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August 16, 2006
Washington DC in trouble
As readers of the blog may now, I lived in Washington DC (about two miles from the Mount Vernon estate to be precise) for about nine years before transferring to Atlanta in late 1998. I take the family back once a year, partly to let the kids see the historic and educational sites and partly to let the kids visit their childhood friends.
Just returned and I have to say that Washington is a train wreck about to happen...
...as we drove around the section of Alexandria between Old Town and Mount Vernon, I was struck that there was at least one "for sale" sign at every street corner, and at some points, five, six or seven. Talking to old neighbors, everyone knows the gig is up and they're trying to sell. But to whom? The friends we stayed with pointed to a new "McMansion" down the street, vacant with weeds growing up yet no sign out front. Foreclosure. Our friends say those houses that do sell are currently taking about four to six months to sell (but I figure that's an understatement given the growing number of "for sale" signs cropping up). And this is in a "close in" desirable neighborhood, not an on-the-edge part of exurbia like Loudon County.
In an previous post, I revealed that my wife and I bought our starter home in Mount Vernon for $216,000 in 1991 and sold it for $223,000 in 1998. Similar houses on that street were going for $549,000 during our previous visit in April of 2005 (and neighbors said prices continued to rise into the summer, to upwards of $600,000). My own guess here is that prices will come down AT LEAST $100,000 and perhaps $150,000 in this price range. I suspect my old house will be back down to $425,000 by the time the mania plays out. Lots of option ARMs and lots of investor-owned properties = lots of foreclosures and panic sales.
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Dean Foust says, "I suspect my old house will be back down to $425,000 by the time the mania plays out. Lots of option ARMs and lots of investor-owned properties = lots of foreclosures and panic sales."
Oh joy... Have you thought Dean what that will do to the economy or even your job in the media? With 30% of the US economy built around real estate, you sound pretty pleased with your doom and gloom prognosis.
Maybe some of you in the media that couldn't try harder to jawbone th housing market down will get what you have been wishing for. But you know what they say about getting what you wished for...
Posted by: Frank at August 16, 2006 05:31 PM
Frank (aka, frustrated real estate agent), get a life. The market is collapsing due to the price fixing of the real estate industry. Even $425,000 is overpriced for that house.
See you at the bottom of the crash!
Posted by: doh at August 17, 2006 09:12 PM
Frank, Dean hardly sounded excited about it, to be fair. He was just stating facts, which you seem unable to accept.
Doesn't it bother you in the slightest that 30% of our economy is built on housing? How is that normal?
Posted by: Anonymous at August 18, 2006 08:50 AM
Dean is single handedly responsible for all the stupid decisions others make that lead to massive debt to income ratios, the absurdly high run-up in real estate prices and the origination of thousands of no-doc,NINA loans that people take out! Never mind, Dean is responsible for all the refinance refugees that do it over and over using the home ATM machine to rack up more debt to buy cars, boats, vacations or 2nd homes etc. We'll you get the jist of it.
Come on Frank, where were you when the media was talking incessantly about home price appreciation!
The media still hammers away, particularly the "jawboning" going on at NAR, CAR respectively that the median prices are still going up up up up up. Yet builders are getting clobbered, list price reductions are all over the place (unheard of just months ago in select markets).
And the funny thing--I was hanging out at a local car dealership the other day looking for a good truck. Two people in an hour came in with their $40K trucks (circa 2005 F-250's)to do what, Frank? Trade them in to get their payments down or have them pay off their existing loans. Dealers love taking people's cars and swapping them for debt ridden people. Completely upside-down patrons. I asked the salesperson how much of this is going on now? She just smiled at me. How much of this is going on all across the country?
Posted by: Tim at August 18, 2006 09:06 AM
i'm not an economist nor a realtor, just an engineer and an investor, (in stocks, REITs, commodities and others), athough i did dabble in RE in the early 90's. I'm going to go out on a limb and say that prices will fall much more than 150K. the run up from 223k to 550k seems unfounded my any stretch of the imagination, unless of course rents in the area also went up by 2.5x in the same time period, which i found doubtful. I'd expect prices to drop about 50% around there.
