? More Flipping Tales |
| Guess How Much These Houses Cost ?
July 05, 2005
Washington DC bubble?
In response to my earlier posting questioning whether home prices were outstripping income gains, one reader (IDed as "Audiorich") writes...
"Not in the Washington D.C. area! House prices here may rise less rapidly in the future (and that would be a good thing), but they won't stop going up. If you lived here, you'd see that."
Actually, Audiorich, I lived in Washington for nine years (1989-1998). And a recent visit convinced me that Washington is a huge bubble waiting to pop...
Consider this: My wife and I bought our first home in Alexandria, near the Mount Vernon estate, in 1991 for the princely sum of $216,000. For the next seven years the house did...nothing. When I transferred to become the magazine's Atlanta bureau chief in late 1998, we sold it for..$222,000.
We visit Washington every year during our kid's spring break, and during our latest visit this past April, my jaw dropped. The house next to our old house (identical in structure) is on the market for $520,000. That's roughly 130% appreciation in six years.
Now let me tell readers what you're getting for $520,000: A 2700-square feet, two-story, aluminum-sided, starter house with no basement sitting on a 7000-square-foot plot that floods during heavy rains (the house is near the Potomac river) in a mediocre school district. Now explain to me how young families buy into Washington. They have to put $50,000 down and take out a $470,000 mortgage for a starter house? Or do a $520,000 "interest only" mortgage with a starting payment of $3700 a month that balloons to over $5000 a month when the principal comes due? I'd like to hear the argument of Washingtonians as to how this isn't a bubble?
TrackBack URL for this entry:
The Washington DC housing market is not a bubble for 3 reasons:
(1) This is a government, defense, and high-tech center. I believe we have either the 3rd or 2nd-worst traffic in the country. Everyone wants to be here, because this is where the jobs are. That puts upwards pressure on house prices, and it isn't going away any time soon.
(2) There is a TON of money running around this town. It's clearly shown by the fact that people can handle $3500-4500/month mortgage payments. And because of the level of incomes here, that's not going to change any time soon, either. As my dad said, this is as close to a recession-proof town as you'll find.
(3) Shortage of land. Every bit of unbuilt land - even small plots that are only big enough for 10-20 houses - is being gobbled up by eager builders who sell half their houses when the houses don't even exist, and will not be built until 6 months after they're sold!
In this area, we have a total seller's market. The situation may drift back and become somewhat more of a buyer's market (and I actually would see that as positive), but there's no way it's going to become a total buyer's market. I don't know how young families buy into Washington, but it really doesn't matter. SOMEONE is buying, as fast as they can!
Posted by: Audiorich at July 7, 2005 05:54 PM
I'd have to agree that the DC area is in a major housing bubble. I agree that SOMEONE is buying, but the fact is that many of these "someones" are investors. One in every 4 homes in the DC area is owned by an investor. Investors are in it for the money - and when the returns start to stagnant - you'll have a lot of someones selling. And given the number of people who have purchased homes with intrest only mortagages, and have been given mortages when they have only marginal credit - you'll end up with a lot of defaults and foreclosures once the interest rates go up.
It's a scary time to buy - and I'm not sure I would right now.
Posted by: Susan Lopt at July 8, 2005 01:40 PM
Re the house that you think rose 130% in price over the last 6 years, practically all of that was in the last 4! My condo, in Manassas, VA, has risen about 130% in the last 3.5 years.
Posted by: Sirocco at July 10, 2005 07:20 PM
Having lived in Wash DC area all my life, I
remember the 1990 period, when my condo's value
dropped from #130K to $85K and stayed there for
the next decade. The current demand is from those
who can take advantage of low interest rates and
more than anything, from investors who only will
resell the properties. When investors get nervous (and the question isn't whether, it's when) they
will dump those porperties that they are holding
at sizable costs (and can't rent) and the market will go plop. I wouldn't buy in the DC area now if you put a gun to my head. The prices have no relationship to reality or underlying value. If demand were so great, as some have said, why can't you rent a mouse out anymore, or if you can, only get a fraction of the carrying costs?
Posted by: Kent Beuchert at July 10, 2005 08:24 PM
Many people in the DC area own several rental properties.
1) What happens when terrorists set off a dirty bomb in the DC area?
2) What happens when many older people are no longer able to pay property taxes and they have to sell their houses in droves?
