January 15, 2006

Gotta know when to hold 'em, know when to fold 'em: Homeowners cash in, hope market cools off

Is this sell and rent strategy happening nationwide? I can tell you that this is my personal strategy - sold in July 2005 for 100% gain, and rented vacation rentals since for 50% or so of the cost of ownership.

I really think this is going to be important for the soon-to-retire baby-boomers. Could you sleep at night knowing that 80% of your net worth was in one asset (your house)? That'd be like 80% of your net worth being in copper, or Cisco.

Two things - do this calculator from CEPR on owning vs. renting. The key variable they're using is the assumption that housing reverts back to the mean (which of course one day it will). But do the calculator - it's freightening if correct.


Next, here's the article from the Arizona Republic today on this sell and rent strategy. Read the whole thing. I don't believe the media is causing the crash, but I do believe that awareness via stories like these plants seeds of doubt, and also seeds of wisdom.

Kurt Nishimura is taking a calculated ride on Arizona's real estate wave. He sold his home in the Willo neighborhood, believing its value has topped out, and is renting an apartment in the Arcadia area for a year, hoping to buy something after the wave has crested.

Nishimura is not alone. A few people are cashing in, some for good, others to sit it out for a while, hoping to beat the market.

They're betting on a crash, on the belief that the market will soon cool, and there will be bargains for the picking.

The idea: Get your money out near the top and, if you're near retirement, keep it; if you're not, wait until the market drops to get back in.


Anonymous said...

I hope I don't see my rent going up because of this. I got outpriced in the housing market, I hate to see myself outpriced at rent. That will be a big mess for my family.

Arioch said...

That calculator does not take tax rate into account.

It would work better if you entered SE income and wage income to calc the SE tax, and Sched A activity better with a rough bracket.

There should be a monthly HOA input as well (as some are quite high, ie: Condos and McMansions).

It would be nice if it worked off of Sq Ft price (purchased) so it can calc purchases that are from pre 05, to see where people stand.

ie: I punched in my #'s and it was extraordinarily wrong on calcing mortgage and assumptions (as I purchased at 98/ft in a market which is now north of 250/ft). So if a 250/ft market loses 41% and lands at 148/ft I can still undercut the market if I so desire and get a check after the signing ceremony. It showed me taking an $88k check to the signing ceremony.

I think renting is a very safe bet right now if one has not purchased a secure roof at a decent price. If I was renting, I would NOT buy and rents will not increase for a few years is my guess. Too much rental property on the market which will not evaporate for some time.

As for non-inflated purchases, best to sit tight. My mortgage is $400/mo cheaper than renting this property, so I can afford to sit it out.

The calculator is a good indicator for the here and now purchases, and I think is a good tool. However for purchases which are not within the last 12 months or so (whatever the parabolic stupid curve fits on an areas market) it is not usefull to retroactively analyse ones purchase.

Anonymous said...

Excellent link. I checked out the home we sold in one of the most anemic real-estate markets in the country. It turns out even there where a nice 1000 square foot 3BR home sold for $120,000... the person who bought it would have been better off renting unless they _knew_ they would keep it for at least 10 years. Who has the kind of job security these days? Think back 10 years, how often would 1 or both partners of a working couple have to relocate to keep their career?

--Outsourced myself out of the rust belt

Anonymous said...

I agree with the analysis that there is a bubble and it is bursting. However, citing CEPR really detracts from anyone's credibility. Seriously, do the research before you cite to someone. CEPR is a liberal political organization that has been latching onto any way it can for the last four years to try to somehow claim the President is tanking the economy. Their "experts" are mostly Democrat hacks, their analysis usually borders on laughable, and their housing "calculator" has one fixed depreciation factor for each area that appears to be tied completely to inflation.

There IS a housing bubble, but CEPR is a joke--you might as well be citing to Ralph Nader's stock market predictions or the AFL-CIO's unemployment forecasts!

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