Washington DC bubble?

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!

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.

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.

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?

Audiorich,

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.

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.

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

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.

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.

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.

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.

..."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 :) )

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.

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

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.

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?

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.

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.

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):

1.L.A.
2.Las Vegas
3.D.C.

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.

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.

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.

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.

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!

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.

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.
So

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)
Less
Tax Break -$829 (at 33% on interest and ppty tax)
Total $2117

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.

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?

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.

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.

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.

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.....

"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.

Lots of "for sale" signs near Old Town Alexandria, VA.
Anybody seeing the same trends?

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?

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?

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."

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.

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 falling nominal housing values. When this happens, credit conditions will tighten and the housing market will freeze up. Since the housing market has been the sole pillar of the economy for the past several years, a recession will ensue and the resulting job losses/income drops will have a reverse snowball effect adding to the downward momentum. I don't think, everything considered, there is any historical precedent for what I believe we are about to witness. I recently learned there IS a historical precedent for interest-only mortgages though. The last time they were this popular was in the 1920's just before the Great Depression.

The flock of people into an asset class that is consistently setting new highs has been described as a herd of "stampeding elephants". Unfortunately, this is what is occurring in this area. People are running into real estate for the big bucks and all the while saying that it is different this time, there cannot be a bubble (as in stocks in 2000).

What people have to understand is that real estate is very illiquid, especially for "small time" investors. It is unlike a stock where you can call a broker and see a couple hundred shares for a loss.

As far as for investment purposes, over the last 20 years the S & P 500 has far exceeded the positive gains in the real estate sector.

It is a big risk, which can result in big rewards if it is timed right. However, it is very difficult to time any market. As for me, it is not a place I want to play right now.

There has been a lot of good discussion on DC housing bubble on this thread. I just wanted to inject some realism into this discussion:

1. I think media has over-hyped the interest-only and option arm mortgages. First off, I think a lot of people are also locking into 40-year low 30-year fixed rates and would be hardly affected by asset price decline or short-term rates going up. When a homeowner buys house at today's "inflated" prices, he may be locking is "super low" interest rates as well, so in view of monthly ouflow from homeowner, these two factors counteract each other and are a net zero. For example, if a home owner buys a $400,000 condo now at 6% rate vs. buys the same condo at $300,000 (after supposed price deflation) at an 8% rate, his monthly outflow would be about the same.

2. Also, 5/15 or 7/23 mortgages make good sense for people who do not want to stay more than 5-7 years in a home. Historical evidence suggests that Americans do not hold a 30-year mortgage for the full 30-years for several reasons-- job move, growth in family size or income, interest rate changes leading to prudent refinancing and so on. Also, if a starting law school graduate is faced with a choice of buying a starter home with 30-yr loan and then upgrade to a bigger home, thereby, paying real-estate commissions and moving expenses twice or to buy a larger home with a new-fangled "exotic" mortgage product, it may make financial sense to go the second route.

3. The 130% gain in last 6-years (some threaders wrote about) needs to be balanced with 0% gain in 8 years preceding this period. A better way to look at the rate is 130% in 14-years total, which is not much more than historical long-term average growth rate of 5-6% per year. This is not to say that current appreciation in DC (as well as major markets on both costs) is sustainable. But I subscribe to the view of slowly deflating bubble (may be 10-15% drop in next 2-3 years and then slow growth again.

Of course all houses are not equal but lets compare my two experiences and new construction prices.

I bought a brand new home in southern Virginia (read: no jobs) in 1993 for 69,900 it was 1100 square foot, 1/4 of an acre, no driveway, no garage, no granite, nothing fancy, basic appliances, 3 small bedrooms 1.5 baths. No public pools, nothing fancy for "amenities" That is about $64 a square foot

I bought a new home in Ashburn 3 years ago for $118 a square foot. Hmm.. it does have the fancy additions, granite, its 3 times the size, it is a 2 car garage, there are jobs around here, there are public pools, nice amenities, culture , fantastic schools, etc

We're about to sell our house and I expect its going to be about $186 a square foot.