3) What happens when interest rates rise and people are not able to make payments on their adjustable rate loans?
4) When people are unable to make their increased ARM payments, many houses become vacant and housing prices drop, then what about others who were trying to flip? Or, those who are being transferred or need to sell - now at a loss?
5) What about all the people who purchased their second, third or fourth rental properties as an investment during this bubble and now they are unable to rent them out at a price to make their mortgage payments, expecially after their ARMs increase?
Simply put, this is the biggest bubble in history, and DC is not immune to recessions or, in this case, a massive impending depression ala 1930's dust bowl.
Posted by: NOVA Resident at July 10, 2005 11:02 PM
Someone earlier mentioned that one in four homes in DC are owned by investors. I have heard this anecdotally a number of times, but haven't been able to get hard data on it. If this is true, then that alone has huge implications for the market. Most investors are bidding rental p/e's to unsustainably low levels with the expectation that price appreciation will make up the difference in thier expected return. If that piece of thier investment theses goes away (with even an expectation of a flat pricing environment), there will be a lot of unloading of properties and prices could collapse. That assumes that the one in four figure is accurate. Does anyone have any links to some hard data on investor ownership? If so, please post it.
Posted by: John Davis at July 11, 2005 08:52 AM
I believe the DC metro investor rate is 11%, and a little less that that in northern VA where I live. That is a far cry from other places in the country like CA and for condos in FL. I dont buy that investors will be the cause of the "burst". The cause will be for what ever reason, public sediment just says "stop" or perhaps, begins to hype a new fad.
There is no question that all these bubble articles have caused public opinion to think more about (a bubble) this year than more in years past. It seems as though the "uh-oh" effect is starting to pass as I'm seeing less and less bubble articles. The trouble will begin when the pesimists jump into the housing market because they feel they have missed out. When that happens, there will be no more safety balances left (not to mention buyers) and a correction will be imminent.
Currently, there is an awful lot of supply for sale right now in my northern Va burbs. Mostly, people are "moving up" with they're equity and putting it into newer nicer homes. Also, this is the moving season for military and folks with children. Even though homes are on the market here longer, they are still selling and home prices are still going up. The economics of this area are unique that it will be interesting to see what happens if a housing correction hits - if it will effect the bustling market here.
Just like stocks - buy value. Its the best way to always come out on top and protect your assets
Posted by: Matt at July 11, 2005 10:22 AM
The other things that people are forgeting about in regrads to the DC area is the very high probability of a WMD attack on the city. Your home won't be worth 5 cents after a dirty bomb attack.
Even if you bury you head in the sand and forget this posibility, the coming storm of interest only/ARM's is coming to a theather near you. ARMs and interest only loans are the last bit of fuel feeding this mania. When the American people see what happens to these people when there ARM adjust up and ballon payments kick in, the party will be officially over.
I saw this all before. Just replace Housing Bubble with NASDAQ.
Posted by: Jeff Jones at July 11, 2005 11:56 AM
To say housing prices in D.C. can't or won't ever drop, and will only continue to rise, is to say that our children will never be able to buy houses when they become adults. Why? Because their incomes and assets will never catch up to current housing prices. Do any of us really believe this is possible?
Are granite countertops and stainless steel appliances really worth $200,000? A house in Clarendon sold just a few months back for $425,000. Since then, the investor put in granite and stainless and relisted the property at $639,000. Now really, are people behaving rationally when they pay a $200,000 premium for granite and stainless.
I believe so strongly that D.C. is bubbleland that my wife and I just sold our house that we owned since 2001 and are now renting in our same neighborhood.
Posted by: tooskinneejs at July 11, 2005 12:51 PM
Audiorich, the three reasons you give to show that ther is *no* bubble are factors that have existed in the DC area for decades. Yet these same factors didn't stop the market from collapsing in the 90's when the bubble was much smaller.
The DC area isn't an island. The fact is that there are plenty of areas for developers to build or rehabilitate. Just look at the District: With no real population increase in the past 5 years and massive construction of new condos, the typical codo price has doubled in that time period. But where have rents gone? The fundamentals of supply and demand are simply not there. The population has stagnated in the district, the supply of housing has increased dramatically. But the *demand* is currently artificially inflated because of speculators and other people like "audiorich" who think that it's impossible for real estate prices to ever go down.
