Todd Vogel: “I've read with interest the material about a possible housing bubble, and I have this question: My wife and I sold our house and moved across the country to Seattle.  At first, we weren't sure if we were going to stay, but we've fallen in love with the mountains, the water, and the fresh fish. We plan to live in Europe for a year and then to return to Seattle to settle for good.  We’ve got the proceeds from our house sale sitting in our account, in a safe but plodding investment.  Seattle's housing prices boomed with the tech explosion, and we're afraid to buy now.  On the other hand, we're afraid to wait a year – things might only be more expensive.  I'd like to dollar-cost average a house the way we would our stock investments – or find some other way to spread the risk. Any ideas on how one might attempt this?”

F Free advice can be disastrous, but here's mine:  Wait.  If prices stay firm or even rise 2% or 3%, you’ll come out ahead for not having had to deal with the cost and hassle of an empty or rented home for a year.  Of course, if Seattle home prices jump sharply in the next year, you’ll hate me for ever having opened my mouth – and that could happen.

But you’ve got to wonder whether outsourcing could affect some of the jobs that might otherwise have added to the demand for Seattle housing . . . whether higher interest rates could hurt the ability of buyers to afford even higher monthly payments . . . whether the boom in Seattle housing prices isn’t at least due for a breather . . . and whether it will ever stop raining out there.  (Cheap shot.  I love Seattle, too.)

Of course, the interest rate question raises another issue.  What profiteth it a couple to wait a year to buy a house for $380,000 instead of $400,000 – saving $20,000! – if the mortgage rate has gone up a point and their monthly payment, despite the lower price, would be higher? 

Quick: taker this quiz.  Which would you prefer, paying $400,000 with a 5% mortgage or $350,000 with a 7% mortgage? 

Assume for the sake of simplicity that you are financing 100% of the price, meaning that you’d face a $2,147 monthly payment at 5% on the $400,000 purchase price versus a $2,328 monthly payment at 7% on the $350,000 purchase price.

Same house; which deal do you prefer?

I’d go with the $350,000 price and the higher mortgage, because there’s always the possibility that in a year or three you might have a chance to refinance the mortgage at a lower rate, if rates drop back down – but under no circumstances will you have a chance to lower the purchase price from $400,000 once you pay it. 

Furthermore, if you should move in, say, five years, the extra $10,860 you would have paid in interest (less, after the value of the tax deduction) would be more than made up by the extra $50,000 profit on your sale.

But you asked a different question:  how to hedge this situation.

The problem with hedging is that, like any other kind of insurance, it carries a price.  You could buy your Seattle dream home and rent it at a small loss until you were ready to move in.  That would protect you against rising prices. 

You could buy a different house or condo, figuring that if the price for your eventual dream house has risen, so will the value of the one you bought as a hedge.  But why go through the extra transaction costs of buying and selling – why not just buy the dream house now?

Or you could buy something in Vancouver.  If Bush wins, demand could soar.

Readers: Any better – practical – ideas for Todd? 

READING .PDF FILES . . .

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