I just don't see this as being unreasonable. Unfortunately the demand for "affordable" housing (smaller more down to earth home sizes) have been driving the prices up on realistic homes..but when people buy "McMansions" they are buying ALOT of house, of course it costs a bundle! But if you look at their square footage price (on average) its not that bad.
Of course we're not talking about the 900+ $$ per square foot that they see in CA and NY

I have been thinking a great deal about buying a house in the next year and have read this with interest. Thanks to many of the posters for the information which they have supplied.

I have been really puzzled by the lack of correlation between housing costs and incomes. Sure, DC has a lot of jobs. But the government is a key employer here and government jobs simply don't pay that well. What GS14 who is single can afford to buy a condo with one bedroom which costs $450,000? And who buys a one bedroom condo except single people?

I've also been puzzled as I look at house after house which has granite and stainless steel appliances. Am I alone here in thinking that this look is going to be horribly dated in 5 years and that people who have these kitchens are going to want to redo them when the next trend comes along? And am I alone in wondering why American kitchens have become more and more fantastic in terms of appliances etc. at a time when more and more Americans are eating out? I can't help but suspect that so many of these houses with great kitchens don't have much else (and I worry that the seller thinks that he/she can convince me to buy a housing with bad plumbing because the kitchen looks great). I worry a lot that so many of these kitchen renovations are being done to enable the seller to flip the house (in fact, one of the previous posts raises this point).

What a relief to read all this and discover that I am not alone in wondering what is happening and what I should do.

Still no answers but at least I am getting educated.

I do want to own a house but I don't want to own a house which I can't afford and which has depreciated in value so that I am holding it at a loss. I don't plan on selling for fifteen or more years but I still worry if my house drops in value for ten years.

In a little follow up, I found a book coming out that will dive further into detail on this issue called "House Poor: Pumped Up Prices, Rising Rates, and Mortgages on Steroids: How to Survive the Coming Housing Crisis". This book also describes how to make money in a weaker market, something that may be very relevant in the near future. I suggest checking it out on amazon, since some of the tips seem very original.

I think the bubble theory is starting to com true in Northern Virginia. We've been looking in North Arlington for the past few weeks and nothing is selling. The same thing seems to be happening in Fairfax County and Princ William. One realtor told me that she is advising sellers to price their home 200k less than what they would have in May.

I'd be shocked if people were actually slashing the prices of their homes $200k
I have talked to 3 mortgage broker friends, several contracters, even housecleaners, real estate agents, etc... they have all said this time of the year is simply slower for their businesses and they expect it to pick up for a few weeks in October and December but not really go full steam again until spring.
I think most everyone agrees that the previous pattern of gaining 20%+ value in a home cannot continue, most are figuring it will flatten out but almost no one that I have talked to thinks that it will revert and prices will take a drastic drop.
You will see nice values on the market right now because there are a lot of people who need to sell fast because they are on a deadline but that is the exception, not the rule.
I for one think prices will hold steady for a while and then increase modestly at a much more reasonable pace, that is not a bubble. DC and the suburbs of DC have not seen the types of run ups that other states have experienced, infact our real estate seems downright cheap compared to some other states.

Alot of people seem to be wondering how people afford these homes, helllooo, people make ALOT more money here than in other areas... all of my friends are making over 100k a year and have been for quite some time, if they are married then they're probably pulling in over 200k a year. That's a snapshot at what is becoming normal around here, its not like they are the lucky few.

A friend of mine bought a TH in herndon area for 505K back in April, when the market was at peak IMO. I advised him that he should go with a Fix loan, but he ended up getting a 5/1 ARM thinking that he can always refinance at the end of the adjustable period.. All of a sudden (we're talking less than 5 mo.), these other houses in the neighborhood drop their sales price to $420-$450K.. and almost none gets any offer. I told him not to panic and to not think of it as an investment but he said that he can't afford a full payment in the next 5 years unless he's getting paid 50K a year more than we he makes now..

Really don't know what to tell him..

