Trapped

House hopping became attractive during Greater Boston's boom years - you could buy and sell every two years and make a tidy profit. But most of that has come to a screeching halt. Meet the folks facing a new reality.

David Goldman has been living in his South End home for about 18 months now - which means, predictably, that he's getting ready to move. "I never stay in one place too long," says Goldman, a real estate developer who's migrated between residences frequently the last few years, reaping profits every time the moving van pulls up. And even in the current real estate downturn, he aims to keep going.

Before Goldman lived in his current home, on Bradford Street across from Peters Park, he bought a three-unit building, which he'd converted into condos. While he rented out the upper units in the South End building, he lived in the garden unit for four years. Then he sold it and moved into the middle unit. Two years later, he sold it, and moved upstairs into the penthouse. Three years later, he sold it and bought his current home for $1.25 million. Now, after renovating its kitchens and bathrooms, moving some walls and replacing some flooring, brokers tell him it could sell for at least $1.8 million. He expects to put it on the market next spring.

"[It's like] owning a car - you keep it until you get bored, and sometimes for no other reason than it's been a few years - two, three, four years - you trade it up," he says. Of course, this was much easier to do during the real estate boom, when prices on homes in Massachusetts appreciated by double digits without even the tiniest home improvement. But Goldman says that by making smart alterations to his home - and, crucially, by buying across the street from a park that's undergone a dramatic, city-financed makeover - he ensured his house would gain value whatever the market did. "If you make smart decisions in any market, you can do well," he says.

It's an attitude that's emblematic of the boom times through which we've lived. According to statistics compiled by the National Association of Realtors, roughly one-third of home buyers are typically trading up to a bigger, newer, or nicer home. (The rest are first-time buyers, downsizers, or people making lateral moves.) Growing families have always had a tendency to trade up, but lately the dynamic has been different. Years ago, homeowners had to wait patiently for some external event - like a big pay raise or an inheritance - that would improve their financial position to allow them to make their move. During the boom, in contrast, "people were able to trade up simply on equity," says Barbara Shea McDonald, a veteran broker in Westwood.

Statistically, Americans' tendency to move between houses has been relatively stable over the years. According to surveys by the National Association of Realtors, the median length of time someone lives in a home before selling it is six to seven years, a narrow range that hasn't changed this decade. Data from the US Census paint a similar picture: Nationally, its average "tenure at residence" for homeowners is approximately eight years. But in some neighborhoods - particularly those featuring lots of smaller starter homes - people seemed to move more frequently during the boom. "There was probably an acceleration of this earlier this decade," says Kermit Baker, a senior researcher at Harvard's Joint Center for Housing Studies.

That was certainly the case in my neighborhood. My family has lived in a suburb west of Boston for more than nine years, and in that time, the Colonial to our right has had four owners, while a Cape across the street has had six. While some of these owners moved due to a job change or other reasons, the majority simply wanted a bigger, better house.

Now that formula has changed. In August, Massachusetts home prices dropped to a six-year low, according to the Warren Group, a publisher of real estate data. And with the number of foreclosures growing and the continuing troubles on Wall Street, the housing market seems unlikely to rebound quickly. For anyone who's bought a home in the last few years and hopes to trade up, that means some tough choices. According to data compiled by Zillow.com, a real estate website, nearly 1 in 4 Massachusetts homes that sold between July 2007 and July 2008 was sold for less than the owner paid. Zillow also figures that roughly 20 percent of Massachusetts homeowners who bought a home in 2005 have "negative equity" - meaning they owe more on their outstanding mortgage balance than they'd reap from a sale. Taken together, that means anyone trying to house hop today has to be extremely clever, relentlessly determined, or willing to look beyond the financial implications of the decision.

In the wake of every boom-bust cycle, a new generation learns some hard lessons. Indeed, one of the reasons America's housing markets went crazy during the early 2000s was that so many people who'd been burned by the dot-com bust sought refuge in the housing market as an ostensibly safer way to invest.

So, for people who became accustomed to short stays and fast profits, the years ahead will require some adjustment. Already, Americans have begun to view homes as less a vehicle for get-rich-quick schemes than a necessary (and often burdensome) monthly expense. And even for many of us who can't help but scan the real estate listings for something a little bit bigger or a little bit nicer, our current home is the place we'll expect to be for quite some time.