And as far as real estate price declines killing the economy, what is never mentioned is that many home owners, esp. recent ones are spending most if not all of their income on housing (mortgage, insurance, taxes, hoa) leaving nothing for travel, entertainment and such. Lower/falling home prices seem like they'll free up more disposible income to be spent other places. ie. Money that would have been spent in Home Depot will instead be spent on a trip to Hawaii. Most people have an uncanny way of spending all the money the make, on one thing or another.
Posted by: Stan at August 18, 2006 02:51 PM
In what way did he "sound pretty pleased" with his "doom and gloom prognosis?" First of all, he was simply stating his opinion. He knows the house, the community and can observe what is going on with the local real estate market. His estimation does not appear to be scientific or terribly analytically derived, but it's his opinion.
And is it a doom and gloom prognosis? It will negatively impact the economy, but cycles are the natural order of markets. When stocks were clearly overvalued in 2000, was it a gloom and doom prognosis to say that they were due to fall? It was painful for many, but it's how markets work. If increased levels of risk taking continue to be rewarded at increasing levels of profit forever, would the markets make any sense? Wouldn't everyone simply continue to leverage in riskier and riskier fashion? Isn't that what happened? How does it end?
And, by the way, you can't jawbone markets down. How many analysts and members of the media talked up the stock market in 99-00? How many bearish analysts did you see on cnbc in 2000? Not too many.
Posted by: LAMoneyGuy at August 18, 2006 03:01 PM
ah, nothing like a good housing panic, the end result of the Late Great Housing Bubble Ponzi Scheme
DC is toast, but so is Boston, Phoenix, Tampa, San Diego, Reno, Las Vegas, Naples, Miami, ...
Posted by: keith at August 18, 2006 03:08 PM
I have no idea why Dean started this string. His previous one ("Washington DC bubble?") on this very topic was very interesting and probably one of the most successful that this website has ever seen. Why split up the discussion and confuse everyone with another string on exactly the same topic. Perhaps the "Washington DC bubble?" discussion was petering out as the ugly state of things get clearer here in the DC area, so maybe Dean needed to kickstart the discussion.
In the meantime, now we have Frank bashing the journalists for "bringing down" the real estate bubble. Sounds like the classic Enron defense that Skilling and Lay used when they blamed Enron's collapse on the WSJ.
And if we're really so dependent on real estate to keep everything going, we're not a very diversified economy (although I'd beg to differ on how really dramatic the impact of this will be.) Should we have prayed for the dot com boom to continue in the late 90s so that we could prop up the venture capital spending in Silicon Valley? Things cycle and bubbles pop. As in any market economy, there can be pain involved, but it's good to get rid of the garbage when we can.
Posted by: Bubba at August 18, 2006 06:56 PM
I live (rent) in a subdivision in Prince William County called Independence (20109). I have watched the real estate market here since last September when my wife an I moved here from Florida. I have to agree with you on one point that the inventories have risen well beyond my expectations. My subdivision consists of both SF and Town-homes. At the peak of the market last July, the TH's were selling for 484k-510k. There are currently 14 TH units for sale ranging from 384k-515k (cookie cutter except a few have bump-outs adding an extra 300sqft). Not all of them show in MLS because some are FSBO. All of these homes have been on the market since last November and not one of them have sold! The lowest selling TH is close to 2 years old, the highest at 515k is 1 year old. The SFH's are in the same shape.
Here is the high-low asking price of basically the same units:
These two represent a split of 125k and is just the beginning of all of this. I'm going to go out on a limb here and predict that prices will fall to 1998-2001 levels within 1-2 years. I'll even go a little further and say that a major depression is on the way going into 2008.
Posted by: SideLineSam at August 18, 2006 10:45 PM
People waiting to buy will be happy if the price comes down 25% or more [specially in overpriced areas]. Buyers are priced out. Even if a home prices go up, if buyers cannot afford it, no one will buy it and economy will suffer. We over-used the real-estate. We cannot get much out of it unless price catches up with reality. It might be ugly, but if we have to blame someone for it, its NAR, builders, government mortgage policies.. not Dean.
Posted by: niaz at August 20, 2006 12:01 AM
" With 30% of the US economy built around real estate, you sound pretty pleased with your doom and gloom prognosis."
If houses cost more than 3 or 4 times median incomes and prices are only sustained by artifically low interest rates and hokey financing schemes that create temporarily lowered payments, the correction MUST happen and is a healthy thing. The prices in bubble areas from 2002-05 are completely and utterly unsustainable unless incomes double or triple very soon.
