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.