FOR SOME OF THE HOMEOWNERS WHO'D hoped to trade up but can't sell their current home, there's a simple solution: Rent out the old place and buy the new one. "I've seen that more and more when we're talking to clients," says Michael DiMella of Charlesgate Realty Group. If homeowners think they won't be able to sell at the price they want, he explains, they are considering renting the home out for a couple of years instead. But that's a process that's become more difficult in the last year. Many homeowners can't scrape together 20 percent down payment toward their new home without selling their old one, and since the credit crisis began, lenders have pulled back on low down payment mortgages. Those who can find a low down payment loan will likely pay a higher interest rate. "Like every other loan right now, it is doable, and you can get financing, but it is more difficult to qualify," DiMella says.

One of DeMella's clients, Andrew Warren, recently decided that strategy made sense for him. In 2004, with financial help from his father, Warren spent $380,000 to buy a 1,000-square-foot loft in Chinatown. At the time, he was 24 and studying law at Suffolk University, and his father figured an interest-free loan beat paying rent on an apartment for him. But last year, after graduating, Warren, who's now an agent representing pro hockey players, wanted to move to something bigger and listed his apartment at $439,000. No dice. So, for the last nine months he's rented out his old condo for $1,900 a month while he's moved up to a $585,000 condo at Navy Pier, which he purchased himself and shares with two friends, who pay rent. (His father gets a portion of the rental income on the old place.) "I just want to get to a position where the market goes back up," he says. Then he'll unload the Chinatown condo - and with luck, earn a profit.

Other buyers aren't so fortunate. They have life circumstances that force them to move now, and they've no desire (or lack the financial wherewithal) to keep their old home as a rental.

That's the situation that the Krebs family faced last year. In 2000, they'd moved from Pennsylvania to Westwood, where they'd purchased a 1,800-square-foot Cape. The family loved the details on the 1935 home, for which they paid $324,000. "It had a very quaint feel, a lot of character," says Liz Krebs. But after the family's second child was born, they began to feel cramped. So, in 2005, they sold the Cape for $460,000 and moved into a three-bedroom, two-and-a-half bathroom newly renovated Colonial, paying $590,000. They loved that house, too, especially its master bedroom. They figured they'd stay put for many years.

Those plans were turned upside down by a job offer. Gary Krebs, a publisher, was recruited by a book company in southern Connecticut. The job was closer to Gary and Liz's relatives, most of whom live in New York. If they were going to move closer to home, it made sense to do it before their kids became ensconced in Westwood's schools. So in June of last year, they listed their Westwood house for $615,000, a $25,000 bump over what they'd paid. Even though Massachusetts home prices had sagged, they believed Westwood was holding up well. "We thought we'd break even," says Liz, who is a stay-at-home mom.

But as Gary began commuting to Connecticut and their house sat unsold, the family realized they'd probably need to sell at a loss. They rejected a low-ball offer of $530,000, but that potential buyer came back with another offer. By the end of the negotiations in August of last year, the Krebses had accepted $568,000 for the house, a loss of more than $20,000 (which became larger after they paid the real estate commission). "We made the choice to lose [money], and it could have been a lot worse," Liz says. "We know other people who've lost hundreds of thousands on their house."

Nobody likes to lose money on a house. But when trade-up buyers make this decision, they have a compelling consolation, a mathematical phenomenon that realtors love to tout. To wit: If an area's houses fall in value by 10 percent and you up-scale from a $400,000 home to a $600,000 home, the home you're buying has lost even more in value than the home you're selling. From a certain perspective, you're getting a good deal.

The Krebses experienced that firsthand when they relocated to Fair- field, Connecticut, last year. They were able to buy a larger home on a nicer lot with a swimming pool. They paid $637,000 for their new home, which had been listed just weeks earlier at $700,000. "If you're moving from one affluent area to another affluent area, you have to look at it in terms of what you're getting," Liz says. They believe their new home is a relative bargain, and they hope Fairfield's school district will help their home hold its value. They take solace in knowing the down market that forced them to sell their old home at a loss helped them buy a better home at a lower price, and they think of it as a form of real estate karma.

Jenny Gibbs and her family have experienced their own form of real estate blessings. In 1999, Gibbs and her husband bought their first home, a two-bedroom co-op in Brooklyn's Park Slope neighborhood. They did minor fixes - adding a wall to improve the layout, changing light fixtures - and sold it two years later for $250,000, twice what they'd paid. They put that money into another co-op, where they renovated the kitchen, painted, and once again reconfigured the floor plan. "I can never leave the walls alone," says Jenny, who's a professional home stager. By 2003, they'd sold their second condo, again doubling their money. They attribute much of their success to the strong Brooklyn real estate market, but Jenny says people underestimate how much small cosmetic changes can increase value. "Just changing the light fixtures and painting and putting in your own nice furniture makes such a huge difference," she says.

