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YOUR MONEY

How we cashed in before the crash

A Times reporter just couldn't ignore the warning signs in 2005

January 20, 2008|Peter Y. Hong | Times Staff Writer

Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.

We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit -- and a sign that the market had been pumped up beyond reason.

That's why we decided to rent instead of buying another house right away. We wanted a place with a yard and a third bedroom, but we weren't willing to pay the sky-high price or take out an exotic mortgage to buy something our income did not justify.

So our plan was to take our profit and wait for prices to return to Earth. The madness had to end, we thought.

For a while, we wondered whether we would prove to be the crazy ones as home values in Southern California overall continued rising through last spring. But a closer inspection of real estate sales data shows that signs of trouble were already appearing when we sold.

Condo prices in the ZIP Code where we owned ours peaked a few months after we got out in 2005, at the median price of $480,000 (almost exactly what we got for our place).

But at the time, a lot of people thought we had sold too early. To stay on course, I adopted a personal anthem. It was a Public Enemy song that hit big in 1988 during the previous real estate run-up: "Don't Believe the Hype."

The song played in my head constantly. I heard it whenever friends warned me that I would be missing out on massive future gains. The music's volume went up as real estate agents said that if we stuck to our plan to sell and then rent, we could be priced out of the hot Southern California market for good.

The thumping chorus carried me through: "Don't believe the hype!"

Now that the bubble has burst, my friends think I am a master of market timing. Those who haven't had their financial legs taken out from under them by the real estate crash are asking when they should buy investment properties to ride the next big wave of rapid appreciation.

As always, there's more to the story.

Lessons learned

Though I would like to claim special powers to read the future, I was really just resisting the market mania of the time.

The tech stock bubble was fresh in my mind, as was the early-1990s real estate boom. At the height of our most recent real estate run-up, there was constant talk of new reasons the market would not fall: immigrants, endless demand for scarce land in sunny Southern California and so on.

It all sounded to me like the Florida real estate boom chronicled by economist John Kenneth Galbraith: the boom of 1928.

The Florida run-up, Galbraith wrote, contained "the indispensable element of substance." He meant Florida's obvious appeal as a sunny destination, much like that of Southern California.

Yet on top of that substance, real estate prices in Florida accelerated to the point that people depended on those gains to support their spending.

A similar phenomenon happened here. I saw friends with otherwise good judgment buying houses they couldn't afford, confident that they could refinance when their home values went up by double-digit annual rates. Others used home equity to pay for fancy cars, meals, vacations and other things that would never return any value.

Of the 1920s Florida bubble, Galbraith wrote, "People want an excuse to believe" in the boom and can't be persuaded by evidence to the contrary. This is what I saw in Southern California in 2005.

The idea of an ever-rising real estate market was a favorite topic in much of the news media. A Los Angeles Times Sunday magazine cover in November 2003 carried this headline: "Will L.A.'s Real Estate Bubble Burst? No, Because There Isn't One. There's Just Too Much Demand, Not Enough Supply and No Room to Build. None of That Will Change."

Reading those words, I thought of Galbraith, and those people in 1928 wanting an excuse to believe.

Legend has it that smart money on Wall Street knew the stock market was headed for a crash in 1929 when shoeshine boys started giving stock tips. I sensed trouble when a homeless man told me he was studying for his real estate license.

When we held our one open house, the frenzied strangers who poured into our living room only deepened my sense that reason had given way to something like mania. But even if I had picked up some of their exuberance and doubted myself, there was no time to reconsider. The place sold in a week -- to a corporate economist -- while repairs were still underway, including one job that left a 3-foot-wide hole in a ceiling.

I wondered what it would have taken to deter those eager buyers. Asbestos? Rats?

By the time the excited throngs cleared at the end of the first day, I no longer doubted my belief that the bubble was about to burst.

Reading the signs

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