Friday, November 18, 2005

Yes, Virginia, There Is A Bubble ...

I'm sure you all recall the famous 1897 New York Sun headline above an editorial written in response to a girl named Virginia, the daughter of Dr. Philip O'Hanlon, a Manhattan coroner's assistant. Virginia, who was 8 years old at the time, had begun to believe her friends and doubt the existence of Santa Claus.

The editorial offered hope and inspiration, and stated quite directly that indeed the fat man was real, regardless of what the facts might imply.

I couldn't help but think of that editorial as I read the text quoted below. It's a letter that was passed on to me by a friend who received it from a real estate agent. The agent e-mailed it to dozens of people with the subject line "The Housing ’Bubble‘ – Is Now the Wrong Time to Buy or Sell?"

Surely there are many "Virginias" out there pondering the question: "Dear Agent, Is there a Housing Bubble?

This agent's reply is more complex than "yes," or "no."
Back in 1990, a family I know bought a beautiful house on a nice street in San Marino.

At the time they bought the house, the Southern California real estate market was in the final year or so of a real estate frenzy that had seen prices escalate dramatically. They bought at the peak of the market.

The house they bought was a five bedroom house on a nice-sized lot with a swimming pool and a three-car garage. They refinanced it and did some renovations and by the time they were done, the house had cost them about $950,000.

And then the real estate bubble turned into a bust. Values plummeted. At one point, in the mid-90s their house was probably worth around $600,000

What a disaster! A terrible investment, right?

They apparently had bought at the absolute wrong time – at the height of the market, then put even more money into the house in a remodel, and were stuck with a real turkey of an investment, right?

Well, that depends. If the house had been a stock, it would have been a terrible investment. But a house is not a stock nor is it a commodity, nor is it an annuity nor is it like any other investment a family can make.

A house is different because unlike those other investments, you can live in a house. And our friends did. During the years their house “declined” in value, they still made mortgage payments, still got the tax benefits of owning the house.

And they got something else. Their children grew up in the house. They made friends with other kids on the block, they joined Little League and went to school. The house was the scene of many wonderful family gatherings and memorable occasions.

Can you knock on the door of a stock and quietly enter a room to comfort your daughter who’s sobbing because her first boyfriend left her?

Can you put up a Christmas tree in the living room of a tax-deferred annuity?

Can you answer the door of your short-term T-bill and give out Halloween candy to the neighbor kids?

No, you can’t. Not that any of these investments are bad. Each has its place. It’s just that when looking at a house as an investment, people often spend too much time thinking about a house like it’s just another financial instrument. They wonder if now is the right time to buy. Are valuations too high? Should I just wait?

The answer is this: the best time to buy a house is when you need a house. If you don’t need a house, don’t buy a house. But – and this is the crucial point -- if you need a house and you find one that suits your needs and you can afford it, now is the time perfect time to buy. Regardless of what “the housing market” is doing.

Did my friends pay too much for their house in 1990? Maybe. But they needed a house and they could afford the one they bought and they loved it.

In 2004, the husband was transferred out east and they sold the house.

Selling price? $1,850,000.

So now, you tell me: did they buy at the wrong time in 1990? Did they pay too much? Or did they, maybe, buy their house at the absolute perfect time?

If you or someone you know are thinking now is the time for you to sell your house and buy a new one, give me a call. Because now just might be the perfect time.

— The Boy in the Big Housing Bubble