Once there's a hint that prices may stagnate or go down, buyers will stop entering the market (they'll see that audiorich is wrong) and owners with tons of paper wealth will flood the market to cash out.
Posted by: adamc at July 11, 2005 02:09 PM
Audiorich, denial is a dangerous thing. Who would think that DC has some of the highest crime rates in the country either?
No area of this country is immune from property bubbles. South Florida, CA, etc.
Posted by: Wes at July 11, 2005 04:24 PM
..."I believe so strongly that D.C. is bubbleland that my wife and I just sold our house that we owned since 2001 and are now renting in our same neighborhood."...
tooskinneejs, thats music to my ears and what I think will keep this (bubble?) going longer. Tell me, what was the event that caused the Nasdaq crash? I honestly dont know. I do know in 1999 that there was the feeling amoung a ton of investors it could never go down. in March 2000, the crash was under way.
Pessimism is an excellent mechanism to protect all of our housing assets. As I said in my earlier post, if everyone jumped into the housing market or had a feeling it could never go down, shortly there after - reason would catch up and the crash would begin. (this happened in 1929 with investments of all kind, 2000 with the Nasdaq). As long as a fear of the crash exists, real estate should maintain good equalibrium of pessimism with the irrationality, and real estate should hold its value. If things become even more so pessimistic this year, then I myself will consider purchasing an investment property or two since shortly there after, another rush upward will occur.
Emotions drive value. Economics drive emotions. (oil prices :) )
Posted by: Matt at July 11, 2005 10:39 PM
Here's an anecdotal rebuttal to those who say that DC prices will never fall because of stable gov't employment. I am friends with a couple, both GS-14's (combined income well north of 200K) who have $400K equity in a townhouse they bought in 1999. They want kids, and recently went shopping for a single family home. Even in the $1.2 million range, they could find nothing really desirable anywhere within 10 miles of their Alexandria office... this radius includes Lorton, former home of Marion Barry's prison cell, as well as Hybla Valley, the Compton of N. Va. Criminy, if THESE guys can't find a nice house within their price range, who is? Is there some huge pool of Federal employees who earn more than $200/year that I don't know about? Give me a break.
Posted by: Bureaucrat at July 12, 2005 08:27 PM
I bought a home for $390,000 in last december and recently my neighhbour sold his house for 499,000 less than three days.( same floor plas as mine)
Across from my house the home stayed in the market for less than a week. I do not think the market will collapse. It might loose its high appreciation and becom more healthy grow
Posted by: jillu at July 15, 2005 09:26 PM
We always hear that the bubble won't pop so long as interest rates stay low and the economy strong. But if it is in fact a bubble and not a boom driven by fundamentals, then panic could well bring it all crashing down. Speculators, euphemistically called "investors," are creating artificial demand. That's keeping inventories low and demand apparently solid. So everyone in the real estate industry keeps saying there is no bubble. Meanwhile, in response to big profits, builders are getting greedy and excess supply is starting to build up. And more and more homeowners, enticed by Realtors, are putting their homes on the market in the hope of cashing in. The latest figures suggest that all this is causing inventory to start inching up and so time on the market to rise.
As this trend becomes apparent, more and more so-called investors will decide it's time to cash in, especially with all the talk swirling about the housing bubble. This will cause available inventory to rise still further. Then panic will set in and there will be a cascade effect. As home prices start to flatten, investors will split town, and all those buyers now stretching to buy with interest-only loans and option ARMS will also disappear since no buyers in their right mind would take out such loans unless they thought robust appreciation was guaranteed.
At first prices will just level off instead of plummeting (it's not the stock market). Homeowners will just take their homes off the market when they don't get the prices they'd been hoping for. But some people will have to sell to move to a new job (Washington has a high population turnover). Moreover, by 2007 not only will interest rates likely be higher but also 2/3s of ARMs will start requiring higher interest and principal payments. Then foreclosures could mount and a serious price decline might well occur. All of this could happen without any change in the economic fundamentals because the bubble was not being driven by fundamentals in the first place.
Posted by: John Dixon at July 27, 2005 12:04 AM
I have been following this discussion with fascination, for a few reasons: my husband, daughter and I live just north of DC, in southern Montgomery Cty, MD. This discussion is the ONLY place I have heard ANYONE say they think there is in fact a bubble and it will burst. Real estate is a hot topic of conversation around here--maybe beating out politics these days, which is saying something in DC--and every single person I have talked to says that they think "prices will have to level out, but they won't decline in the DC area."
