Aug. 12, 2006 - Timing the market when timing is everything / CNNMoney on ‘bubble-sitting’
They make it sound so easy
“Bubble-sitting” is the term used by CNNMoney reporter Les Christie to refer to potential buyers who anticipate that house or apartment prices will fall, so are renting in the interim. There is a lot of talk about this these days, most of it overly simplistic, in my view.
Sell high / buy low
No real estate market in the US is as transparent or as deep or as broad a market, with as much up-to-the-minute well-regulated data, as the stock market. Stock investors (speculators?) try to time the stock market all the time, yet few civilians succeed.
But Dean Baker is Bubble Sitting the real estate market, or so he says.
Dean Baker, an economist and co-director of the Center for Economic and Policy Research, is a bubble sitter himself, having sold his home a couple of years ago. "It is a very bad time to buy. Prices are heading down," he said.
Baker also predicts that the markets that have run up the most will suffer the worst turndowns. He compares it to the tech bubble when Nasdaq stocks rang up the biggest gains before the pop and fell the farthest from their highs after it.
How’s his timing?
But Mr. Baker illustrates the difficulty, perhaps inadvertently, “having sold his home a couple of years ago”. Since The Center for Economic and Policy Research is in Washington DC (according to its website), I assume Baker lives somewhere in the metro DC area. I don’t know that area market, but I will try to get some stats on pricing history there. For present purposes (and as an illustration) let’s assume that the DC metro area real estate market has had average price increases of 7% per year from 2003 through 2005, and stays flat beginning in 2006 until whenever this 'bubble' bursts.
So if Mr. Baker sold his house for a hypothetical $500,000 in early 2003, that house was worth about $610,000 in early 2006. If Mr. Baker is right that there is a bubble and that the “correction” will be between 11% and 22% (as he argues elsewhere; I will explain) that same house might be worth ‘only’ from $544,000 to $478,000 after that correction, when Mr. Baker would anticipate getting back into the market.
Hmmmm …. Does that work? (Let’s ignore the real life complicating factors of what he could have done with the net proceeds from the sale of the $500k house in 2003, other than paying rent with it, and the transaction costs of getting in and out.)
Mr. Baker has been writing articles about ‘the housing bubble’ since at least August 2002, so maybe he sold even earlier than my hypothetical date of early 2003. (About halfway through this article, Baker has a scenario involving a “big bubble" and a “little bubble”, which he equates to a range of 22% to 11% as the decline in average house prices when the big or little ‘bubble’ bursts.)
So my hypothetical Bubble Sitter named Baker tried to Bubble Sit beginning in early 2003 by selling a $500,000 house and hypothetically bought that same house back sometime in the future for up to a $44,000 more than he sold for, or up to a $22,000 less than he sold for (without considering transaction costs, etc). Someone else owned it when its value increased above $500,000 to its post-bubble low value. That does not sound like a terrific deal to me.
If he was three years off when beginning to sit…?
Of course, that is assuming my hypothetical Baker timed the market perfectly when he bought it back – right at the moment when values increased. Since he was hypothetically at least two years wrong in picking when to sell, he would have to get lucky to time it perfectly on the return, wouldn’t he?
If he waited too long (perhaps a quarter or two to be sure that the market trend continued), he would probably pay even more to buy back his $500,000 house.
I don’t mean to pick on Mr. Baker, especially as he told reporter Christie that most people should not try what he tried:
Even though he did it himself, Baker says most people should not sell in anticipation of getting back into the market at a lower price.
"I don't think people want to speculate on their homes," he says. "But if they're selling for another reason - if they're downsizing, for example, because their children have moved out - they should cash out and rent for a while."
Christie closes with at least some good advice, warning off people from Bubble Sitting if they have a longer term orientation.
The value of bubble sitting also depends on how long you intend to live in a house. If you're planning to be there for five years or more, it make sense to buy as soon as possible. Time smoothes out any price bumps - over long periods prices nearly always go up - and the tax advantages may help make it cheaper to buy than rent.
It's a different story for the short term. Then, all those buying and selling expenses means that even in flat markets, you could be underwater if you sell out after two or three years.
But even if you have a short term perspective, timing the market is not for the faint of heart. Remember how much gain the hypothetical Mr. Baker sold to someone else when he missed the best time to sell by at least three years.
© Sandy Mattingly 2006
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