" have been really puzzled by the lack of correlation between housing costs and incomes. Sure, DC has a lot of jobs. But the government is a key employer here and government jobs simply don't pay that well. "

I'd like to point out that the high paying jobs that people are here for are not actually working directly for the government, they are usually contractors working for the government and they make great money!
I've known people who did practically nothing all day at work and were paid $119,000 annually, ..they were there "in case" something came up.

That's the way most government work gets done, through contractors, not the day to day administrative staff and yes there is "short term" job stability even though that contradicts itself. I know going in on a contract whether its for 2 years, 6 months or even 10 years, so I'm able to plan accordingly. There is so much work available through homeland security they can't get it bid out fast enough, there is no reason to think that work will slow in this town anytime soon barring any disasters.
So all of those 'tech' companies you see probably have a federal accounts department, they're selling to the government, products, services etc... the money makes its way around.

Look at the numbers and see for yourself if there's an eminent bubble or not. The Washingtonpost reported that there were about 5,000 condo units for sale in Sept04. In Sept05, there's 18,000 units for sale! And there's another 47,000 units under construction within the next 3 years.

Much of the sales activity in the condo market were done by investors who bought these units and flip them and make $100K. That is no longer happening. Some are starting to near panic, because they aren't selling and are now left holding the bag. How long can they sustain carrying these huge mortgages depends on how deep the pockets of these investors. Let's see what happens in the next 6 months.

"I'd be shocked if people were actually slashing the prices of their homes $200k
I have talked to 3 mortgage broker friends, several contracters, even housecleaners, real estate agents, etc... they have all said this time of the year is simply slower for their businesses and they expect it to pick up for a few weeks in October and December but not really go full steam again until spring.
I think most everyone agrees that the previous pattern of gaining 20%+ value in a home cannot continue, most are figuring it will flatten out but almost no one that I have talked to thinks that it will revert and prices will take a drastic drop.
You will see nice values on the market right now because there are a lot of people who need to sell fast because they are on a deadline but that is the exception, not the rule.
I for one think prices will hold steady for a while and then increase modestly at a much more reasonable pace, that is not a bubble. DC and the suburbs of DC have not seen the types of run ups that other states have experienced, infact our real estate seems downright cheap compared to some other states.

Alot of people seem to be wondering how people afford these homes, helllooo, people make ALOT more money here than in other areas... all of my friends are making over 100k a year and have been for quite some time, if they are married then they're probably pulling in over 200k a year. That's a snapshot at what is becoming normal around here, its not like they are the lucky few."

Sara,

It is not the norm for a young person (late 20s/early 30s) to make $100K. Trust me, I have a master's degree, 8 years of work experience (so I am not exactly poorly educated or fresh out of college) and the jobs in my area pay about $65K. Most of my friends earn approximately the same range. There are very few people - even among those with a JD or an MBA - who bring in more than $100,000 in their first few years out of law/business school.

I live in Montgomery County, and the prices here are ridiculously high - especially when compared to other parts of the country. I have friends who live in Durham, NC where salaries are quite good and $200-250K will buy a nice, new 4 bedroom house. However, I firmly believe the bubble - and yes, that's what it is - is already popping here. I have been observing the housing market closely for the past 2-3 weeks, and I see houses listed for $45K less than similar homes that sold in the past few months. Also, a real estate friend told me that there have been very few contracts in the past 30-45 days. Just go on Craig's List and look at all the "price reduced", "seller will pay closing costs" entries. Also, check out how much houses rent for. Yesterday, I saw a 4-bedroom house in Potomac, MD (very posh neighbourhood) with a monthly rent of $2,500. If you were to buy a place there, your monthly mortgage payment would be more like $4,500 or even more.

A large discrepancy between rental and for sale properties is a very good indicator of a bubble.

P.S. Why do you think all these people who are currently selling are on a deadline? And why is this the exception rather than the norm? If it's seasonal one ought to see it every year, which would then make it a normal phenomenon, correct? O

It is not the norm for a young person (late 20s/early 30s) to make $100K.

