In May of 2004, Dean Baker, an economist in Washington who had been warning about excesses in the housing market, sold his two-bedroom condo after concluding that the market had lost its moorings from reality.
Had he waited until May 2006 when home prices in the Washington area peaked, his home would likely have appreciated by roughly 38 percent from its 2004 value
So Mr. Baker was right about the housing market. Or was he? His condo may have increased 38% in value after he sold it. It’s very unlikely, in my mind, that the price of that condo will ever decline to the 2004 level.
Ah, the perils of trying to time the market.
I think Mr. Baker’s mistake was looking at his primary residence as an investment instead of as a home.
I don’t think you should apply the same investment decision-making criteria to personal residences that you apply to stocks.
If you believe real estate prices are going to decline, should you sell your home and rent for a while? Normal people just don’t do that. (Economist may not be completely normal. I know. I am one.)
Normal people consider other costs such as the disruption to the family and the very real concern that they may not be able to buy another home later.
Further, a mistake in timing in either the sell part or the buy part of this “sell now, rent, buy later” strategy can be disastrous as I think it was for Mr. Baker.
Oh yeah, and there are transaction costs of perhaps 10% with this strategy (ballpark 8% on the sell part and 2% on the buy part).
“Even the people that were talking about booms busting, my goodness they were talking about it in 2001 and 2002,” said David Lereah, the former chief economist with the National Association of Realtors. “And they were wrong for four years and they only became right at the end of 2004.”
I hate to agree with Lereah but when he’s right, he’s right.
“The naysayers simply look silly at the end of the bubble,” said Mark Zandi, chief economist for Moody’s Economy.com who was among the experts raising questions about the underpinnings of the housing boom. “They are completely discounted and discredited because they have been saying things are askew for a year or two. It’s when the naysayers’ views have been completely discarded and discredited that the bubble inflates to its apex.”
Zandi sounds a little defensive there. I bet he took a lot of arrows for a lot of years because of his forecasts. But Zandi was right, too.
You need to see who’s talking when listening to economic forecasts. Lereah leaned overly positive and Zandi overly negative.
I bet Lereah’s short term forecasts were better than Zandi’s when the real estate market was positive and that Zandi’s forecasts were better than Lereah’s when the market turned negative.
One point they both might agree on, however, is that you shouldn’t treat your personal residence as if it were a stock. Your home has a big impact on your family’s happiness and that shouldn’t be treated like a commodity.
6 responses so far ↓
1 Frank // Sep 23, 2007 at 4:57 am
I sent you an email in regard to Moody Economy.com predication that the housing market in the Phoenix area will decline as much as 18% in the coming years and 25% in other areas, are you saying that he is right now. the article is on CNN business.
http://money.cnn.com/2007/09/19/real_estate/steep_home_price_drops_coming/index.htm?postversion=2007091915
2 Jonathan Dalton // Sep 23, 2007 at 9:13 am
Market timing doesn’t work any better with stocks … in both cases, you’re trying to call tops and bottoms when they’re only truly revealed after they’ve passed.
3 John L. Wake - Realtor // Sep 23, 2007 at 11:08 am
Frank, thanks for the email. It was on my to -do list to respond.
The Case-Shiller index for Phoenix estimates that the metro Phoenix market as whole has already declined 6.6%. http://www.arizonarealestatenotebook.com/2007/08/31/phoenix-home-appreciation-just-the-facts/#more-1245
“From then until last June, metro Phoenix home prices have depreciated 6.6%. Since September 2006, prices have had an average depreciation of 0.66% per month.”
It’s always safer to assume that a current trend will continue, at least for the short term, and that is my assumption.
Be aware, however, that Phoenix has 4 million people and it is in fact many different housing markets. What happens to home prices in El Mirage may be very different from what happens to home prices in Paradise Valley.
Some sub-markets will do much better and some will do much worse than the average.
Also remember that just because prices have declined significantly in a sub-market doesn’t mean you can’t find a bargain in that sub-market and it doesn’t mean that that sub-market will continue to decline rapidly. Some of the hardest hit sub-markets might be the first to bottom out and return to “normal” price appreciation.
If someone is considering buying a primary residence in metro Phoenix, all these blue sky, crystal ball forecasts should take a back seat to the daily reality of the family’s needs and wants.
4 Paul Cooper // Sep 23, 2007 at 11:55 am
And yet the Phoenix area inventory continues to rise. We just hit another all time high. And it is an all time high even when you take the population growth into account. 1 out of every 62 is for sale in the phoenix area. To put this in perspective, Las Vegas has 1 out of 65 homes for sale. As long as inventory continues to rise, Phoenix prices will continue to implode. And IMO, 2008 will be the year the Phoenix RE prices went bust. Just wait till the record number of resets that are coming at the end of 2007/beginning of 2008. It is not going to be pretty IMO.
5 CoRE Link Post #60 | Carnival of Real Estate - Real Estate Blogging Tips and Tricks // Sep 26, 2007 at 3:26 pm
[…] Wake presents Can you time the real estate market? posted at Arizona Real Estate […]
6 Sam Chapman // Sep 27, 2007 at 12:42 pm
I’m glad I read this post. First, you can’t time the market - period. Second - thanks to Frank for the link to the list of cities with depreciating real estate values. As expected, I didn’t see Austin on the list!
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