Posted by: Dave at August 20, 2006 02:13 AM
So Frank, are you saying that journalists are to be cheerleaders for whatever position they think of as being "good"?
I'd rather hear the facts as they can best be reported rather than a "sugar coating" of whatever topic (not just housing) under consideration.
Posted by: jd at August 20, 2006 11:43 AM
I find it hard to believe banter I've been reading! Price fixing? Journalists fueling the fire? I fail to see the importance of placing blame on a person, group, region or industry. What happened was a frenzy in several markets and it would have been more interesting if this had never happened before but it has.
You know what may help us in the future? A little consumer education in our homes and schools.
Posted by: Jason at August 22, 2006 09:10 AM
I live in the area described by Foust (between Old Town Alexandria and Mt. Vernon) and while the market is bad, it is nowhere nearly as gloomy as he describes...at least at this point. In my neighborhood of over 100 SFH, only 3 have gone on the market in 2006 and all sold in under 30 days at prices between 600k and 700k, and higher than the 2005 "peak prices." These homes were all sold between January and June, however, and the DC market on the whole has worsened since then. No homes have come on the market in my neighborhood since June, though, so I have nothing to compare against.
Posted by: bdeco at August 22, 2006 09:51 AM
A train wreck is right. Since when did it make sense to be able to rent something for half the cost of owning it? If anything, renting should cost more than owning. After all, rational-minded asset owners require a positive return on their investment, right?
Prices in the DC area will drop 40-60% (in nominal terms) over the next five or so years, with the greatest drops ocurring in outlying areas and in condos and townhouses. This will bring home prices back in line with rents. How do I get 40-60%?
A good rule of thumb is to take the monthly rent of any property and multiply it by 100 to 150 to figure out the home's post-bubble price. This was the long-term historic average price to rent ratio of the DC area prior to the bubble.
Compare this to current asking prices to see just how far your subject property's price will fall over the next few years. And to really test this rule of thumb, think back to a home you once rented long ago and to how much that home sold for back in the day - the ratio works, doesn't it?
We're in for a heck of a ride. It's going to be long and painful. I hope people are preparing themselves and getting their financial houses in order. Good luck everyone and thanks for the commentary Dean.
Posted by: tooskinneejs at August 22, 2006 10:43 AM
Dean is making a blanket statement based solely upon single data points 14 years apart. The appreciation he describes simply represents 7% market appreciation over 14 years. If home prices stabilize over the next 24 months, that growth rate drops to 6%, only slightly higher than the 5.5% average growth rate of US home values over the past 50 years. The DC market represents the fact that home prices had been stagnant, and that the DC economy is the strongest anywhere in the world. More jobs were created in the DC area over the past 5 years than any other metropolitan region in the US. It is suspected to create an additional 250,000 jobs over the next 48 months.
When looking at the risk of a "bubble burst," you need to explore potential causes:
- An inverse yield curve that demonstrates that short term interest rates exceed long term interest rates - this doesn't currently exist
- A gap between salaries and cost of living - which is still well within historical levels
Be skeptical of people who provide little economic evidence of these doomsday scenarios.
Posted by: GT at August 22, 2006 10:11 PM
GT---Another frustrated realtor taking out your grief on Dean..come on now!
Posted by: Ann Johnston at August 23, 2006 10:00 PM
We moved to DC in 2004 and decided to rent due to the disparity of the costs of renting vs. buying. Our current lease is over in a few months, and then we will be ready to buy, **but only at 25-35% less than asked prices and at least 25% less than Zillow.com.** I will get many interesting reactions, but the way I see it, the "true" value of housing in the DC area is approximately 33% less than today's values (this varies among the various jurisdictions, type of contruction, proximity to Metro/MARC/VRE, etc.).
Today's prices are extremely inflated and out of touch with both rents and incomes. Every bubble (tech, RE, defense industry) gets deflated at some point or another. Our collective emotions (plus the Fed policies) inflated the bubble artificially high. Now, not only the asking prices are beginning to go down, but more amenities and incentives, like closing costs, finished basements and even brand new cars are being thrown in, so the actual prices today are already less than that reflected by their dollar value. Also, many people are doing FSBO on Craigslist.com and elsewhere, so the actual inventory is higher than published.