People cite exactly the 3 reasons that Audiorich gave for "invincible" market here: steady job supply, short supply of desirable locations, and lots of money running around.
We have lived in an apartment here for a year now, and we'd like to buy a house, since we forsee living here for at least 5 more years. A LOT of first-time homebuyers are in our same position--everyone, who, like my husband, is a few years out of law or business school and is now coming to work for the federal government. If you were us, what would you do? --Continue paying $1500/mo in an apartment, or find a house in an "up and coming" area, where the prices are not as inflated, and you could find a comparable monthly mortgage payment (especially after the tax break)?
Is there a certain set of questions house hunters in a "selllers' market" should ask themselves?
Posted by: Laurel Dugan at July 29, 2005 12:16 PM
To Laurel Dugan:
I am no financial advisor. But I have followed the housing bubble debate. My advice is, if you're planning to stay in town for a long time, go ahead buy. Interest rates are low. Take out a 30 yr fixed with a 20 percent down payment. So what if you're probably paying 20 percent more than the house is really worth. Eventually you'll recoup your losses. But I really wouldn't buy a house now if you think you'll be leaving within five years or so, especially not with any kind of interest-only loan. Because there is a real chance that you could see price declines here. And if you don't have the cushion of a substantial downpayment, you could well find yourself owing more on your mortgage than you can sell the house for. If you couldn't come up with the money, you'd have to default.
Don't believe me about the risk of a price decline. Look at the just published PMI Risk Index available at the PMI Mortgage Insurance Co. Web site, a widely cited authority. They ranked the DC area as 19th in their list of metro regions at greatest risk of a price decline (admittedly this comes to only a 20 per cent or so chance of decline I believe). Besides, median rental costs are now only 59 percent of owning a comparable median-priced home (showing how much rents are out of line with house prices--historically they march more or less in tandem). If your planning to just stay a few years, I'd rent and invest the money you save.
Of course everyone will tell you how people have been predicting a bubble for years and will mention stories of how people sold and rented in 2003, convinced there was a bubble and how since then the house they sold has gone up another 30 or 40 percent. That's true. It's not easy to time the housing market. But that's no proof it's not a bubble. Frankly, I would make my financial plans around the conservative assumption that house prices will very likely soon cool off and increase only at about the rate of inflation. I'd also keep in mind that experts believe there is a 20 percent chance of prices declining in the next five years. There is already some support for the cooling off hypothesis. Check out the Washington Post, July 25 A1: "D.C. Area Housing Market Cools Off: Inventory Up 50%; Region Still Strong."
Of course if you are like me, you WILL try to time the market. I am waiting till this spring to buy, convinced that the market is at the edge right now, and that a few more knotches of Fed tightening will drive all the investors and interest-only people out of the market. With me, it's partly a matter of pride. As much as I would like to buy a house for the same reasons most normal people want one, it just irks me to be enriching sellers, especially if they are speculators, at the top-end of an absurd market; out of stubborn pride I refuse to be one of the last fools entering the market, one of the chumps taken in by all the hucksterism of Realtors, mortgage bankers, and get-rich-quick gurus who will tell you that real estate is a no-lose proposition and you're missing out on the road to easy riches if you don't stretch yourself to your limit and buy now.
Posted by: John Dixon at July 29, 2005 10:07 PM
I thought Matt's argument that pessimism will prolong the bubble a bit hard to grasp at first, but apparently it is an argument out there in the debate, for I came across it again today in the Wall Street Journal:
"Now that people are talking about a bubble in housing, I suspect it will take a lot longer for the housing-market bubble to pop. People say they are conscious of it, which means that a good portion of the population isn't entering the market. When the last marginal buyers give up and rush to get in, that will be when it ends. In other words, maybe we have some years left in this, but it will end eventually" (Jesse Eisinger, "Option ARMs Are Fueling Bubble, Aug 1 , 2005).