It is *becoming* the norm amongst working young professionals to make very good money and I'm sorry to hear that you've got such an excellent educational background and experience and cannot find a better paying job.

It would take far too long to disect every little opinion to make it fit our mutual thoughts on this but here is what I think.
There are plenty of couples (and singles) making the money to buy these properties, some of them moved their equity up - some simply make enough income and some use mortgage products that are deemed "risky" but the fact is that housing here is not really that expensive per square foot in larger homes and the price per square foot for small houses is maxed out (if not too high) because so many people were competing for the smaller overall price tag. But if its worth it to them and there are always people to squabble over it then when is this "bubble" going to bust?
People who sell on a deadline are doing so based on many factors, like being relocated or they already put a deposit on another house. My neighbors just sold their house very quickly for a reduced price to an aquaintence because they did not want to go through process of realtors/buyers and they made the same amount they would have even with a realtor.
They are closing and moving into their new house next week! They had to do it fast.

Oh and I agree that you will see price reductions because people hit the market thinking they could increase their pricing once again and that is probably not the case, so my thoughts have always been that while we're not going to see any price increases, its highly doubtful that people are going to sell their house for any less than prices in their neighborhood from last spring. That is not a bursting of a bubble, that is not people "losing money" - that simply means they are not increasing anymore from what a lot of us would agree is the peak.

And yes, they see a lull in the market every single year, therefore it is a normal phenomenon.
I'd really love to hear neutral opinions about this - it seems like the people who are priced out of the market are wringing their hands and laughing waiting for the bottom to fall out but I can't help but think that these high prices are here to stay. Have you considered that a parent 15 years ago might have paid $50 a week for daycare and now they're paying $250 a week minimum? I heard people say that would never last but yet the price only gets higher year. Look at the prices of cars, in 1976 my father bought my mother a brand new car for $3000 and he paid cash - now look at the price of a car, they do cost as much as some folks paid for their houses and those prices have not "hit bottom" - when is the last time someone offered you a brand new car for half the price?

So please just understand what you're predicting, what you're fighting and what it is that you hate..perhaps those prices are here to stay - perhaps not but it seems more than likely they are.

A couple of interesting points from my personal experience:

1.) Listen to the professor. He got us in this mess in the first place, don't think he would accentuate this unless he was really serious... (3 + warnings in the last few weeks is enough for me, and I belive enough for speculators as well). My point - he would not put salt on the wound, unless he really, really had to.

"Federal Reserve boss Alan Greenspan tried to take a hatpin to the nation's housing bubble yesterday - warning Americans that real estate prices are bound to level off or even plummet."

2.) I have studied the D.C. market and its trends for the last 30 years. What went up, eventually came down. NO EXCEPTIONS here. One needs patience (I mean years). Trends come and go -- social ones, racial ones, economic ones.

3.) I don't care what people pay for real estate, just like I did not care that Yahoo was trading at 150$ in 2000. IT came down, and guess what -- it's back up after 5 years. My point: Be a contrarian and go against the masses. It PAYS off. BTW, I bought in DC in 1999 (even got a tax break from the FEDs and locked in 6.5% Fixed, no points, 6 years ago). Why? Everyone else was buying Yahoo.

4.) I would much rather study Psychology in this case over Economics. Ask yourself how much of this is based on reality and how much is based on the old American "competitive" spirit of not missing that chance, that wave, that craze. Most of the stuff we've been fed is actually false, as statistics intend to manipulate reality often times. For those interested, I will post another detailed description on this.

5.) Final point. Hell, we make 190K combined income and even have a kid on the way. Have savings and major equity (which, btw can easily create a false sense of security).

SO WHAT! We still live in a condo, travel to Europe/US, and ENJOY a really good LIFE. My point - only fools would give all that up and lock themselves into a 800K+ mortgage.... cause that's all you'd afford with a 200K income :)

Sara, I'll respond with a neutral opinion.

Disclaimer - I'm upper 20's, no kids, well paid for my area (>70k, avg inc. ~ 35k), college educated, renter.

