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:
and Sarah Bland sold their Los Angeles house ahead of retirement so
their biggest asset wouldn't abruptly lose value at precisely the wrong
and Linda Celkupa decided to bubble sit so they could move to grander
accommodations in Hoboken, N.J.
and Steve Sweeney sold their house in suburban Denver to flee a declining
neighborhood; renting affords Vicki the chance to stay home with the children.
sees himself as a pragmatist, motivated by reality-based self-preservation.
"I'm pretty sure the prices around here will plummet," he says
from his two-bedroom rental in Washington, D.C. "We felt it would
have been foolish to stay there."
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
A housing bubble consists of a boom followed by a bust. Prices rise rapidly
during the boom, and people buy homes on the assumption that prices will
keep rocketing upward. The bubble bursts when home values fall. A burst
bubble hurts homeowners who have to sell at a loss or who remain in their
homes longer than intended, stubbornly waiting for values to return to
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.
"Economists have a saying that unsustainable trends will not be sustained,"
says Paul Merski, chief economist for the Independent Community Bankers
of America. "We expect that to apply in overheated markets"
like the West. Merski predicts that price appreciation will decelerate
in Arizona, California, Hawaii and Nevada, but he doesn't expect home
values to fall.
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
High home prices might not surprise Berson, but they worry Alan Greenspan,
chairman of the Federal Reserve. In his June testimony before the congressional
Joint Economic Committee, Greenspan said: "Although a bubble in home
prices for the nation, as a whole, does not appear likely, there do appear
to be, at a minimum, signs of froth in some local markets where home prices
seem to have risen to unsustainable levels."
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."
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
"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."