Money Magazine on "Cashing Out"

We once again turn a curious eye over to the real estate section of the CNN/Money website, where we find this article which asks the question, "Should you cash out of the real estate market?" Not surprisingly, you pretty much know everything that Money Magazine wants you to know on the subject by reading the title and subtitle:

Homes: Cashing out might freeze you out
Is it ever a good idea to try to time the real estate market?

While there is some worthwhile information and some good advice in this article, the headline writers at CNN/Money never cease to amaze. In the title, they colorfully answer a very specific question about cashing out real estate gains (i.e., selling, then renting with the intent to buy again in the same area after prices fall), but then they ask a much more general question on the same subject in the subtitle.

So, what might seem like an obvious question and answer pair really isn't. They get around to answering the general question hundreds of words later, in the last section, while most of the article focuses on the headline answer.

To the unwary Money Magazine reader, the message is clear - DON"T CASH OUT!

[We are spending way too much time commenting on CNN/Money stories, as is clear by looking here, here, here, and here ... no, maybe that is the right amount of time.]

Good Advice

The good advice contained here is pretty simple - if you gamble, be prepared to lose:

The biggest gamblers are even attempting an extremely tricky maneuver, according to Christian Coleman, district director for Zip Realty, a publicly traded real estate broker with offices in 10 states.

They're selling their houses with the intention of buying back into the market at a lower price in a couple of years or so -- after the bubble bursts, they believe.

The advice from the real estate industry pros is: Resist this temptation. It's almost impossible to time this market.

Now, investing in condos in the summer of 2005, with expectations of quick and plentiful capital gains would seem to be a much trickier maneuver than selling your primary residence at a time that appears to be, more and more, the peak of a bubble. But, that's not really relevant here.

The cash out maneuver described above is tricky indeed.

It is similar in some ways to selling a stock, and then shorting it - the short sale part of the transaction being the intention to buy back into the market, sometime in the future, at what is hopefully a lower price. Of course, when you do this with stocks you must cover the short position. For housing, you have the option of moving to a lower cost state.

So, if a seller is planning to live in an area for the rest of his life, then, yes, this is very risky. Anyone who has unsuccessfully shorted equities knows the old adage, "the market can remain irrational, longer than you can remain solvent", and it is indeed possible that housing prices will just flatten out or rise moderately while rents and incomes catch up.

The couple from San Diego who sold two years ago at $850,000 and now look at that same home with a price tag of $1.2M, must be painfully aware of this by now. Let's hope they invested some of their home sale profits in oil and oil stocks two years ago.

Wait Just a Second!

Before we continue, can we just pause and think about how bizarre this whole situation is?

A major personal finance magazine has actually published an article asking if it is wise to cash out real estate gains on your primary residence and rent a home while waiting for a real estate bubble to burst. This question is being directed at millions and millions of homeowners in the bubble areas of this country, many of whom are now obsessed with their home equity - either trying to figure out how to spend it, how to invest it, or how to preserve it.

Can you imagine your parents or grandparents faced with questions like these when they were young adults?

Other than the 1925 Florida real estate market, can you think of any other time in history when questions like these were asked?

Imagine if you could pocket a cool half million today, then everything falls apart next year, and then after another three or four years, you use that half million to buy back in. You end up with the big house on the hill that you longingly looked at back in 1997 and thought, "there's no way I'll ever be able to afford a house like that".

In 2009, you are pretty much the same person you were in 1997, a steady job, some moderate salary increases over the years, but now you're living in that big house on the hill.

Calling this one correctly could set you up for life! Is this a great country or what?

Nothing Bad Will Ever Happen

While Money Magazine does offer good advise from time to time, they also know that part of their job is to help prevent confidence from faltering:

Anyone even considering it should take heed that many experts predict that the strength of the housing market will continue for the near term.

The latest forecast from chief economist Doug Duncan of the Mortgage Bankers Association, for example, is that the price of a median house will rise a total of 6.8 percent in 2005 and between 4 and 5 percent in each of the two following years.

Many people have made many forecasts in this world, and with the exception of predicting quarterly financial results, pessimistic forecasts are few and far between. What's the point? No one goes back to check on your forecast unless you issue stock - in that case it matters.

What harm does it do for any economist to predict blue skies and clear sailing? What fun is there in being a wet blanket?

And, finally to the "elephant in the living room" as some call it - the argument that real estate will not falter because the underlying economy is strong:

Drops of more than 20 percent in local real estate prices have never been common and the worst falloffs are almost always related to reversals in the economic fortunes of an area.

Conveniently omitted from this shot of confidence is the horrifying reality that our economy is, as never before, dependent upon a booming real estate market to not only provide jobs (construction, home improvement, and finance), but also to enable increased consumer spending via home equity withdrawal. This phenomena, for the county of San Diego, has been previously discussed here and here.

To use this argument is to completely ignore the role that real estate has played in today's Frankensteinian economy.

At some point in time, we will all look back and wonder what we were thinking. How could so many people in such high places have thought that it was OK for real estate values to play such a large role in economic growth?

But, for now, we just watch and wait.