I am not priced out of my area. My paycheck can support a very nice house payment and my stash would provide a more than adequate down payment. I choose to rent though since I plan to move in a year or so. I also abhor paying $250k for a house that was going for approx. $110k just 4 years ago.

1. $3000 car in 1976. What kind of car? I bet you would be surprised to know you can go to a Chevy dealer and drive out in a brand new Cobalt for $11,000. It's safer, more reliable, and gets better gas mileage than the most expensive or nicest 1976 car. Car prices might sound expensive, but that's because people are buying gaudy SUV's and higher end cars that are driving the average transaction price up. Been there, done that, not going back. BTW, that $3000 car would cost $10300 in today's money. Pretty much a wash after 29 years.

Getting to the subject of housing prices, here's a little math to consider. I live in Florida, one of the hottest markets. The average wage where I live is about $35k. Average housing prices have risen from $97k in 2000 to $215k in 2005. Average wage gains have kept pace with inflation, so that's a wash.

How are people able to afford houses here? There are a couple of ways including horrendous commute to live where it's cheaper, creative mortgate options, or stretching the budget. I have friends who spend an entire bi-weekly paycheck on the mortgage only. That doesn't include car payments, other loans, utilities. Simply mortgage, insurance, and taxes. In my eyes, that's 50% of take home pay (not counting the two extra paychecks per year)

Even if one was lucky and bought a house back in 1995, they are being squeezed by hurricane insurance (from $750 to $1500 rougly in the past year), taxes that are increasing due to sky-high values, and energy costs. It's almost impossible to sell and buy a comparable house for the same amount of $$.

Around here people use the argument that "the weather is nice, it's a nice place to live," etc. Valid points. Yet when it's not affordable are people going to be able to move here, take a likely salary cut, and pay double for a house than they would have in other parts of the country (Ohio, Tennessee) just for the sake of not shoveling snow? I doubt it.

I turned bearish on housing when some friends of mine who have marginal economic knowledge started pouring money into housing, stretching to pay for a primary house and buying rental houses, just because someone at work thought it was a good idea. I wonder if that guy also though buying Yahoo at $250 was also a great idea? (These are the same people who cannot contribute to a 401k plan because of expensive car payments.) Read Fortune, Money, Kiplingers. All those magazines have articles (buried deep, generally) of how the wealthy have pulled almost all money out of the housing market as of last fall/this spring.

Who would you rather listen to....? Someone who is barely scraping by suggesting to a coworker to buy an investment property during on a coffee break because he heard his daughters teachers ex-boyfriend made $150k flipping condos...or the Fed reserve chairman suggesting that real estate is overhyped and overheated; Robert Shiller, the Yale economist who rightly predicted the 2000 stock market crash or your neighbor who would be underwater in a home loan if prices declined 1%?

Demand has been artificially stimulated by low mortgage rates, lenient lending, and price speculation. People poured out of the stock market in droves and have subsequently done the same thing to housing that they did to stocks. Buy high, expect higher prices, and ditch when the gains do not materialize. We might now be seeing the beginning of the "ditching" process. The longer it takes to correct this market, the more severe the correction will be.

Just an additional comment to my earlier thoughts.

Regarding the comment about the lack of correlation between federal employment and housing prices, I stand by what I said viz a viz the government being a key employer here and government salaries not being that great. I actually have a PhD and work as a 14. My job would not be feasible as a contract position. Simply put, my work is so specialized I'd have to work as an independent; this would mean paying both my own pension plan and own health insurance; these sums are so significant that I would not be able to charge enough to make more than I currently make as a federal employee. I actually think my situation is fairly typical of government employees. So while there may be lots of independent contractors out there who make more than I do, I am guessing that they have higher costs than I do. So, again, I think this is a wash.