I admit that I found this argument a bit hard to grasp at first, since the more usual notion is that an increase in talk raises the chance of the bubble popping as people start losing confidence in the market. Having thought about it some more, I now admire this as an interesting piece of counter-intuitive reasoning. But for this argument to be convincing, wouldn't you have to show that the bubble doubters and housing pessimists are indeed a "good portion" of home buyers, a portion substantial enough to actually moderate and therefore prolong the market? But the available statistics I have run across actually suggest that optimism and confidence is at new heights. Thus a study reported on in the Wall Street Journal found that "7 in 10 consumers expect housing prices in their areas to increase over the next year. Significantly, one in three of those who expect rising prices think they will go up by 10% or more during the next 12 months. In fact, nearly 1 in 10 expect housing price increases in the 20%+ range in their areas." And the LA Times reported that "A widely followed University of Michigan consumer survey, released Friday, showed that 24% of respondents nationwide said it was a good time to buy a home because prices would rise. That was the highest percentage since 1988 — right before prices peaked in the previous real estate cycle. ( "It's Not a Bubble Till It Bursts," May 29, 2005).
So I suspect that Matt, and Jesse Eisinger of the Wall Street Journal, are wrong because they are overgeneralizing from nonrepresentative samples. They are positing a spreading pessimism based on their own narrow experience of the views of people who frequent financial blogs and read the financial press, whereas available surveys suggest the trend is in the opposite direction towards increasingly pervasive optimism.
Posted by: John Dixon at August 2, 2005 01:12 AM
Most falling prices of any bubble will result in a slowdown of the market. Howerver, there are 3 places where rapid expanding home prices seem to be fueled more by hype than by other factors such as job growth. They are (in order):
If there is anything that is going to burst this bubble more than anything else, it is the fact that the recent hubub by the press will lower consumer confidence. if one must work in DC and want appreciating home prices I suggest living in an area such as Loudoun County or to a lesser extent, Fairfax County. When the bubble slowly and eventually bursts (remember that real estate is not like the stock market), there will be a slowdown in appreciation there, but appreciation nonetheless.
Posted by: Adam Silverberg at August 4, 2005 10:48 AM
The most important piece of data is the disparity between the cost of renting and the cost of buying. Consider this math: it costs about $1000 per month more to buy a 3bed/1.5bath than it does to rent. Considering that most of the country is not in a bubble and therefore rents are w/in $100 or so of holding costs, I could take that $1000 per month that I save and buy 10 houses somewhere unremarkable, but far safer.
Posted by: Greg at August 8, 2005 09:21 PM
I do agree the increase in price will start to slow but they will NOT drop. I also agree that double digit appreciation is NOT good....As far as renting vs buying. I bought a condo a few months ago. The mortgage payment is around $1800 (with no money down). Apartments in the same area run around $1400-$1500 per month to rent. Now if I put money down, my mortgage would be less. Another thing to note: The washington Dc area has one of the highest incomes in the country. Another point to note: people are moving to the washington dc area for the jobs. I know many people at my work that moved here from orland, and dallas. We have more job growth than any other area in the country. Washington dc is changing, people are moving INTO the city. I can personally see the transormation since I live around there. I have seen "bad" neighborhoods transformed into desirable neighborhoods.
Posted by: washington dc suburb resident at August 9, 2005 01:44 PM
I'm seeing fast growing "For Sale" signs around Fairview Park region along Rt 50. If you live in that area, you'll notice that houses are listed for months without being sold.
People who don't believe there's a bubble, have a drive along Rt. 50 and see.
Posted by: Winston at August 10, 2005 04:34 PM
It's true that Washington DC has a strong job market, but remember that more jobs than you can imagine are being created by the bubble itself. Stop and think about how many jobs have been created directly or indirectly in the last 5 years as a result of the mania (RE agents, contruction, mortgage-lending, appraising, home renovation, insurance, household furnishings, etc..) as well as all of the extra spending that has resulted from home equity extraction and a general sense of greater wealth. I believe that when things start to slow it will begin to feed on itself as people become more cautious, psychology operates in reverse, and there is a ripple effect.
It's important to remind ourselves that much of the ever increasing prices have been supported by a parallel increase in the use of extreme mortgage financing where people are basically leveraging themselves to "get in at any cost". I read recently in the Post that over 40 per cent of the mortgages in the DC area in 4Q 2004 were non-traditional or "exotic". I live in one of the most expensive zip codes in NW DC and the typical mortage financing options sheet handed out now at open houses in my neighborhood include the 3 choices, the 30yr fixed standby and two interest only and option arm choices. So it is not just those of meager means who are resorting to this. Rising prices have not been supported by rising incomes. Incomes are high here but have in no way kept pace with RE appreciation. Does anyone know what is the mean percentage of gross income spent on housing (including home equity loans) in the DC area? I'd be interested to see the trend in the last 5 years.