Let's get our economy down to reality. Houses and other RE are not ATMs. Many wealthy families (except an eternally optimistic one with the last name Trump) have minimized their RE exposure in the last year or two. Maybe they had advisors that most of us do not have (at least on a full-time basis) and were able to see the future with some reason instead of excessive emotion. This is not a "doomsday" scenario; I see it as a party that needs to come to an end. With reason, we can land "softly" and not overshoot on the way down, like we did on the way up.
Posted by: HJ at August 24, 2006 12:54 AM
"You know what may help us in the future? A little consumer education in our homes and schools."
Jason, genius idea. I was talking about this with my sister the other day - where are the classes on credit cards and how they work, renting, mortgages, stocks, 401Ks, etc? I'm all for teaching economics, but there needs to be some real world education in there as well.
Posted by: Anonymous at August 24, 2006 08:56 AM
First HJ, Trump has lost his shirt on real estate in the past. Sure he may be optimistic now, but it definitely cost him in the late 80's/early 90's. Gotta love the guy though - largely parlayed his Dad's real estate holdings into fame as a "billionaire." If only my dad was a shrewd guy who bought up good parts of Manhattan.
Second GT, I love your optimistic attitude and don't want to curse you with the title of "real estate agent." In fact, I agree with you that prices were somewhat depressed at some point in the 90s since, frankly, DC sucked then. However, regarding the "flattening of prices to the long-run trend" argument which gets us back near that trend over the next few years, one crucial point that you're missing is the fact that, around any long-run trend, there are fluctuations. Now, for assets that tend to be stable (like money market funds, some short term bonds, etc.) the long-run trend is pretty stable (yielding relatively low returns in the process.) Things don't bop up and down too much for those assets so that the long-run average is a pretty good predictor (technically, the variance of their returns isn't very high.) But the risk-return trade-off implied by most economic models suggests that most assets that may have wildly high returns can also be incredibly volatile. Historically, we may not have thought about real estate as such an asset. But then, we didn't have speculators running rampant in places like DC (have you ever seen so many empty homes for sale?) or people taking out nutso loans and using their homes as piggy banks with the expectation of selling their house for a bundle later. Hence, there's no reason to suspect that we'll shift down smoothly to the long-run trend in any correction. In the long-run, you're probably right, 5.5% would be a reasonable return to expect on a home. But what's the variance around that (and, by extension, when does the long-run kick in)? C'mon buddy, you're appealing to "basic economics" in your post, but there's no mention of risk to balance out returns. What's up with that? Can you really envision an asset that yields 100% return (as real estate in DC has in the last few years) without some modicum of risk involved? And I have to think that, as with tech stocks in the late 90s (sorry for beating a dead horse), the risk has to be downside at this point and isn't so comfortable as "regression to the mean." (Your "inverted yield curve" argument is getting there, but I honestly don't think that you really understand it.)
Posted by: Bubba at August 25, 2006 12:52 AM
The question I think will be how will rising rents affect the slowdown in housing.
??s they and others lease instead of buy, rents have risen 7 percent in the past year, according to a new analysis by Delta Associates. In suburban Maryland, rents for luxury high-rise apartments rose 11 percent
??ven so, rents are expected to rise 5 to 9 percent annually over the next few years, said economist Gregory H. Leisch, chief executive of Delta Associates.
Here is a link to the report (the PDF is from 2004, the summary is through mid-2006)
Posted by: Condomania at August 25, 2006 12:41 PM
Rents are rising in the area slightly because there are few who could afford and/or wanted to buy. The (massive, compared to historical numbers) of houses on the market need to do something if they don't sell (how soon will it take sellers in the area to start saying "what do you mean my house won't sell?").
As indicated in an earlier post, the cheapest TH listed in my neighborhood has not sold since November (270 DOM). Yes, this home as all the others in the neighborhood have been listed and de-listed almost 5 times. Don't let the RE folks fool you when they give you a figure for average days to sell. That number means absolutely nothing right now.
Those who can't sell will attempt to rent the home, thus increasing rental supply as well. If they don't sell, foreclosure is on the way. Who wants to hold onto a $3,500/mo investment with no guarantee of return. Most foreclosures during this crash will be sucked up by investors when they can get them for dirt cheap (relatively), then turned around as rentals.