Second, I think that if we are to do comparisons to the 1970s in terms of salaries and costs, a couple of factors need to be taken into consideration. Sure, there are lots of couples with 2 good incomes who may make $200,000 or so (again, providing they don't work for the government). However, out of that $200,000, they have certain costs which people did not have in the 1970s. Most families must pay daycare(at least $12,000 but often running $30,000 or more) out of that $200,000 salary. Unlike the couple in the 1970s, every family now must have (and does have) two (or more) cars. Yet another hefty cost (especially as more and more people are leasing cars which means hefty payments each month for years). Health care costs have also have risen dramatically. Many people in their 20s, 30s and even 40s have student loans (especially people with JDs, MDs, and PhDs---people who hold high-paying jobs). More and more people are reluctant to send their kids to public school and private school tuition can be astronomical. Saving for your child's college tuition can also take a chunk out of your salary if you are seriously engaged in doing this. And so on.

So, while people make great salaries, a lot of this money is wiped out by day care payments, student debt repayments etc.---and this is before they even make their mortgage payment.

This is what makes me so hesitant to believe that people can afford these astronomical mortgages.

And I can't help but remember what happened to someone I know in Chevy Chase. He bought a beautiful house for $650,000, promptly tore down the house and built a new one. A few months into the project, he lost his job because of a merger. He was unable to hold onto the house and lost it very quickly. Let me emphasize that: despite a fantastic income, he wound up losing the house within a few months! Simply put, he and his wife (nice upper-middle class people) lived paycheck to paycheck. No savings meant that they were extraordinarily vulnerable to the slightest catastrophe.

I find it hard to believe that they were or are unique.

Sara,

Thanks for your feedback. Please don't misunderstand me: I don't feel sorry for myself at all. As a matter of fact $65-$70K is a very good annual salary. I have a good friend who is an attorney with a J.D. and LL.M. who works in the nonprofit sector and makes about $50K! I think she does qualify as a young professional...

But all that is really a bit beside the point. My husband and I have good lives, we travel to Europe every year, our daughter attends private school, and we actually just bought a house in Maryland for $35K less than the asking price. I believe there is a bubble, and you believe that the market is simply cooling off. We are all entitled to our beliefs, and only time will tell who was right.

Anonymous and Wes, I couldn't agree more with both of you. I picked up my daughter from school yesterday, and I saw all these multi-million dollar mansions; every second or third one was for sale. There were eight real estate signs for eight different properties on a 1 or 1.2 mile stretch of road. I find it hard - actually downright impossible - to believe that all these people have to suddenly relocate because of jobs, etc.

Cheers,
Katharine

First, this is a great string. It’s nice to get so much discussion about this type of issue.

Next, it seems like it’s gang up on Saraf time. While I think that the “bubble is popping!” talk may be a bit premature (or at least it’s impossible to really know given the frequency of the data – although Lynn’s post on 10/10 about a 18,000 unit condo inventory vs. 5,000 last year is pretty interesting if true – and note that any shock to the condo market will not be confined to that part of the real estate market), I do think that Saraf is misguided on a number of points. In fact, looking through Saraf’s posts, there are so many logical errors that it’s difficult to know where to start. However, I’ll take on a few points that Saraf makes. (Note also that I feel that Saraf has added a somewhat nasty tone to this string due to his/her post on 10/11 belittling the “underpaid” but highly educated Katharine. So I don’t feel that guilty about making some points at his/her expense.)

Going back to the post on 9/28, let’s consider a few of Saraf’s points:

Point 1: “If a home owner buys a $400,000 condo now at 6% rate vs. buys the same condo at $300,000 (after supposed price deflation) at an 8% rate, his monthly outflow would be about the same.” It’s obviously true that you can find two bonds with the same maturity that have different face values and coupon rates such that the coupon payment is the same. However, that’s not the issue in real estate right now (or in this type of investing more generally.) The potential buyer is considering a situation in which she faces a particular bond (presumably the high price-low rate case in Saraf’s hypothetical) and must consider the position in which she would find herself in the event that the price and/or rates change also taking into account her exposure to interest rate changes. If you buy your $400K condo at 6%, but rates rise to 8% and your condo’s value falls to $300K (so you end up in Saraf’s second “indifferent” case), your initial position implies that you’re not in very good shape. Particularly if you have a loan that starts to float when the second scenario is realized (even if you’ve always planned to sell at that point – see point 2 below.) Especially since you can never renegotiate the purchase price of your home downwards ex post, nor would it make sense to refinance at the new higher interest rate.