The CEO of the largest secondary mortgage market player ( and a significant DC are employer), who had repeatedly in the past denied the existence of a bubble, said in an internal company memo late last year that he now did believe that in certain pockets a bubble existed and that no doubt leveraged financing was playing a big part. Incidentally, the CEO is no longer with the company (nor am I). Guess what market was at the top of his list as one of the bubble "pockets".
You guessed it! DC!
Posted by: John Davis at August 12, 2005 02:43 PM
This weekend, I saw more "for sale" signs along West Ox Road/Reston Parkway than I ever recall seeing before. One modern, newly remodeled Reston TH was cut in listing price from $619k to $599k. Finally, inventories appear to be up, and, unlike this Spring, sellers seem to be forced to accept less than list.
A co-worker has had to drop his price on his tiny place in Glen Echo from $719k to $695k.
Posted by: DC Chak at August 16, 2005 05:37 PM
Here is a good model to use for assessing the attractiveness of renting vs. owning in DC (or anywhere). First things first, make sure you are comparing apples to apples and find the closest rental option you can (in terms of bedrooms/amenities) to the place you are thinking of buying. Next, assume no money down (ignoring a deposit, you don't put money down on a rental). To compare apples to apples with renting, you should assume an interest only mortgage (you don't pay down principle when you rent). Current 5/1 Jumbo ARM for DC area (per yahoo) is 6.09%
Let's use $400,000 as a price for a 1 bedroom condo in Northern Virginia, close to DC.
Interest $2,030 ($24,360/year at 6.09%)
Taxes $458 ($5,500/year, 1.375% of value)
Condo Fee $333 ($4000/year at 1% of condo price)
Other $125 (insurance and internal repairs)
Tax Break -$829 (at 33% on interest and ppty tax)
You can play with the numbers as you like, but in my example, this $2117 represents the price at which you should be indifferent between renting and buying. If you can buy a place and TRULY COMPARABLE rents are higher/the same, then you know you are safe in the event you rent it out (and you are getting the potential for appreciation for free). Since I'm guessing this isn't the case in DC area (1 bedroom rents are substantially below this) then you know you are paying up for the appreciation option.
Posted by: DCRealEstateGuy at August 18, 2005 02:26 PM
I just bought a 2 bedroom, pretty nice condo at World Gate in Herndon. The sales price was $332K, and I have seen the same floorplan sell recently for $355K. However, this is still a 2 bedroom. This bubble talk is bugging me out. Luckily, I got a fixed-rate mortgage, but the monthly payments are still pretty steep including PMI (grrrr). Does anybody out there have any words of encouragment?
Posted by: Michael Klein at August 22, 2005 09:49 PM
Let’s face the truth: it is impossible to know what will happen to the real estate market in the short-run. There are far too many unknown variables, and you will never have all the information required to know exactly what will happen and when.
The 4-point real estate strategy that will give you the highest probability of success is as follows:
1) Do not buy real estate unless you would be willing to hold it for 10 years or longer, or unless you were willing to sell at a loss if prices were to decline. It is very unlikely that real estate will not produce positive returns over a 10-year period or longer.
2) Buy a property you can comfortably afford and that will allow you to maintain your sanity even if prices decline. This means you should buy real estate based on the monthly outflow you are willing to spend and not on the amount of mortgage you are approved for.
3) Regarding your primary residence, make sure that you will still be able to save some money in other types of more liquid assets after your home purchase. Remember, you will still want to have the option to be able to stop working one day without having to take a major hit to your standard of living – you need other assets outside of your home to be able to provide enough income to you so that you are not forced to work.
4) Always have an emergency fund of cash available even after you purchase your property. The emergency fund can be used to float your mortgage payment if an unexpected financial problem occurs such as the loss of your job, etc. This also means that you should not use all of your cash in the home-buying process.
If you follow these four points, you have a much better chance of being successful.
Posted by: cpaoletti at August 28, 2005 02:27 AM
Click on my name and you can read my thoughts on the DC Housing bubble which I am sure is popping.
