posted on September 22, 2004 05:58:47 AM new
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House Play
After Big Run-Up in Real Estate,
Some on Coasts Are Cashing Out
Lower Prices Inland Create
Opportunity for Arbitrage;
A Slowdown or a Peak?
Selling Loft for 9 Acres Upstate
By JAMES R. HAGERTY
Staff Reporter of THE WALL STREET JOURNAL
September 22, 2004; Page A1
Jo Anne Zliczewski cried when her husband proposed uprooting their family from Pompton Plains, N.J., about 30 miles from New York City. But she had to agree that the numbers looked good: By selling their suburban ranch house for a profit of nearly $300,000, they could buy a much larger home in Pennsylvania and live mortgage-free.
So began a debate that is rumbling across many kitchen tables on the East and West Coasts: Is it time to take profits on the real-estate boom? The huge rise in prices in thriving cities on or near the coasts has created an arbitrage opportunity for people who have the flexibility to move: Sell Manhattan, buy Montana.
Over the past five years, raging real-estate markets in some coastal areas have more than doubled housing prices, while farther inland prices have risen more moderately. That has stretched the price gap between the middle of the country and the coasts far beyond the norm. The typical home price for the 10 American metropolitan areas with the highest housing prices has jumped to 230% of the national median from 155% five years ago, according to an analysis by Economy.com for The Wall Street Journal.
STATE OF THE MARKET
See a state-by-state map of home sales and prices, including snapshots on local economies.
Plus, home sellers in San Diego, Columbia, S.C., Atlantic City, and Akron share their stories of recent selling experiences.
Americans have been arguing for years about whether the surge in home prices on the coasts represents a bubble -- like Internet mania or the 1980s real-estate boom -- or merely an adjustment dictated by supply and demand. But anxiety over the question has been rising lately amid signs that some markets are finally cooling off. Inventories of unsold houses have begun growing in many parts of the nation, including Orange County, Calif., where the median home price has surged to $655,000, up 84% since 2001. Some owners are rushing to sell before it's too late.
Diane Saatchi, a regional vice president for the New York-based Corcoran Group, is advising customers to take their time looking. With war in Iraq, the economy looking wobbly and interest rates expected to rise, "who knows what could happen between now and November?" she says. For those inclined to sell, Ms. Saatchi says, now "seems like a great time."
One reason for caution about the market's long-term prospects: It's getting hard for ordinary people to afford housing near the coasts. The median house price in San Diego has climbed to 4.7 times average annual household income in that city from 2.8 times a decade ago, according to Economy.com. On a national basis, the ratio has risen only modestly, to two times income from 1.8.
For those approaching retirement, the price gap can be too tempting to resist. Jeanne Rowe, 67 years old, had expected to work for several more years as a technical writer for a mortgage company before selling her home in Costa Mesa, Calif., and retiring elsewhere with her husband, Fred, a former manager at a coffee-roasting company.
But Mrs. Rowe says her four decades of working in the mortgage business taught her that there is a cycle in housing: After seven to 10 boom years, she says, "the bottom can drop out." As for the latest boom, she figures, "there has to be an end because people can't afford to buy houses anymore."
So Mrs. Rowe accelerated her retirement plan. In March, the Rowes put a "for sale" sign in front of the four-bedroom house they bought in 1974 for $39,900. On the opening day of the sale, the first couple who viewed the home made an offer, matching the asking price: $672,000. The Rowes accepted rather than waiting for higher bids. "We didn't want to be greedy," Mrs. Rowe says. The profits will help fund their retirement in Tullahoma, Tenn., where they recently paid cash for a $145,000 home.
"They timed it perfectly," says Valerie Torelli, the real-estate broker who handled the Rowes' sale. About a dozen of her clients have made similar moves to cash out and move to cheaper areas inland, she says: "It changes their life. They never have to work again. Isn't that cool?"
The gap between the most expensive housing regions and the rest of the country has widened partly because there is a shortage of land available for home building in the high-cost areas. Those areas already are crowded, and local officials often block residential developments that would add to burdens on roads and schools.
So when the lowest mortgage interest rates in more than four decades spurred demand for housing, builders in many coastal areas couldn't quickly find space to put up more houses. Watching prices shoot up, buyers panicked. In the suburbs of Washington, many dispensed with the usual precaution of making their bids contingent on a professional inspection of the home's soundness.
By contrast, builders can respond much more quickly to increased demand in freely sprawling cities like Atlanta or Dallas, where land is plentiful. Median home prices have risen just 27% in Atlanta and 19% in Dallas over the past five years.
Economists hotly debate whether the housing boom is leading to another bust. "The boom continues," declares David Lereah, chief economist of the National Association of Realtors. While Mr. Lereah forecasts a slowing of price increases, he argues that strong demand from immigrants and the children of baby boomers will keep the market firm over the next decade.
But Robert J. Shiller, an economist at Yale University whose book "Irrational Exuberance" correctly predicted the bursting of the stock-market bubble in 2000, now is increasingly bearish on houses. Noting that prices in Los Angeles fell nearly 30% in the early 1990s, Prof. Shiller says such local or regional busts could happen again in the coastal areas where prices have risen most spectacularly. "These markets are riskier than people realize," he says.