We are already starting to see what effect high inventories are having on prices. Rents will drop, home prices will drop, and both buyers and renters will once again be happy.
"Every action has an equal and opposite reaction," Newton's 3rd Law. Converted to RE, "A bubble that inflates must also deflate," SLS's 1st Law.
Posted by: SLS at August 25, 2006 07:12 PM
Raise your hand if you cashed out last year with $200k in profit locked in. Hi - Im raising my hand.
Raise your hand if you are locked into a house you can't afford to sell because you followed the heard. Look at all those hands.
There is no reason why houses should cost more than 3 times what the average salary can afford. If you didn't see this crash coming then you are either a real estate agent or live in Utopia. Welcome to the real world (where real estate agents go back to their real jobs).
Posted by: doh at August 25, 2006 08:40 PM
Chris Sicks wrote in yesterday's Times that July was the best month for buyers since 1997. http://www.washtimes.com/fhg/20060823-083053-3523r.htm
Of particular note:
Median sales prices in Arlington fell 15 percent from June to July, and July's figures were down 9 percent compared to July 2005.
No, that's not Loudoun, Stafford or somewhere else way outside of DC. That's ultra-desirable, prices-never-go-down-here ARLINGTON.
15% in one month. Wow. What do you housing bulls have to say about that?
Posted by: Jim at August 26, 2006 09:31 AM
I asked on the other thread for a facts based reasoning for housing prices being overinflated. No one there could do it. Here is an excellent discussion on why housing prices will COLLAPSE.
Posted by: doh at August 27, 2006 10:30 AM
Any insight on real estate trends inside the city (e.g. Capitol Hill)? Is there more stability?
Posted by: Kevin at August 28, 2006 02:54 PM
I've been following the posts on the old thread & this one for quite some time now. No one ever mentions the gentrification that has & is currently happening in the DC area as one of the reasons for the huge run up in home prices. A few years ago, SFHs in many areas (like U Street & Columbia Heights) were about 100k. From what I understand, these areas also used to have some terrible crime problems. Crime is now relatively low (as low as it can be for DC, anyway) in these areas. The DC police has done a great job of reducing the crime in the district...at least in the ones where there's new construction :). Isn't it safe to assume that some of these places in these gentrified areas that sold in the past year for 300-400k are (in part) just reaping the benefits of gentrification & crime reductions? And if so, then the "bubble" that is being talked about wouldn't really apply (or to a lesser extent) to these areas? Maybe the "bubble" is more around some of the overpriced areas around DC, where 1 br condos are being listed for 500k?
Posted by: Columbia Hizzle at August 28, 2006 05:31 PM
I think that Columbia Hizzle brings up a very good point - certain parts of DC, such as Cap Hill in the late '90s and U St in the '00s, have improved dramatically over what they were in the past. And I agree with the basic premise of Hizzle's post, namely that those areas should have seen price appreciation.
The issue is twofold. First, are the price increases warranted given the improvements in the neighborhoods? I think that this is a very difficult question to answer on its own since we don't have many instances of gentrification on which to gauge this effect. Second, might these gentrified neighborhoods still be affected by "bubbles" in other areas, both on the way up and on the way down? This, I think, is an easier question to answer. A run-up in prices of more established neighborhoods certainly will impact prices in up-and-coming areas as people move to those areas to "avoid" high prices. Moreover, the fact that houses in places like U St and Clarendon are clearly substitutes on some level implies that a fall in prices in the latter will impact prices for the former. Think about it. If prices in Clarendon fall enough, I'd certainly be willing to live in that hip area rather than the hip U St area, so prices in U St will have to decrease to keep up.
Where, then, do we end up? I'm not sure. I would confidently say that many neighborhoods in DC are more desirable than they were 5, 10, etc. years ago. But a downturn in the real estate market must affect those markets especially if they are pushed up due to forces that inflate the overall market.
And one last point. I suspect that many of these marginal markets have been especially populated by speculators who are counting on the area to "turn around" (see SoFlo, Eckington, or the far east parts of Cap Hill where tons of homes are listed, but not moving.) If that is the case (i.e. speculators moving in with the anticipation of gentrification who are now sitting on homes), then things could be more problematic for these areas.
