Getting Out

“I feel totally safe playing polo on a field full of pros. But when amateurs are all over the field, someone can get killed.” – Tom Barrack

I’m still skimming old issues of Fortune that my mother passed along during our Christmas visit. There was an interesting article by Shawn Tully in the Oct 31 issue about Tom Barrack getting out of the U.S. real estate market. “The world’s best real estate investor is selling most of his U.S. portfolio. Now he’s cashing out and buying overseas. Should you cash out too?”

“Right now, Barrack’s view of the U.S. market couldn’t be clearer: It’s a great time to sell, and a terrible time to buy. In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties.”

“And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. Construction costs have spiked 20 percent in the past nine months. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.”

Interesting that this all ties back to housing starts. I wouldn’t really call Tom Barrack the typical homeowner or real estate investor. It’s not like most people can cash out of their New York condo and buy a stake in a Raffles resort in Asia. The Fortune article wasn’t really comparing apples-to-apples. Tom is more like a watermelon. Most Americans just have one apple or small basket of apples. So does his advice really apply?

Well, it does, in a way…. at least his views on the U.S. real estate market. So what steps can a homeowner take to reduce risk and protect their investment before the housing market slows? CNN Money provides a few ideas:

1. Your house is not an ATM
“Now is also the time to stop leveraging our homes so we can continue to spend. People have to minimize the use of home equity for short term financial needs. Get your budget in order. Home equity lines of credit are for long-term financial needs. They were not meant to buy cars and trips and fuel overspending.”

2. Fix your rate
“If you have a variable rate mortgage, now is the time to refinance and lock in a fixed rate to protect yourself in the long run,” said Gary Ambrose, a director at Personal Capital, Inc., a unit of National Financial Partners, recommending that homeowners lock in a rate for at least 25 years. Such a move may hurt in the short term, since it will likely result in a higher payment now, but it can protect you from crushing payments in the future as rates rise unpredictably.”

3. Downsize and diversify
“Maybe you’ve been thinking about a smaller house now that the kids are gone. Or you’ve fixed up the investment property and have been contemplating a sale. If you’re planning on downsizing anyway, do it now. Prices are high now, and at the very least price appreciation is going to slow down.

This same article said, “Several financial planners said it would be smart to use the cash your real estate has created to diversify into more traditional investments. We’re going to see a lot of the money that has been parked in real estate move back to stocks. Wealth should not be centered in your residential real estate, which is going to return to more stable to flat appreciation.”

Perhaps, this is something to consider after selling the house in Palm Springs. Was it worth the risk? Would I have been better off buying in Texas six months ago where a four-plex in San Antonio could be generating positive cash flow? Or because housing is in this state of flux, is it better to take the money and tuck it away with my SmithBarney advisor for a spell. More on this topic soon…