Investors who bailed out consider retesting the housing market waters
(Anthony Freda For The Washington Post)
By Tomoeh Murakami Tse
Special to The Washington Post
Sunday, July 25, 2010
New York — In hindsight, Scott Feldman’s decision to sell his first home in late 2006 could have been a case study in a textbook called “How to Time the Real Estate Market.”
Feldman, who works at a private equity firm, sold his two-bedroom apartment on Manhattan’s Upper East Side for $879,000, about 40 percent more than what he paid for it in 2003.
But whether Feldman’s return to homeownership proves as financially savvy remains to be seen. After weathering the recession in a rental unit, he bought a five-bedroom house in a New Jersey suburb last spring for 30 percent below the original asking price.
“We probably overpaid for it — but we’re happy here,” Feldman said, adding that he and his wife’s decision to buy had less to do with calling a market bottom than settling into a community their two young children, nearing school age, could grow up in.
Indeed, while some financially sophisticated professionals who foresaw the housing crisis — and acted on it — have re-entered the housing market, others remain renters today. With the fledgling housing-market recovery suddenly deteriorating, these holdouts are scrutinizing the increasingly uncertain economy and doing old-fashioned, shoe-leather research on their local real estate markets as they weigh the timing of their return to homeownership.
Of course, no one is expecting the kind of double-digit annual appreciation that created the illusion of homes as red-hot investments and bottomless cash machines. But as other assets recover from the lows of the financial crisis — the Standard & Poor’s 500-stock index is up 65 percent from March 2009, for example — and home sales and even prices inch up in some markets, more investors sitting on cash are starting to wonder: Do I dare put my money in real estate?
Those who have bought say they largely wanted to take advantage of record-low interest rates and a recently expired tax credit for homeowners. They also note that prices had dropped to a point where the emotional benefits of homeownership outweighed potential losses from further price declines.
Meanwhile, the holdouts cite a number of reasons for staying put — cheap rents and still-declining home prices, tight credit and expiration of a popular tax credit to spur home sales, lingering unemployment and rising uncertainty about the economy.
“You have to be patient,” said Mark Kiesel, global head of the corporate bond portfolio management group at Pimco. Kiesel has been renting since selling his house in 2006 and recently renewed his lease for another 18 months. “You have to stick to the fundamentals. There are more sellers than buyers — it’s that simple.”
Ben and Julie Feldman sold their 900-square-foot condominium in Dupont Circle in fall 2005. This spring, they went house hunting but concluded that prices were still too high.
“Given the level of uncertainty about short- and medium-term economic performance, it really doesn’t make sense to jump in unless you have a five-to-10-year horizon,” said Ben Feldman, 44, an independent consultant and a renter in Capitol Hill.
Home prices have proved volatile. After a steady decline from mid-2006, national average home prices climbed more than 6 percent in mid-2009, but they have dipped since then. Overall, prices are off by about a third from peak levels through March of this year. That follows the huge run-up in prices — a 90 percent appreciation — from the beginning of 2000 to their peak in 2006, according to the S&P/Case-Shiller home price index.
In comparison, the S&P 500 index fell nearly 14 percent from the beginning of 2000, near the peak of the tech boom, to mid-2006.
With the cloudy economic outlook and tightened lending standards, Feldman is concerned that the shrinking pool of eligible buyers will pull prices down further.
In the meantime, he is not too worried about missing out on a chance to buy at the bottom. “We were lucky enough to call the top once,” he said, “and that gives us a little bit of a cushion about missing the bottom.”
Of course, perfectly timing the market is an elusive feat for even the most successful investors. Rather than worrying about making a perfect call on the way back in, professionals who sold near the peak say assessing one’s personal and financial situation, as well as risk tolerance, is critical.
After watching the breathtaking buildup of homes in the Southern California community of Carlsbad, Axel Merk of Merk Investments and his wife, also an executive at the firm, sold their two condos and invested the proceeds in their mutual fund business. One sold in 2004, the other in 2005.
The couple bought a house in the Bay Area in November. The purchase “does not suggest that we believe the prices have bottomed but that we can afford the risk of prices going down further,” Merk said.
“We sold out a bit early, but we have no ambitions of picking the exact top or bottom, as that’s almost impossible to do,” he added. “It always amazes me how long a bubble can last.”
Dean Baker, an economist who was among the most vocal bears during the housing bubble, agrees. He acknowledges that he and his wife may not have maximized their profit when they sold an Adams Morgan condo in 2004, or their savings when they bought a house last spring in the District’s 16th Street Heights neighborhood.
Still, Baker expresses few regrets. The selling price on the condominium was nearly three times the 1997 purchase price. And he and his wife, also an economist, were able to take advantage of an $8,000 tax credit and historically low interest rates of 4.25 percent upon their return to the housing market.
Kiesel, of Pimco, has begun house hunting, and even made a few bids. He says he could buy as early as this fall, when he expects a “flush-out” of excess inventory to start. But the overhang of inventory will probably linger through 2012, Kiesel said, and he plans to remain patient.
Kiesel thinks a fair value for a house similar to the one he sold in 2006 in the same neighborhood is roughly half of what it was in 2006 — another decline of 10 to 15 percent from current prices.
“The housing market has not bottomed yet, especially for the high end, as taxes are headed higher, credit remains extremely difficult to obtain and renting remains cheap vs. buying,” he said. “Supply is still greater than demand, which means prices will likely keep falling. The only place where that’s different is the lower end, because that’s where government has come in to subsidize financing and credit.”
For all the sophisticated spreadsheets and financial data Scott Feldman (no relation to Ben and Julie Feldman) analyzes at work, the signs that prompted him to sell his Manhattan apartment were decidedly Main Street: newspaper articles about soaring home prices, the proliferation of exotic mortgages and first-time home buyers snapping up dream penthouses.
“I was watching TV and there was this show called ‘Flip This House,’ . . . ” Feldman said. “It just didn’t seem right. It was just such a sign of a top when you see TV shows about people buying and selling homes in two months and making hundreds of thousands of dollars.”
For some, the market may look attractive now after three years of price declines. Feldman warns that buyers should be careful.
“If you’re a transient person, don’t buy anything. If you’re a young person, don’t buy anything,” Feldman said. “Don’t buy anything unless you’re going to be there for a long time.”
How long is a long time?
“My wife and I have a deal that we will never leave and never move,” Feldman said, “because moving is so much work.”
http://www.washingtonpost.com/wp-dyn/content/article/2010/07/24/AR2010072400195_2.html
Comments (0)