Posted by: Bubba at August 30, 2006 12:04 AM
Why ANYONE would choose to live in Columbia Heights is beyond me. The area is a wasteland, and I'm terrified to walk around the area during the daytime, much less at night.
My friend just bought a townhouse from a speculator in CH for 300K, and it was totally redone. However, he looked at about 10 beforehand in the area, all of which were owned by speculators (and all of which had bars on the windows). In other words, speculators have fueled a lot of the appreciation in the CH market. It's bound to tank as well, with condos taking a much harder hit than actual townhouses, though.
I still would rather have a smaller place in a safe area than live in the CH.
Posted by: Saul G. at August 30, 2006 02:44 PM
NOVA is recognized as a "completely riduculous" real estate market. Ahh, the blind love of real estate and the psychology of the market where "investors" watch their holdings shrink, all the while saying "it will come back", all the way to the bottom where they lose it all. The facts have been stated for well over a year and the people who are hanging on to their real estate fantasies will wake up one day and "blame the media" for ruining them when in reality it was their own fault. Ahh, the entitlement nation where everyone is "owed" a life of luxury; it makes it so much eaiser to be successful in this market when you clear away the noise and invest based on sound fundamental principles which, unlike market psychology, are time tested and proven.
Hope you all had a great labor day and have properly preppared your financial house for the pending real estate collapse and the recession that it will bring...Don't say you never saw it coming.
Posted by: doh at September 2, 2006 11:55 AM
I have lived in Northern Virginia for the last 20 years. I have never owned a home. I have been trying to buy a house for about 8 years now. I think the reason the real estate market is so difficult for both buyers and sellers is because of all the people other than the buyer and the seller with vested interest when a house is being sold. When others besides the seller and the buyer become involved in any transaction it makes for an expensive and difficult to close deal. Just imagine if I had to go to a lawyer and an agent to sell my car what would that do to the availability and the price of used cars? It would make used cars much more expensive and would reduce their availability and selection since less people would sell them. Would anyone be selling a used car for $1000 then? What if for some reason the prices of used and new cars suddenly went up for a few years would lawyers and agents allow the prices to come down as easily? I would think not since that would cut into their profits. Can lawyers and agents influence the market? They are the experts, who know the market better than anyone; they can and do influence the market since they advise their clients? I consider mortgage bankers, real estate agents, lawyers and government to be responsible for the problems buyers and sellers have in coming to a successful transaction when buying a house. They simply will not allow an owner to sell his house cheaply. Mortgage bankers love to give bigger loans since they get more money this way, real estate agents love to sell high priced houses since they get bigger checks this way, lawyers love to write contracts for bigger deals since they get more money that way, governments love the taxes from higher valued homes and the exclusion of lower income more troublesome people that higher valued homes cause. Because of all these powerful entities with much vested interest in the real estate market the market will not collapse or go down by any meaningful measure. If that was possible it would have never climbed this way in the first place. If worse comes to worse the government will step in and bail out the people the way it did in Savings and Loan. There are simply too many powerful people involved on the price gain side and no powerful people on the price reduction side. There are presently as many buyers in the market as there were during all the years the prices kept going up. These buyers are simply shocked at the fact that they foresee no comfortable future as a home owner. Even if they buy a house it would be a miserable living since most of their income will be spent on mortgage payments. It simply seem that the misery that this kind of price appreciation causes on the hopes and desires of those who wished for a place of their is not of any interest to anyone but themselves.
Posted by: Bijan at September 2, 2006 05:30 PM
I'm sure all the folks in Columbia Heights whom you just insulted won't be shedding any tears over the fact that you won't be moving there any time soon. You must be scared of your own shadow. Last time I drove through there, the area was greatly improved and getting better.
Posted by: Badh at September 5, 2006 09:48 AM
Actually, Badh, I helped my friend move in about four weeks back. While we were in the backyard, we heard a mother yelling vulgarities and threatening her child from a neighboring house. We also watched someone pull a Range Rover into the lot where we were unloading, someone enter the car and sit there for a minute or two, and then leave. I wonder what was happening!
Probably a better idea than your "drive-through," Badh, would be for you to read the crime reports in Thursday's Washington Post. Why don't you take a look at the plethora of crime reports for Columbia Heights and then maybe post something knowledgeable on this chain?