I live in NW Washington and the for sale signs are popping up all over the place. I drive about four blocks to get to Rock Creek Parkway and I pass 9 for sale signs. At least two of them (on 16th St) are up for over a $million. One of those has been on the market for over a year. The other houses on that intersection are also now for sale.
We rent and plan to move to VA in the fall and rent there. We earn a good salary but find it not responsible to take these 'exotic' loans. Renting is the way to go for now. I will re-think this once the market prices have halved, because that is where they are headed.
Posted by: Fred Fry at September 6, 2005 12:07 AM
Alot of good points on this thread. I, too, live in Northern VA and have been really itching to get into the market.
Here is something that recently scared me. I went to get a pre-approval (needed in order for a realtor to even speak to you). I was pre-approved for more than I could possibly afford in a month for a mortgage. I mean, they were pre-approving me for a mortgage amount that was more than two-weeks of income. (Of course, with that, I was offered all of the "exotic" options others have referenced previously)
I too, am starting to see lots of "For Sale" signs on Rt50 as well as Ashburn and other parts of Fairfax, and they are staying there for a LONG time. I get the MLS listings and have also started seeing "Price Reduced" on alot of properties.
What is also happening is that alot of apartment places are conveting to condos (im not really sure what that means market-wise, but just someting else that I have noticed)
Bubble or not, those "exotic-loans" (interest only, Option ARMS) are going to be converting soon. I do know that the housing maket in the DD are has been increasing WAAAAAY more than the rate of the cost of living/inflation since 1999. It has to self correct. It just has to. Someone else on this thread mentioned people here being "paper rich" and they could not have been more right.
Posted by: K Michael at September 12, 2005 03:33 PM
I'm one of those buying because I just moved to DC and intend to live in my house at least 10 years. I would rather home prices not increase as fast so I don't have to pay as much taxes. Maybe later when I am ready. Still, for the house we picked (Beechtree in Prince George's County, MD), the selling price has increase 15% since we signed up 4 months ago and we have yet to close and move in. If the so-called bubble bursts in the next five years, then my property taxes will go down and that will be great! ... well, as long as it goes back up long before I sell in 15-20 years or so.....
Posted by: Fred at September 13, 2005 09:31 AM
"Pop!" The difference between rental and mortgage prices is a big indicator of the impending bubble burst.
Beyond that I have read in more than one reputable paper that the majority of people in the DC area who are standing in line to buy condos are investors - who admit they will bail and lose their deposits if prices start falling. They aren't willing to hold on to badly depreciated property.
I myself have three friends who have become investors in the last couple of years. Two of them quit their day jobs. When everyone and their grandma starts to think they are real estate moguls, it's only a matter of time.
During the 90's bubble. I had two acquaintances who had to hold on to badly depreciated property because otherwise they'd be forced to sell at a gut-wrenching loss. One of them held on for 5 years, but then got married, moved and couldn't hold two mortgages. She tried renting to keep her N.Va. home, but renting turned out to be much more trouble than it was worth. She finally dumped it at a loss. The other friend bought toward the end of the slump and lost money at first, but eventually made a profit. Both of them worried often.
The moral of their story for me is, if I'm going to buy it will be toward the end of the slump not in it's dawning day.
Posted by: Cindy at September 13, 2005 12:57 PM
Lots of "for sale" signs near Old Town Alexandria, VA.
Anybody seeing the same trends?
Posted by: billy at September 17, 2005 09:12 PM
Did any one heard about "COPPERMINE CROSSING" by Pulte homes in Herdon VA? It came to my attention as one of my friend bought Yesterday (Some one sold their Investment Home). This was a never occupied Three bed 2 1/2 bath 2 car garage home with Granite, recess lights, brick front, elevation upgrade etc - in market for 3 months listed @ $ 575,000. The seller reduced the price to sell last week @ $ 529,000. Did you hear the sound Sshhhhhhh from the Bubble?? Today I saw some more houses listed @ 524,000(Check http://www.HomeDatabase.com and select Virginia, Herndon 20171.
Lot of people paid $ 570,000 + in the same community still waiting to get their houses(Some are due in Dec 2005).
Pulte Still selling the Single Car Garage homes base price @ $540,000 - go to http://www.Pultehomes.com and look for "COPPERMINE CROSSING".
Now any one can tell me if there is a bubble or not?
