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| The Basics | Homeowners who'd rather rent
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They sold high and are renting low, convinced that they got out while the getting was good. See why some are locking up their profits while they can.
By Bankrate.com
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:
- Warren and Sarah Bland sold their Los Angeles house ahead of retirement so their biggest asset wouldn't abruptly lose value at precisely the wrong time.
- Jordan and Linda Celkupa decided to bubble sit so they could move to grander accommodations in Hoboken, N.J.
- Vicki 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.
Baker 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."
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.
| Selling out | | Owners | Bought home | Sold home | Gain | New rent | | Bakers | $160,000 in 1997 | $445,000 in May 2004 | 178%, or $285,000 | $2,200 a month | | Blands | $170,000 in 1978 | $889,000 in 2003 | 423%, or $719,000 | $2,200 a month | | Sweeneys | $142,000 in 1997 | $200,000 in 2003 | 41%, or $58,000 | $1,170 a month |
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Bubble 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 previous levels.
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.
Related news and commentary on MSN Money
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%. Over the same period, the average home value in San Francisco rose 63%. 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.
Unsustainable trend
"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."
Skeptics 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."
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."
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