Bubble sitting: The pros and cons
Waiting for home prices to drop before buying a home is tempting, but making the right call isn't simple.
NEW YORK CNNMoney.com -- Convinced home prices will fall? So are a lot of other Americans.
Some - known as bubble sitters - are acting on their conviction. They're cashing out by selling their homes and renting, figuring they'll return to the market after prices have fallen.
Bubble sitters also include those people who have never owned a home and are waiting to take the plunge, along with folks who are relocating and holding on to their cash until the market in their new hometown softens.
Many experts have labeled the majority of U.S. housing markets either overvalued or severely overvalued, but is it wise to count on prices falling?
Roulette or sound reasoning?
Bubble sitting has contributed to softening in housing markets, especially in new homes. Builders have reported slowing sales and they're offering numerous incentives, rebates and discounts in order to move inventory. Just this week, builder Toll Brothers announced they expected sales to decline substantially for the year.
"With many potential buyers on the sidelines right now, we believe there is growing pent-up demand that will come into the market once buyer sentiment improves," said CEO Robert Toll.
He does not, however, think bubble sitting works. "It's very hard to pick a bottom," he said.
Bubble sitters might argue, though, that it has worked for new home buyers this year. They are, after all, receiving discounts and incentives that were nearly non-existent last year.
Dean Baker, an economist and co-director of the Center for Economic and Policy Research, is a bubble sitter himself, having sold his home a couple of years ago. "It is a very bad time to buy. Prices are heading down," he said.
Baker also predicts that the markets that have run up the most will suffer the worst turndowns. He compares it to the tech bubble when Nasdaq stocks rang up the biggest gains before the pop and fell the farthest from their highs after it.
Even though he did it himself, Baker says most people should not sell in anticipation of getting back into the market at a lower price.
"I don't think people want to speculate on their homes," he says. "But if they're selling for another reason - if they're downsizing, for example, because their children have moved out - they should cash out and rent for a while."
A colleague here at CNNMoney.com is a perfect example of someone who Baker thinks could take advantage of plunging home prices.
The colleague is moving from one New Jersey suburb to another with a more respected school system. He's selling and renting. That way, he hopes, he can wait out the bubble and scoop up a property from a motivated seller at a big discount next year.
"He's playing a bit of roulette," says Jim Gillespie, CEO of Coldwell Banker, who doesn't think even that scenario justifies bubble sitting. "Look at the history of prices in this country. [Postwar prices] have never gone down."
While that may be true on a national level, it's also true that home prices in individual markets have fallen during periods after 1945. (See"When booms go bust".)
"My advice is don't do it," Gillespie said. "If the Feds stop raising rates, mortgages will start to go down and prices will recover."
Factors to consider before making a move
But Bernice Ross, CEO of realestatecoach.com, says that there's a lot of downward pressure on home prices. Foreclosures and delinquencies have risen and, in many of the hottest markets, interest-only mortgages will be adjusting upwards, making it difficult for some owners to keep up with monthly payments.
That will open up buying opportunities, but also will draw more professional investors into the mix. These, she says, are "not emotional buyers. They're crunching numbers, looking for cash flow."
If professionals enter a market, they could help support prices, making them less attractive for bubble sitters, not to mention that the entry of professionally investors will indicate that the market has fallen as far as it is likely to go.
John Bredemeyer, speaking for the Appraisal Institute, an association of professional real estate appraisers, says anyone considering bubble sitting should take three basic factors into account:
Where the market is heading: Says Bredemeyer. "You need to know what your market is doing. (This is where a professional appraiser comes in.)"
It matters little if California crashes when you're buying in Iowa. Local economic conditions such as factory closings and population changes, count as much as or more than national trends.
What your reason is for buying: Bredemeyer says cashing out and buying later is usually not a good idea - the costs of selling and repurchasing is going to kill you, even if prices do fall.
But, says Bredemeyer, "If you feel you're sophisticated enough to time the market, go ahead, but go in with your eyes open."
For those who are just entering the home market, it can make sense to rent for a year, according to Bredemeyer. "If you don't know the area, you can learn more about it and find out where you really want to live." Falling prices make the advantages of that strategy even more compelling.
"But if you already own a house you like and there's no other reason for moving, stay put," he says.
What your time horizon is: The value of bubble sitting also depends on how long you intend to live in a house. If you're planning to be there for five years or more, it make sense to buy as soon as possible. Time smoothes out any price bumps - over long periods prices nearly always go up - and the tax advantages may help make it cheaper to buy than rent.
It's a different story for the short term. Then, all those buying and selling expenses means that even in flat markets, you could be underwater if you sell out after two or three years.