Like most people who look to trade up for profit, Gibbs and her husband were careful to spend at least two years in each property before packing up. If you stay that long and the place is your primary residence, the tax law gives an exclusion on capital gains taxes if you make a profit when selling. Under the law, individuals can pocket a gain of up to $250,000 tax-free, while a married couple can avoid taxes on gains of up to $500,000. That's why when would-be up-sizers call Back Bay real estate agent Ricardo Rodriguez, he usually urges them to stay put until they can get the exclusion. "It's smarter for somebody to wait for two years," Rodriguez says. "Ideally, why not take the benefit of it?"

After two successful trade-ups, Gibbs and her husband began thinking bigger. For $490,000, they purchased a full-fledged house, albeit one in rough shape. They did a substantial renovation, adding a two-story addition. By 2005, they'd sold it for a smidgen under $1 million. That's three homes in six years - and along the way, they'd earned hundreds of thousands in profits.

They poured much of these winnings into an $850,000 brownstone that required a gut renovation. They drew up plans to add a fourth floor and a three-story extension out back. Unlike their last three homes, they figured they'd live in it for years. From the get-go, however, things were rocky. It took seven months to obtain the proper permits, during which time they faced huge carrying costs. By the time they needed to sell for a job relocation, in late 2007, the credit crisis had hit, limiting the buyer pool. At one point, they had a signed offer for $1.95 million, but the buyers never showed up at the closing. "Every offer after that was a little bit less," Jenny says, and several deals fell through. Now the house is under contract for $1.8 million, a price at which they'll barely break even.

Today they live in a rented home in Milton, which they plan to buy for $755,000 as soon as they close on their home in Brooklyn. Their new home is a farmhouse, renovated by the previous owners, that needs very little work. They'd hoped to buy a home in Milton that they could fix up and sell in two years, but they don't have enough faith in the current housing market to make that kind of bet. Today, after years of house hopping, the Gibbs family expects to stay in its current home for as long as five years.

IN A COUNTRY WITH MORE THAN 800,000 bank-owned homes for sale and the foreclosure rate still soaring, stories like the Gibbs family's feature relatively happy endings. But among people who've moved frequently between houses in search of riches, some stories are still unresolved, their owners still facing peril.

Earlier this fall, that group included Dennis Kerkado, a builder who lives in Falmouth. He'd purchased his first home, a condo in Ashland, five years ago when he was just 25. After 18 months in it, its value had increased, so he tapped into the equity by refinancing. He rented out the condo and used the proceeds from refinancing to move into a waterfront home in Mashpee, paying $575,000. During the next two years, he added a second story to the home, which he lived in during most of the renovation. Last October, he sold it for $975,000, earning about $100,000 on the deal.

Soon afterward he was straddling two big projects and feeling a bit overextended. For $610,000, he bought a waterfront home in Falmouth that he leveled and rebuilt, paying $350,000 to construct the new home. Today he lives in it, and it's on the market for $949,000. Even if it sells at that price, he'll lose money.

Meanwhile, he's also midway through building a 9,000-square-foot waterfront home in nearby Mashpee. It has five bedrooms, a wine cellar, a media room, and 1.2 acres of land near a country club. He'd intended to be living in this home by now, but he's been unable to sell the Falmouth house, and now he's short of funds to finish the Mashpee home, which he has listed for sale at $2.99 million. "I'm holding on to too many mortgages right now," says Kerkado, who figures his total mortgage indebtedness at $4 million. "I've gotta get rid of something. . . . Cash flow is really tight."

This current predicament has led Kerkado to rethink his practice of moving frequently and seeking profit in his primary residence. Although he worked at other contracting jobs on the side, he's always thought that buying and fixing up houses (usually while living in them) would be a profitable quasi-career. "If you're able to move through a property every two years and make $250,000 [the amount excluded from capital gains taxes], that's $125,000 a year. That's not a bad living. If you can supplement that with other stuff , that's pretty good."

Of course, that plan assumes that houses always appreciate and that it's easy to sell when you're ready to - and right now, neither assumption is proving true. For Kerkado, who's now 30 and getting married this fall, the vagabond lifestyle might not have lasted anyway. "Changing your address, the mail, it's a pain - everything about it is a pain," he says. And like a card player who keeps rolling his winnings into the next bet, Kerkado says he's essentially placed all his profits into the big home in Mashpee. "Your real payday is when you stop," he says. "I'll come out on top if I'm able to sell it."

Daniel McGinn is a Boston-based national correspondent at Newsweek and author of House Lust: America's Obsession With Our Homes. E-mail him at dan@houselustthebook.com.