Posted by: Saul G. at September 5, 2006 12:42 PM
I live practically a stone's throw from Columbia Heights so I know the area. Guess you did not hear about the recent murders in Georgetown. This and the incidents you mentioned are all part of living in a city and you will find them in the best and worst parts of town. I guess it is difficult to see the good side of an area when you are looking down your nose at everyone and everything.
Posted by: Badh at September 5, 2006 02:51 PM
On this and Dean's old blog, I've heard one or two posters lately calling this a "bitch session for people who can't afford RE in DC", and decrying the lack of analytical posters. So, first, in my own defense, I make a six-figure income, have over $200K in free cash in the bank (enough for a down payment on a SFH anywhere in NoVA) and I still rent. Why? Because to buy the same home I live in, on the same block in North Arlington, with a 20% down payment, I would be out almost $1000/month more after my income tax decuction (I'm in a combined 35% bracket btw) than I pay in rent, just considering mortgage and taxes, not including repairs and upkeep, which are not minimal on a 60-year-old tract home. There are five homes within 3 blocks from me currently up for rent and they are sitting for months empty, so I don't expect my landlord to be raising my rent any time soon.
Now, a real estate bull would say "sure, but if your 600K home goes up 5% a year, that's much more than the $1000 extra a month". Which brings me to the other statistic recently posted, that says that a home should cost 100-150x monthly rent. The most expensive rental homes in my neighborhood (which rent for far more than I pay) go for $2500/month. Assuming the top end because of desirability of the neigborhood, 2500 x 150 = $375,000. Those same homes list in the high 500's, already down 100k from last year's prices. So, a fair price for those homes would be closer to 400K, given that there is arguably a premium to be paid for owning over renting. Therefore it is hard for me to believe that if I buy today, prices will go up, in fact is is far more likely they will continue to soften. The developers have pulled out of this market and are no longer buying lots for teardowns, where last year they paid 550 for any lot in my neighborhood. The speculators are gone, so who's left - normal buyers, who make normal DC incomes. Using the tried and true 3x annual income rule, that means that a family who would pay today's prices for these tiny little homes would have to make almost 200K/yr. If I made that much money, I'd expect to be living in a bigger home.
The numbers just don't make sense long-term. The rules aren't different now. So, maybe as one poster said, I should move to the midwest. However I like living here and the rents are affordable, so instead I'll put my cash into rental properties in other parts of the country where the numbers still work.
I don't wish anyone ill, and I hope for the sake of all the people who bought homes in this area over the past few years that I'm dead wrong. But all the numbers point in the other direction, so I'll continue to sit on the sidelines.
Posted by: Jim at September 7, 2006 10:48 AM
I actually think that it's undeniable that Cola Hts is a much better neighborhood than it was in the past. On the one hand, it's hard to go anywhere but up from where the neighborhood was in the past. On the other hand, it's actually not a bad place to live now based on the reports of my friends and the amount of development that's going on.
Still, it's hard to see how homes in Cola Hts could currently sell for $750K - 1 million which is not an uncommon list price on the MLS these days. The key to a neighborhood like that is the possibility that it will improve greatly in the future in which case your risky investment will pan out. But at current prices, that's like buying Amazon.com near its 2000 peak based on future projections of its earnings (which, if Amazon was valued correctly at that point, would have implied that the company would have to transact a huge amount of GDP at some point in the future.) In other words, rather than getting a discount for buying a property in an up-and-coming, but risky neighborhood, you're paying an outrageous amount for that property. This seems crazy (and really parallels the dot coms when they reached their high prices in the way that future cash flows were linked to prices.) Think about it. You're not buying a house in Georgetown or some other established neighborhood. You're buying a house in a questionable, but improving, neighborhood that may or may not get over the hump to respectability. Is that house (and its risk) really worth more than $750K? I can't fathom the reasoning behind the purchase of such a property at that price.
But all of this is really beside the point for the bigger picture in DC. When you look out at listings, open houses, etc. in DC and NoVa, does it seem that everything is moderating? My impression is that, while some properties are still moving, activity has dropped dramatically although there's a lag in the way that publicly available data reflect that. I have to say, the more I talk to people in the market and the more I see the way in which properties are selling, it's starting to get really ugly just as we move into the "slow season." What happens to those listings that have been on the MLS for months as we reach the doldrums of October? Nasty stuff could arise.
