Bubble Sitting

When the promo for last Friday's Good Morning America was spotted, Tivo was dispatched to record the event. Apparently Charles Gibson & Co. have been talking about real estate lately, and the current topic dealt with the new phenomenon of "bubble sitting".

According to Mr. Gibson:

Bubble sitters are homeowners who are selling now, getting a good price, and then waiting, hoping that prices will come down and they can buy back in at a lower price.

They ran a segment which included an interview with a couple in the New York area who have cashed in and are now renting an apartment that they could not afford to purchase at today's prices. The gentleman interviewed, a financial planner, was keen to discuss their fantastic rental value rather than the prospects for future homeownership, a common theme for those who do this sort of thing.

Then the discussion went in-studio, where none other than Barbara Corcoran was waiting anxiously to discuss this topic with Mr. Gibson. As you'll recall Ms. Corcoran has been featured at this blog on a few prior occasions. Let's see, the first time was back in November when she opined:

It's funny what's happening right now - there's so much uncertainty in the market, and everybody's been spooked by all the media coverage that's out there that it really is a great time to buy. It's a great opportunity right now, and I don't think it's going to last very long.

I think come January, everybody who doesn't buy the house right now for the price that they could afford is going to wish they had because they are going to be paying more in January.

This "bubble babble" is baloney, and it's scaring people away and making buyers "think about it", and while they're "thinking about it", the house prices are going to go up, and I truly believe that.

OK, the part about paying more in January didn't seem to pan out as predicted. But, in fairness, this prediction was really a post-January prediction - it involves something that was later learned to be the "real estate Super Bowl theory":

The Super Bowl may be the grand finale of football season, but in most markets it marks the beginning of prime home buying season.

Buyers usually put house hunting on hold during the holidays, and begin heading out in full force in February.

Last year, according to the National Association of Realtors, existing home sales fell 31 percent in January, reflecting that fewer buyers were out looking in late November and early December. In March, however, sales shot up 41 percent, indicating that buyers rushed back to the market in late January and early February.

Sunday's big game will have no direct impact on the housing market, of course. But real estate agents say they expect that telephone calls and e-mail inquiries will start picking up after the weekend.

Well, the telephones of real estate agents may have been ringing after the SuperBowl, but the sellers likely outnumbered the buyers by a wide margin. With rapidly rising inventory, homebuilder price cuts, and otherwise generally disappointing buyer interest in the last six weeks, what now?

To borrow a football analogy, it seems Barbara is adopting the approach that the best offense is a good defense.

Gibson: Over the last five years or so, nationwide real estate has boomed, but what goes up will likely go down and many homeowners see property as risky as trading on the market... So, the question is, should you sell your home, take the profit, and then rent, hoping that home prices will fall, and then buy back into the market. Joining us now, our real estate contributor, Barbara Corcoran, who's also chairman of Barbara Corcoran Incorporated.

Corcoran: Good morning, Charles.

Gibson: We tried to find some statistics, and it's hard to do, about how many people are actually doing this. Do you have a gut sense?

Corcoran: Yeah, my sense is that roughly ten to fifteen percent of all the sellers out there, worrying about this big bubble idea are choosing to go on the sidelines and "bubble sit" for a while. And, it's growing I might say - growing by the month.

Wow! Combine ten or fifteen percent in this category along with nervous speculators and builders who have no choice in their decision to sell, and this could get pretty ugly - the term "crowded exit" comes quickly to mind.

They then went on to discuss the pros and cons of bubble sitting. The pros, obviously, consist almost exclusively of locking in the gains - pretty simple. What happens next in real estate, if for example, prices do not correct in a timely manner, well, that goes in the category of downside along with transaction costs and a host of others that Barbara had meticulously detailed on a little 3x5 note card which she was eager to share:

Corcoran: And, should I mention one more? I have my whole list here. Is that OK? I'll keep going? Interest rates typically go up, they typically don't go down. So everytime, when you're sitting on the sidelines and interest rates go up by one percent, your mortgage payment is going to go up by 11 percent. That's what it translates to. And so you've got to factor that 11 percent loss into your profit idea as well.

Well, Barbara should know that in the last twenty years interest rates have not typically gone up. In fact rising interest rates in the Greenspan era were very atypical - it is certainly true that interest rates have been rising in the last two years, but that has been the exception to the rule, and it would not be surprising at all to see interest rates go back down, significantly, over the next few years if housing continues to weaken.

Let's just hope our Asian lenders are willing and able to comply with the next round of monetary stimulus that may be required to perpetuate the world economy as we know it.

There were a few nice comments made along the way about having to be "happy where you live", and that maybe it's best to think of real estate as a home, rather than as an investment from which you can profit. Of course, this is counter to the mainstream economic thought in the middle of this decade - rising net worth for homeowners, home equity extraction, negative savings rate, and debt based consumption are all based on the rising housing values.

Just when it was looking like Barbara had the American public's best interest in mind, we hear:

Corcoran: On the other hand, if you're the type of person that you really don't want to disrupt your family, pack your things and put the dog in the car, then my God, take it easy, enjoy the profits - you're living in a beautiful home, and forget the whole darn bubble idea.

That's right, according to Barbara Corcoran, unrealized gains against which money can be borrowed at ever increasing rates of interest are really "profits".