bubblicious

Our house theoretically goes on the market in a week, but that's just to whet buyers' appetites. Our realtor is going to stipulate no showings until the broker's open house on Tuesday June 7th.

Let me repeat that. our house is going on the market. People will be walking through, strangers will be commenting on paint colors and flooring, opening closet doors and peeking into the bathroom. In less than two weeks.

This feels so strange.

I always assumed that we'd already have a new home by the time this happened. That we'd be in escrow and be planning furniture arrangements and landscape alterations on a house in some neighborhood across town, a place that would feel foreign but only a little bit. Instead we're planning a cross-country move to a rental as yet unknown. Cashing out, as it were.

I know some people (and have read of more) who are doing the same thing we are, only they're not moving to a new state, but rather into a rental in the same neighborhood. Why? Bubble, baby, bubble, bubble, boil and trouble. Many people believe we're at or at least near the top of California's absurd house price surge, that there's nowhere to go but down. They may be right. Even Alan Greenspan finally fessed up last Friday that there are in fact local bubbles (he calls them froth):

The Fed chief said Friday that he didn't see a national housing bubble and that the economy was not at risk, an assertion he had also made in February.

"But it's not hard to see that there are a lot of local bubbles," he said Friday, without specifying these local markets. Greenspan said price surges might "simmer down" as housing became less affordable.

"It's pretty clear that it's an unsustainable underlying pattern," the Fed chief said. "People are reaching to be able to pay the prices to be able to move into a home."

Greenspan hasn't been admitting any such thing until now. In fact, he's the one who's been keeping interest rates artificially low to stimulate the insane buying frenzy, and even urging people to refinance using adjustable rate mortgages so they'd have more cash in their pockets and therefore do more to stimulate the economy. If he's finally confirming the obvious, it means only one thing: interest rates will rise in the relatively near future. And if interest rates rise? Pop goes the bubble. People with those lovely adjustable rate mortgages that allowed them to squeeze into too much house for their income level will fall out of the market. Can't pay the mortgage? Put your house up for sale. Really really can't pay the mortgage? Hello foreclosure. Net result? More homes on the market. A glut of inventory? Prices go down. It's kind of simple, no? Kind of obvious, yes?

Funny thing, though. I keep talking to people who say, "Yeah, I think it'll happen. But not here, not in my little pocket of the city. We're immune." In West Hollywood, we're immune because it's become such a hot area, so desirable, it'll be at the top of whatever market there is. Well, maybe, but if the overall LA market falls, it will fall in this neighborhood too. You can bet your ten percent interest rate on that. They're apparently immune in the Jersey town we're moving to, as well. Because, you see, the Midtown Direct commuter train has made it so very desirable to live there. And it has. Home values there rose the instant the train to Penn Station stopped in town. Good schools and restaurants don’t hurt either. But if the New York bubble bursts? You can bet it's going to take Essex County, New Jersey with it.

There are certain markers when a market's about to switch from favoring sellers to favoring buyers. First, rentals become cheaper and more plentiful. I know this is happening in the New York area. Apparently rental apartments are staying vacant longer between tenants, so landlords have to drop their (still absurdly high) prices. And in our new home-town-to-be, I see the same thing. Lots of rentals available, and the listings linger.

Not only that, but even high rents are nowhere near as high as what you'd pay every month on a brand new mortgage for the same exact property. IE: a modest house in the pleasant neighborhood near Damian's school rents for $3300 a month. A lot of money, yes. But similar houses on the same block are selling for around $1.2 million. Assume twenty percent down. Assume six percent interest on a jumbo loan. You're looking at closer to $6000 a month. Drop that interest to five percent because maybe an ARM will be lower up front, you're still looking at a monthly payment of over $5000, and that's not including tax and insurance. Cheaper to rent than own? You bet.

Another marker of an unsustainable bubble: Housing prices in the hot markets have far outstripped median income. It has to self-correct. As soon as interest rates nudge up a point or two, wham bang crash.

On the other hand, some people say that there's no bubble – though there may be a bobble – and that it's all about supply and demand. More people are moving to cities, causing more demand, but cities are built up already, there's no place for more housing. Thus, a crunch. Thus, prices that go up and up and up. But then how do you explain the plethora of rentals and the wide gulf in price between a monthly rent outlay and a monthly payment on a newly minted mortgage? I agree with the prevailing wisdom: the housing market is overdue for a correction. I just can't see it any other way. The only question in my mind is when it'll happen and how big a correction. Well, and how it'll affect the economy and – okay, I do have some other questions, but I do believe this will happen, this giddy spending spree in California and New York and Washington and Boston and south Florida and all the other hot markets that has gone longer and higher than anyone expected, that it will in fact subside sometime in the next few years and that the money in people's houses right now is more Monopoly money than it is real.

If we loved our house and our city, we'd stay put despite this. It doesn't hurt to live in a house valued at half the price you paid if you have no intention of moving. Who cares what it's worth? It's just a number on a piece of paper. But we don't want to stay. So we go. I'm not one of those people who would sell our home and rent instead just to ride the wave. I'm not that much of a gambler. And we might be mistiming this. Which doesn’t matter, because this is what we need to do and when we need to do it. And we'll figure out a way back into homeownership, one way or another, even if prices continue to rise. But hey, if this adventure does happen to time out so we cash out at the top and then can buy in our new town when the froth has subsided? How cool would that be?

Posted by Tamar at May 27, 2005 05:26 PM | TrackBack