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Some saw the housing bubble and sold; trick now is spotting the bottom

Some who sold homes during the bubble are buying again, drawn by deals, despite the possibility of further price drops.

August 17, 2009|Peter Y. Hong

Mark Kiesel saw the real estate crash coming.

Kiesel, a managing director at investment firm Pimco, wasn't alone in his 2006 warning of a looming housing market meltdown. But he was among the few who put his money -- in his case, a lot of it -- where his mouth was.

Kiesel and his wife, Amy, sold their Newport Beach house in the summer of 2006 for 20% more than they had paid and moved into an apartment one-fifth the size.

Now, news reports highlight signs of a real estate market bottom. And the Kiesels are still renting.

Just as experts couldn't precisely time the bursting of the housing bubble, no one claims to know exactly when the market will hit its bottom.

There are plenty of pundits weighing in with predictions on when the housing crisis will end, but knowing what to do is tougher than knowing what to say. For those who sold homes during the bubble, actions can be as telling as words.

"We're not there yet," Kiesel said, referring to the bottom in housing prices. "I plan to buy when I can get a place for 50 cents on the dollar" compared with the market peak, he said.

Kiesel turned out to be right about the housing bubble. But three years ago, he didn't think the crash was going to be as prolonged as it has turned out to be. The Kiesels probably will stay in the apartment longer than planned, he said, perhaps even until 2011.

Declining prices are driving home sales up over last year's levels in Southern California and statewide. Nationally, sales are still below year-earlier levels but have been inching up.

Nobel laureate and Princeton University economist Paul Krugman and his economist wife, Robin Wells, bought a $1.7-million Manhattan apartment this month. The New York residence had earlier been listed for close to $2.5 million.

Dean Baker, a Washington economist, also bought recently. Baker began warning of a housing bubble in 2002 and got even more nervous as prices kept rising.

Baker and his wife, Helene Jorgensen -- also an economist -- sold their Washington apartment in 2004 and rented a place a couple of blocks away. Although they got about three times the 1997 purchase price, Baker and Jorgensen might have made more if they had held on a year or two longer.

"I wasn't trying to time the peak," Baker said, because he doesn't think it's possible to perfectly time markets. (After all, he was three to five years off in his crash prediction.)

That's why Baker and Jorgensen bought a house recently in Washington. The bottom isn't here yet, he says, but it's close enough for him. Baker said he's psychologically prepared for his house to fall 10% more in value.

That risk, he said, was offset a bit by the 4.25% mortgage rate he obtained and an $8,000 federal tax credit. He also emphasized that a house isn't just a financial instrument but something one might decide to spend money on for enjoyment.

"I really value having a porch, a yard, other things like that," he said, and he's willing to pay a price for them -- just not any price.

UCLA public policy professor Mark Kleiman also thinks markets can't be precisely timed. "I'm always happy to get in late and get out early," he said. Kleiman sold his house in 2005 and warned on his blog that real estate prices had zoomed into bubble territory.

He did, in fact, get out early -- the buyer flipped the Mulholland Drive house a year later for an additional $300,000, Kleiman said. But Kleiman was happy to walk away with a hefty profit on the house he bought for $465,000 in 1997 and sold eight years later for nearly $1.4 million. (Kleiman notes he spent heavily on remodeling, so it wasn't all profit.)

Although prices are down, he thinks the safe position is to hold off for now. Kleiman is still renting the Brentwood apartment he moved into after selling.

"Two years ago it was clearer we were still headed down. Now it's not so clear how much more we're heading down, but it's also not clear we're at the bottom," he said.

That's because Westside prices, Kleiman said, are still above what incomes can realistically support.

"When I moved here in 1995, I could afford the house I bought," he said. Now, even though prices have come down, Kleiman said he couldn't afford houses near UCLA on his salary, unless he made an unusually large down payment.

Some people who had been saving for years may be doing just that; others have taken advantage of recent record-low interest rates. That could be putting a floor under home prices.

Still, Kleiman thinks "we may not necessarily be at a natural bottom," because "I still think houses in Los Angeles are expensive on an absolute basis." The "natural bottom" would be the level at which homes would be affordable to people with a down payment of about 20% and fixed monthly payments that could be sustained on their incomes. The Westside is not close to that level yet, Kleiman said.

Kleiman and Kiesel may be more likely to wait because they live in markets far pricier than Baker, who paid $650,000 for his three-bedroom, 1,500-square-foot Washington house.

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