Posted by: BubbleBath at September 20, 2005 09:48 AM
DC express blurb today indicated that the DC housing market hasn't cooled. That more people are projected to move in. Isn't it true that should the bubble fizzle, that the declines will be felt with higher end homes, say $500,000 plus. Won't the market stay strong for first time homebuyers for those home, say $350,000 or less. Say interests rates did go up to 8%, how much would that deter first time home buyers?
Posted by: Tellmetrue at September 23, 2005 01:57 AM
A follow up post. First, I'm glad to see the many thoughtful comments here representing both sides of the debate. Its nice to have some intelligent discourse.
People frequently cite "job and population growth" as a reason for the continuation of the bullish housing market in DC. That sounds logical on the surface. So I did a little research and what I found was quite interesting.
Over the last 5 years, the population in the greater DC metro area has risen approximately 6% in total (not per year). Average housing prices in the region have risen well over 100% during that same time.
So, we have to ask ourselves if it makes sense that job and population growth of 6% could really be a significant driver of our local housing boom. I don't think it does.
A look at the stats should tell you whether this market is sustainable:
-52% of DC buyers used "exotic" mortgages in the first half of 2005
-33% of DC buyers are investors (and thats the percent who admit it, I'm sure many more tell the banks they are buying principle residences to get lower loan rates)
I believe prices are significantly driven by "artificial demand." What do I mean by that? The flippers are adding to the current demand for housing but their demand is only temporary. Because of the added demand, prices have gone way up. Eventually, the artificial demand will exit the market and its not hard to figure out what will happen to prices.
My best guess is that the DC market is 40 to 60% overpriced at current levels. This is based on average incomes, expected future interest rates, and rental costs in our region. Outlying areas and condos will be hit the worst (closer to 60% drops) while single family houses closer to the city will be hurt only slightly less (closer to 40%). Why? Condos are more commodity-like than single families and outlying areas generally have lower relative demand.
It will be interesting to look back at this thread five years from now to see what actually happened and how accurate peoples' views were.
I'll close with a quote from one of the most successful investors in the world, Charles Munger (Warren Buffett's buddy):
"Never have so many people, made so much money with so little talent."
Posted by: tooskinneejs at September 23, 2005 03:22 PM
Perhaps a bit philosophical for this thread, but here's what I think is really screwed up about the real estate market in DC (and elsewhere) right now. When I think about what has historically led to financial success in our country, I think of three general factors: skill, hard work, and some measure of luck. Just as in the stock market of the 1990s, the real estate market today has almost completely supplanted the first two factors with the third. "Making a killing" in the real estate market is currently like winning the lottery - there's no skill or hard work involved as complete morons (and you know who I'm talking about if you've seen the real estate agents running around DC these days or have watched the real estate infomercials on TV) are cleaning up with almost no effort for no discernable reason. They don't know what's going on, and they don't really know the potential ramifications of what they're doing, but as long as their number keeps coming up, they'll roll the dice. One could argue that they have a higher tolerance for risk, but I don't think that qualifies as "skill" or "hard work" (not to mention that I doubt they really have a good sense of the risks involved.)
In the long run, this isn't sustainable. Sure, some people will do quite well if they're able to time things correctly (due to no particular vision on their part.) But in the long run, all of the people with more realistic views of the real estate market will be proven right. Of course, how far ahead is the long run? Who knows (I sure don't.) But after you see enough really crummy houses selling for $700K in the DC area, you really start thinking that things have to change soon.
Last point. My impression is that prices have been running up at such a crazy rate largely because people think two things. 1) If I don't get into the market now, I'll be priced out of the market. 2) If I don't get into the market now, I'll miss out on the potential price appreciation. Prices rising simply because people expect prices to keep rising seems to me to almost be the definition of a bubble in asset prices.
Posted by: Bubba at September 23, 2005 11:41 PM
I believe a very point to consider here is the impact of currently rising short-term interest rates on existing mortgage debt. The media tends to focus on what rising rates will do to housing demand, but equally important is the debt outstanding. As Greenspan himself noted yesterday, a staggering 80 percent of all mortgage debt issued in the past five years (about 4 trillion!) has been second-mortgage refinancing to extract home equity. In fact, in spite of all of the appreciation we've seen during that time, the actual equity Americans have in their homes is at an all time historical low! And worse, all of that debt is issued at variable short term rates. So as rates rise, debt payments will increase simultaneously with f