Sell high, rent low: The Bubble Sitters
The American Dream comes with a twist for Dean Baker. Convinced that he lived in a housing bubble and that property values would crash, the economist sold his condominium and rented a similar condo two blocks away. Now he waits for prices to plunge so he can scoop up a new place at a bargain price.
Call Baker a bubble sitter. He and others have taken themselves out of the homeownership game. Now they sit on the sidelines, renting and waiting for a housing bubble pop.
Bubble sitters vary in their reasons and tactics:
Amid their diversity, bubble sitters have something in common: They think home values have risen too high, that they will fall, and that homeowners will get burned. So they sell their homes and become renters.
and burst, defined
Some experts believe that a national housing bubble exists. Most economists don't perceive a national bubble, but agree that some local markets could pop. The most frequently mentioned markets include San Diego; Orange County, Calif.; Los Angeles; Las Vegas; Boston; New York City and Long Island; the District of Columbia; and South Florida, from West Palm Beach to Miami.
Bubble believers maintain that low mortgage rates, combined with a mass delusion that property values will skyrocket forever, have inflated a bubble. They predict that rising interest rates will pierce the bubble, causing mass psychology to reverse: As houses take longer to sell, homeowners will put their homes on the market before the bottom falls out, panicking still more homeowners into dumping their homes on the market to limit their losses. In this scenario, potential buyers take their time, because they know prices will drop next week or next month. A deflationary spiral ensues.
As evidence that home values have moved out of whack, bubble partisans note that house prices have far surpassed rental rates in some markets. Take San Francisco. From the first quarter of 2000 to the first quarter of 2005, average residential rent in the Bay Area rose 18 percent. Over the same period, the average home value in San Francisco rose 63 percent. To return to a more realistic balance, one of two things must happen: Either rents will rise while home prices stagnate, or home prices must fall. Whichever way, rapid price appreciation has to end.
Bubble skeptics attribute the divergence between rents and prices to an earlier imbalance. They say that home prices once were too low in comparison with rents in some markets, so prices are merely bouncing back. They point out that values have risen fastest along the coasts, where developers have trouble finding land to build on. And when developers do find land, they run up against environmental and land-use rules that make it expensive to build.
"Prices are supply-and-demand driven, and we have record housing demand going on in the economy today, and in many parts of the country, increasing supply constraints," says David Berson, chief economist for mortgage giant Fannie Mae. "There's no surprise that housing prices are strong."
see just froth
Froth. Not a bubble. A bunch of cute, tiny bubbles.
Harmless little bubbles, enthuses David Lereah, chief economist for the National Association of Realtors: "Yes, there's froth in the markets, but froth can be healthy," he says. "It's not necessarily a bad word. When I think of froth, I could think of effervescence rather than some popping of bubbles."
When Greenspan made his "froth" comment, legislators didn't pin him down. He didn't identify which local markets have unsustainably high prices.
Bubble sitters think they know where prices have gone out of control -- their own neighborhoods.
"We sold mostly because we wanted to get the money out when the money was good," says Bland, who sold his home in Los Angeles as a prelude to retirement. "I think it's very timely to think about selling before the bubble bursts."