Paper Economy - A US Real Estate Bubble Blog

Tuesday, April 20, 2010

BoughtAtTheBottom?

You read it right folks… I’m in! Big Time! Go long real estate! Get back in the water! Prices can only go up from here! … Booyahhh!

All joking aside my wife and I recently closed on our new metro Boston area home and are now busily shuffling stuff around, making regular trips to “The Depot” and IKEA and re-acclimating ourselves to the demands of home ownership.

This bit of news might come as a shock to longtime PaperEconomy (and PaperMoney) readers as I have consistently been one of the most negative and bearish bloggers on housing for the better part of the last five years.

But, be that as it may, we were bubble-sitters waiting for an opportunity to turn our good fortune from selling at the literal top of the market in late 2005 into a situation better meeting our specific needs.

That opportunity came late last year when a house showed up on the market that can only be described as a near duplicate of our old home except with 2.75x the property, a substantially more attractive and updated exterior and a location within the metro area nearly 15 miles closer to Boston proper.

In terms of price, our results were telling.

We paid no more (in inflation adjusted terms) than we paid for our old home which we purchased back in 2000 while the sellers took roughly a $40,000 hit from what they paid back in 2003.

So, this was quite a trade particularly given that the town is not generally known for screaming bargains.

In any event, I still believe that the Boston area is likely to see home prices decline further.

Our decision to buy now was more a function of our genuine need (two steadily growing kids and two dogs) for more space, our good fortune of having a very large down payment (changes the rent vs. buy argument a bit), the ridiculously low interest rate environment and lastly $8000 cash!!!!

In a way, our purchase represents an instance of the function that is supposed to take place during a market clearing process whereby weak and distressed asset holders are forced to discount, take losses and yield their assets to stronger buyers who are fundamentally more prepared for taking on any additional risks brought about by market dynamics.

I’m convinced that we could see prices slide further in Boston, possibly 5%, 10% or even 15% over the long run... especially in real terms, but in any case it is virtually impossible for my situation to ever end up distressed or “upsidedown” and I’m prepared to shouldering a loss of even 15%.

All in all, the purchase simply made sense for our particular situation.

Good luck to all other bubble sitters, especially those in the Boston market that have withstood endless ridiculous bullish housing propaganda and the massively seasonal swings of our market and remember that all available evidence suggests that bottoms to residential real estate markets can take several years to fully form so although you may at times feel that “time is of the essence” there is always plenty of time to make sure that your purchase is right for you.

Best to all!

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8 Comments:

  • Congrats SATT. Well it took years to create a bubble, it will take years to deflate. I would say at least another 5 years with hectic seasonal swings as SATT pointed out. Additionally the real esate market will have to endure these variables.

    Potential for increase in rates
    Inventory overhang
    Stricter lending standards
    etc.

    Btw I do own real estate, but I like to look at things from the fundemental point of view.

    By Anonymous Anonymous, at 11:37 AM  

  • Anon,

    Thanks and you are totally right... housing is so fragile.

    I expect any increase in rates to play havoc, more foreclosures means tighter lending and more boomer sellers may eventually create a real serious issue that not many people are expecting...

    By Blogger SoldAtTheTop, at 11:46 AM  

  • SATT,

    "boomer sellers" - Judging from people's behavior I think many boomers will stay in their houses if their mortgage is very small or their house is paid off. I think the boomers who are overleveraged will sell. Although they are so many variables in this equation. As you may have boomers' kids moving back with their parents and paying off the mortgage together. But I am sure there is higher incentive for the boomers as ever to sell their real estate as the stock markets had given many boomers disappointing returns over the last 10 years.

    By Anonymous Anonymous, at 11:54 AM  

  • Anon,

    Maybe but I can't help thinking that the boomer demographics are going to bring a net-liquidation posture.

    Owning and maintaining a home is an expensive thing... downsizing to a comfortable condo really is a sensible move.

    But as you suggest, doubling up is a real factor so we will have to wait to see how things trend out.

    By Blogger SoldAtTheTop, at 12:11 PM  

  • Hey that's great SATT. I have a house too, and I love it, even if it has dropped a bit in value.

    And who knows. Maybe we're poised for another great real estate bubble! ;)

    Ya know, when you take out a mortgage it's the same as short-selling a bond. If interest rates go up, bonds go down, and your short-sale increases in value. Not enough so you hope interest rates rise, but enough to slightly lessen the sting if they do.

    By Anonymous Dagger, at 2:59 PM  

  • Congratulations from Sydney Australia!

    Sydney is the second most expensive market in the Anglo world after Vancouver in terms of multiples of median income to buy a median priced house.

    Jeremy Grantham says Australian Real Estate is one of the two great bubbles.
    http://www.ft.com/cms/86a30e34-dfd5-11dc-8073-0000779fd2ac.html?_i_referralObject=15762261&fromSearch=n

    Is it time for me to sell in Australia and gear up in the US?

    Are people with jobs and largely unencumbered houses in the US now gearing up to buy an investment property?

    By Blogger Explorer, at 9:11 PM  

  • Congrats SATT. Regarding your fear of rising interest rates driving prices down, you may be comforted to know thats not necessarily the case historically.

    http://seattlebubble.com/blog/2010/02/09/do-rising-interest-rates-lead-to-falling-home-prices/

    As you can see, the first two graphs make clear that rising interest rates do cause values to fall in real terms. However, in nominal terms, it isnt so clear.

    http://seattlebubble.com/blog/wp-content/uploads/2010/02/KC-Home-Price_1950-2009-nominal.png

    Here it looks like nominal prices rose ever so slightly as interest rates rose higher and higher. While this is only a seattle specific case, national median home prices over the same timeperiod show a similar pattern.

    In real terms, it makes sense to wait because wages (a lagging, yet necessary part of any inflationary cycle) are rising faster than prices, and you get more bang for the buck as interest rates rise. However, the fear that rising interest rates will cause nominal price drops, causing buyers to be underwater is unfounded.

    Now its true, it may be "different this time" in that rates will rise while nominal values fall, but given how history has treated those who made that statement, I think its better to be on this side of that bet!

    By Anonymous Anonymous, at 9:22 AM  

  • Dagger, Explorer and Anon,

    Thanks for the good words...

    I think as your excellent comments point out the key to making a good home purchase is being informed and giving consideration to all the moving parts not just jumping in blind just because the NAR says you will miss out on this or that if you don't.

    That's probably the best outcome of this whole ugly period... wide discussion and debate over all the pros and cons of homeownership, rent-vs-buy etc. price trends, macro-trends all in a public forum with lots of diverse positions and points of view rather than just a bunch of marketing spin and jargon from interested parties.

    By Blogger SoldAtTheTop, at 10:15 AM  

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