Posted by: Bubba at September 8, 2006 12:21 AM
This condo (within a block of where I live), was first listed about 6 months ago for 429k. It was taken off the market last week (after multiple price drops) and is now being marketed (as a new listing) for 355K, with 5K in closing help. That's an 18.5% price drop in 6 months. This condo would have sold in a day a year and a half ago. I still don't think it's going to sell at this price.
DC is, indeed, in trouble.
Posted by: Saul G. at September 8, 2006 01:01 PM
Columbia Heights was 'up and coming' 4-5 years ago. As far as living in the city goes, it is now an established neighborhood. Oh, and it is a 5 minute drive (if that)from the downtown section of the capital of the free world. Would I buy there right now? No, that ship has sailed. However, every time I go through there, there is some new store opening or some new developement starting. I have to think that the money behind this new development knows more than I or most of the folks who post here about what direction things are headed.
Posted by: Badh at September 8, 2006 02:15 PM
Oh Badh, I??e managed to avoid your wrath for so long, but you can?? seem to help yourself (esp. ironic given that I agree with you on a basic level about Cola Hts.) Don't want to pick on you, but the "appeal to authority" fallacy that you made on 9/8 doesn't seem to provide a great deal of support for Cola Hts. Not to belabor the dot com analogy, but your argument is like saying "I have to think that the money behind Qwest (ride the light!) knows more than I or most of the folks who post here about the direction things are headed."
You're making an irrefutable, but ultimately vacuous and tautological, argument. Why is property in Cola Hts valuable? Because prices are high. Why are prices in Cola Hts high? Because places there valuable. Who can argue with that logic? (But substitute Qwest for Cola Hts in the previous statements and think carefully about what's wrong with this type of reasoning - I'll help you out later if you can't get it.)
Regarding the timing of the "flip" (sic) in Cola Hts, we could debate this. Unlike some naysayers for the neighborhood, I would say that its a lot better than it was ?a pretty good neighborhood now with lots of interesting stuff going on. Still, it has some serious problems that are more systematic than those that arise in more established neighborhoods. And most of the development that seems to both precede and accompany gentrification has really happened in the last two years or so. Perhaps we should determine an observable criteria for distinguishing "up and coming" vs. "established" and we could sort it out. If too many people still feel wary about a neighborhood, I’d argue that it’s still up-and-coming. Think about Adams Morgan in the mid-90s vs. today. Back in the 90s, some people were heading to restaurants and bars in Adams Morgan and some were moving there, but lots of people still felt that it was too iffy for them. Until recently (and possibly still today), I suspect that many people would have a similar opinion about Cola Hts. I would argue that’s up-and-coming. Until the stroller brigade really dominates the Starbucks, you’re not established. That’s not to say that you wouldn’t have made a boatload of money if you bought a place in Cola Hts in 2001 (frankly, you'd be a freakin' genius! If your place didn't burn down in the next few years.) But I can’t recall anyone talking about Cola Hts back then or in 2002 (seems to me that they were starting to talk about U St back then.) Sorry for the "appeal to (my own) authority," but that’s my casual observation.
And I would suggest that we stop obsessing on and arguing about Cola Hts and get back to the really interesting issues. Which are ........ a couple of anecdotes from this past weekend:
* Went to a party at a friend’s apartment above the Market Common in Clarendon (he’s renting.) From his terrace, you could see cranes all over the place. "I’ve looked into it," he said, "And just the ones that you can see are putting up 8-10,000 new condos. There are more on the other side of the building that I haven’t investigated." Given that it appears that the market is having problems absorbing the current supply of condos in places like Clarendon, what will it do with 8-10K+ new ones in the next few years?
* Playing the "nosy neighbor" role by wandering through the open house in an incredibly over-priced renovation in Burleith ($948,000 - $200K more than anything else that's sold in the area - for indoor-outdoor carpet on the second floor?!?! You must be kidding me), we overheard the agent talking on her cell phone: "In my twenty years in the business, I’ve never had fewer buyer appointments than I do right now. And all of the other agents in my office are in the same situation!" Perhaps she was trying to bait us (which was obviously pointless given our guffawing about the house), but she seemed so oblivious to her surroundings that I