After they had their first child last year, Diana and Bob Pailthorpe knew they would eventually outgrow their 1,250-square-foot home in San Jose, Calif., purchased in 2000 for $415,000. They started to look around in their area. "We realized we'd have to spend at least $800,000 to get a house that was even livable," Ms. Pailthorpe says.
Despite the high costs, they wanted to remain in California a few more years because they both had good jobs at technology companies. But they fretted: What if they bought an expensive new house in San Jose just before prices dipped? They could easily suffer a big loss when it came time to sell in a few years, especially after subtracting 5% or 6% in real-estate commissions. In the end, they unloaded their San Jose house for $593,000 in May and bought a new one, nearly three times as large, for $425,000 in Bozeman, Mont.
Mr. Pailthorpe found a job as a marketing manager for RightNow Technologies Inc., a software supplier based in Bozeman. His wife has found public-relations work there. Their household income has dropped by about a third, and Ms. Pailthorpe has been surprised to find that some things, such as medical and auto insurance, cost more in Montana than they did in California. Even so, the real-estate savings trumped all other financial considerations.
Ben T. Smith IV, chief executive of Spoke Software Inc., Palo Alto, Calif., says he has lost some promising young employees who decided to move to areas with lower housing costs. "When you begin to see young kids -- ones who are the future of the business -- opt out, that definitely has an effect on how you develop the business," Mr. Smith says. He has moved some work to India and allowed one of his software engineers to work from home in Vermont, visiting California just once a month. "For both sides, the economics worked out better," Mr. Smith says.
In Manhattan, Michael Quinn and his partner, John Soroka, decided to cash out on their two-bedroom condo in Manhattan's Hell's Kitchen neighborhood, agreeing to sell it for around $625,000 in mid-September. The proceeds will be enough to let them buy two homes -- one in Bronxville, a 30-minute commute from the gift and clothing shops they own in Manhattan, and another in Fort Lauderdale, Fla. The real-estate windfall makes it possible "to have two places and not be financially strapped," Mr. Quinn says.
Karen Davidson, a 50-year-old graphic designer, recently sold her loft in Manhattan's trendy Tribeca district for more than $1.5 million and bought a cabin and barn on nine acres in Lake Placid, N.Y., for $65,000. She found that she could do her freelance work there as easily as she could back in Manhattan. One of her main motivations was that she didn't want her life savings to be wrapped up in Manhattan real estate. By moving, she has been able to create a retirement fund for the first time.
Some owners of vacation homes also are deciding this is a good time to cash out. The inventory of unsold homes in Great Barrington, Mass., a popular spot for vacation homes in the Berkshires, is up about 40% from a year earlier. Richard Jackson, a real-estate agent at Wheeler & Taylor Realty in Great Barrington, says a local home-listings publication "is getting to be more and more like a telephone book." Dick Krzynowek, president of Isgood Realty in Great Barrington, says many sellers are seeking fancy prices for their homes but some buyers are "digging in their heels."
For the Zliczewskis (pronounced zluh-CHEF-skis) of Pompton Plains, N.J., real-estate profits were a lifeline. John Zliczewski, 51, who holds a bachelor's degree in business administration, last year was laid off from his job as a manager for a software company in New Jersey. It was his third layoff in four years. "Three strikes and you're out," he told his wife.
Jo Anne Zliczewski, 45, a mother of four children age 7 to 13, went to work folding clothes at a discount store so the family would still have medical insurance, but their financial situation looked shaky. Their four-bedroom house, purchased a decade earlier for $175,000, was their major asset. After his layoffs, Mr. Zliczewski wanted to ensure his family would have food and shelter no matter how he fared in the job market.
Friends suggested they consider Pennsylvania, where the typical house price is about half the New Jersey level. Mrs. Zliczewski hated the idea of moving away from family in New York City and doubted the schools there would be as good.
Then Mrs. Zliczewski began looking at Pennsylvania home prices on the Internet. "I was amazed at the size of house you could get for the price you'd pay for the handyman's special in a flood zone in New Jersey," she says.
In March, the Zliczewskis sold their house in New Jersey for $459,000. They used the proceeds to pay $309,000 in cash for a much bigger home overlooking a corn field on the fringes of Lancaster, Pa. Mrs. Zliczewski found the local schools better than she originally expected. Her husband got a job selling trailers for temporary office space. Though his new job pays only about two-thirds of what he made in New Jersey, the family no longer has a mortgage payment and can live comfortably. The neighbors include a doctor and a bank president. "We're like the Beverly Hillbillies here," Mr. Zliczewski says.
At their new church in Lancaster, the Zliczewskis met Jeff Geoghan, who recently moved with his wife and two children to Lancaster from Orange, Calif. The Geoghans sold a 1,200-square-foot bungalow in Orange for $400,000 and bought an 1,800-square-foot home in Lancaster for $175,000. Mr. Geoghan had to give up his job as an Internet sales manager in California, but he quickly found work in Lancaster as a real-estate agent. He expects to help people from the coasts find homes in Pennsylvania.
