery market has been as overvalued as our own local market. After rate raises from the Bank of England in 2004, the London market had a very lousy year in 2005 (very much like SD in 2006). All analyst said: “OK, it’s finally going down now, look out below!”. So the market dipped a bit in 2005, but came back strong in 2006 (up 10%). Now, this is still overvalued as hell, even more so than before. Everybody is scratching their heads, not knowing what will happen next. All analysts agree that the market has to go down, sooner or later, but this year’s surge was a complete surprise. Timing that sort of market is a fool’s game.

[vegasrenter]

The Henderson (Las Vegas) market rose 50% in the 12 months from July 2003 to June 2004. The market DIED during the last half of 2004, and all the signs were there that we were at the top – rising inventories, falling sales volume, etc. I bought in March 2004 with a 3-month lease-back and sold (panicked, to be honest) in July 2004, glad to get out with enough “profit” to cover my 4% commission and closing costs. Then interest rates went back down and the market rose another 25% in 2005. This mid-2006 top looks exactly like the mid-2004 one – the point is, you can’t say for sure until history proves out the timing.

[an]

I don’t think timing RE is any easier than timing the stock market. Sure stock market moves much faster than the RE market, but that doesn’t mean the same “fundamental” for timing are not there. Timing the market is impossible. You might get lucky and get 1 or 2 timing right, but to say you can truly time the market, you have to be able to point out every peak and valley. If you truly believe you can time the RE market, then you should buy 10 houses and rent out 9 and make a killing and retire.

[powayseller]

AN – Yes, I will buy 10 houses and rent out 9, at the bottom of the market. Not now.

Daniel and VegasRenter – did you track the months inventory for these cities and times, as well as the multiples of housing prices as rents and wages? We need to look at months inventory, changes in inventory and sales, HAI, and a return to a true values (multiple of wages and rents in line with history) and combine that with the experience of realtors in the field.

What you both provided is interesting, but in the absence of data, does not dispute my method at all. Perhaps the price changes you noted were just statistical noise in monthly home sales.

Check out the historical price/income charts on piggington’s Bubble Primer. You can see home prices move in one direction from top to bottom , without rallies or false bottoms/tops as you find in stock charts.

I had not heard of false rallies in housing markets. Do you have any charts? Or are these rallies just monthly noise? I will not buy on monthly noise, or a temporary blip. It doesn’t matter to me if prices dip down one month or two. I am looking at the fundamentals: home prices vs. wages and rents, and demand measured by months inventory.

Just curious – when are you planning to buy a house, and how do you plan on making your decision on timing?

[Author]

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