Song of the Real Estate Siren 

Is home equity appreciation the new dot-com bubble?

I'm in denial. I haven't brought in a single penny since September, but on paper I'm worth more than I'd ever dreamed of. Come January, I swear, I'm going to get a job, but as long as I've got this "side job" that pulls down $340 a day, where is the motivation to get on the phone and rustle up some work?

My side job is great, too. It doesn't require any brain power. I don't have to make any phone calls, deal with annoying clients, or even go to meetings. All I have to do is get down to the bank before the 15th each month to pay my mortgage. I am the lucky owner of a home in Montclair, and since I purchased it two years ago, it has appreciated an estimated $250,000. If my husband and I were to cash out today, we'd have earned about $2,400 a week. For us, that's a lot of cash -- more than I ever made as a dot-commer hoping to create the Next Big Thing, and certainly more than I pulled down during all my years in journalism combined. Granted, if we did cash out, we'd probably have to move to Fresno, but we'll cross that bridge when we come to it. For now, we're choosing to count our fantasy cash as if it were real.

Welcome to my bubble. I'm happy to be living here, even though I realize I'm not too different from all those dot-commers who said, "Yes, I'll take the Porsche. With stocks like these, what could go wrong?"

Actually, I'm like my dot-com brethren in lots of ways. Like them, I can see all the signs, but I'm positive my bubble won't burst. Like them, I believe I've tapped into the greatest secret well of riches ever discovered. And also like them, I live with an ever-present, ulcer-inducing undercurrent of fear. For the dot-commers, this fear surfaced in the form of the question "Will anyone notice the Site hasn't made any money?" For me it emerges as "Will anyone notice that my house is only 900 square feet? That I live within spitting distance of a Safeway? That I don't have a backyard? That I'm surrounded by flat-topped 1970s-style apartment buildings? That the parking is as sparse as the needles on Charlie Brown's Christmas tree? That Oakland schools are nearly bankrupt?"

In the rare moments I choose to listen to these fears, I can get really grumpy. That's when I join the other thousands of out-of-work Bay Area journalists looking on craigslist under Jobs: Writing/Editing. That's when I call my husband in a panic and say, "I am going to apply for that position at JoAnn's Fabrics!"

But inevitably, the bubble woos me back with its soothing Siren song. For instance, Money magazine's December issue featured the ten best places to live in the United States, and the Bay Area came in at No. 3. The neighborhoods that make the area so desirable: Noe Valley, Rockridge, and Montclair. My little neighborhood! Cha-ching!

And then there's the matter of "comps" -- real-estate lingo for "comparisons" -- recently sold nearby homes that are used to give homeowners an idea of what their own home is worth. When a similarly sized home two doors down from ours went on the market last month, more than ten people bid on the place. Three offered cash outright, and ultimately it ended up selling for an estimated $140,000 over asking price. But the Siren's song grows even sweeter. The sale of that house brought so many would-be homebuyers into our neighborhood that we soon got an unsolicited offer of our own from someone who lost in the bidding war. She offered us cash. It was the second unsolicited offer we've gotten since we moved here.

Real estate agent Susanne Paul wrote the letter on behalf of her client. I had no intention of responding until deciding to interview her for this article. Now that we've made contact, of course, we're going to set up a meeting to see if we can't work out a deal. My mom thinks it could be the opportunity of the lifetime, but all I can see is a fearsome Fresno stucco McMansion with cathedral ceilings and a dreamy "Tuscan" kitchen. No, we are not leaving the area. The deal would have to be lucrative enough to allow us to upgrade to a larger Oakland home. The thing is, it could be. Despite our home's drawbacks, Paul's client may be willing to pay the price. For several years now, people have been willing to overlook all sorts of problems when it comes to buying a home in the East Bay.

Something ultimately has to give, but when? Not even the experts know. Next month, real-estate trade publisher Inman News is hosting an imposing-sounding "Summit on the US Real Estate Market" titled Housing Bubble: Fact or Fiction? Founder Bradley Inman explains his choice of topic in a press release: "Despite the reams of data pouring into economists' offices at record levels, there is still no general consensus about what will happen in the real estate market over the next six to eighteen months." The keynote speaker is Yale economist Robert Shiller, who is best known for predicting the stock market downturn and resulting recession in his book Irrational Exuberance (Princeton University Press, 2000). Still, Shiller seems to be guessing like the rest of us. Shortly after the September 11 attacks, he projected that Bay Area home values would slide, according to a November 2001 CNN/Money article.

In fact, they haven't. Economist Cynthia Kroll of UC Berkeley's Fisher Center for Real Estate and Urban Economics posits three reasons why East Bay home prices continue to creep upward: new houses remain in limited supply, interest rates remain close to record lows, and people are still working even though we're in a recession. Since East Bay home prices have tended to dip or at least stabilize during times of recession, the rising home prices have Kroll cautious. And of course, now that I've talked to her, I'm feeling cautious, too.

"I would not have expected the kind of increase that we've had," she says. "That does leave one to wonder at this point, 'Could prices go down?' and the answer is 'Yes, they could.' Whether they will is much more uncertain because I would have said they would have gone down two years ago."

But Kroll stands by her belief that the market has to correct itself, although she doesn't think home values will drop as precipitously as stock prices did two years ago. "It's not going to be the NASDAQ," she says. "It might be the Dow."

Kroll doesn't see the East Bay housing market taking a dive out of an airplane. It'll be more like a slow ride down a sticky playground slide. People who bought at the right time won't end up losing ground, she explains. For instance, if a home's value increased by 30 percent over the past two years and dips 25 percent in the following two years, the homeowner is still 5 percent ahead.

The true losers will be the ones who called up their brokers and borrowed against their equity when their home's value peaked -- dot-com stock-style. When the market eventually drops, they'll be forced to stand by as all that equity-earned cash starts looking more like the long-term debt that it is. "I'd think carefully about taking out a $200,000 loan on your equity right now," Kroll cautions.

So where does all this leave me? Plan A is out -- so much for doing a few renovations and pocketing a little cash for living expenses. Plan B looks like the winner -- time to join the rest of the world and find a real job. Plan C remains a possibility -- sell our house and upgrade to another Oakland home -- but only if the agent offers us significantly more money than that nearby house sold for. After all, even though I know that I should stop listening to the bubble's Siren song, it's just too enticing to resist.


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