How will things move in reality? Who knows. But once there’s enough momentum for variables to move in certain directions, I claim (without proof) that they will.

Point 2: “5/15 or 7/23 mortgages make good sense for people who do not want to stay more than 5-7 years in a home.” N.B. Planning to sell an asset at (or before) some specified point in the future does not insure the price at which that asset will sell!!! Saraf’s argument doesn’t reflect this fact. And, I would strenuously argue, my point is not an unsupported claim – it is a fact!!! (unless you know the future.) I’m really amazed at prevalence of the fallacy that Saraf makes here. Talk to lenders, and they’ll throw Saraf’s argument around like it’s a self-evident truth (while approving you for some amazing home loans – see KMichael’s post from 9/12.) However, it’s fundamentally wrong (or at least is based on some underlying assumptions about movements in housing prices.) Even if you plan to sell your home some time in the future, you still have to find a buyer for your house. So with an ARM, you are exposed to interest rate risk as well as more general price risk. Not that ARMs aren’t reasonable in certain situations, but it is wrong to ignore the risk that they involve on both price and interest rate dimensions. (Incidentally, it’s interesting that ARMs historically have been popular when interest rates were unusually high. I find it somewhat incongruous that the opposite is true right now when most interest rate risk would appear to involve rates moving up. That risk, I think, is pretty clear given how current rates compare to historical rates. And, more controversially, when prices might arguably fall.)

Let’s move on to the post from 10/5. “I think most everyone agrees that the previous pattern of gaining 20%+ value in a home cannot continue, most are figuring it will flatten out but almost no one that I have talked to thinks that it will revert and prices will take a drastic drop.” First, I think that it’s interesting that most posts on this string are either extraordinarily bearish or expect a flattening of the market. Not too many real bulls out there trying to justify the nutso DC real estate market which I think doesn't bode well for the current prices. Second, note that we really care about real prices, not simply nominal prices. I just want to point out that if housing prices flatten, they may not outpace inflation at which point prices are still falling in real terms. I don’t know if that will happen, but it’s worth noting the distinction between real and nominal prices. As a last point, note that the people with whom Saraf is discussing the real estate market, namely “3 mortgage broker friends, several contracters, even housecleaners, real estate agents, etc.”, are not really objective analysts (except perhaps the housecleaners.) Think about the fund managers pumping up internet stocks in 1999. My “mortgage broker friends” in the DC area are all pretty candid once you get a few beers in them, and uniformly they’re pretty darn nervous (and, notably, all of them have fixed rate mortgages on their homes, none of which they’ve bought in the last year.)

“helllooo, people make ALOT more money here than in other areas... all of my friends are making over 100k a year and have been for quite some time, if they are married then they're probably pulling in over 200k a year.” I just LOVE “statistical” arguments based on some combination of anecdotal evidence, small sample sizes and/or non-random samples. If you actually look at the income distribution figures from the 2000 Census, you’d find that the Washington area, while having a income distribution that involves slightly more extremes in BOTH directions, is not terribly at odds with the national income distribution (and things have not changed that much from 2000 to 2005 so don’t try that response – I have other, less comprehensive, data that would refute that objection.) (Also, don’t turn now to the claim that “land is scarce” as a justification for high real estate prices – the problem with that argument is that it could be used to justify ANY price for real estate.)

Personally, I find it amazing that so many people can afford $800K houses in Capitol Hill and Columbia Heights. My wife (a lawyer) and I (an economist) are DINKs who make a pretty fair income even by Saraf’s standards. But I would feel uncomfortable about the debt obligations required to buy most homes anywhere close-in in the DC area at the current prices even if we were to use an exotic mortgage to lower our monthly payment (which would make me uncomfortable for other reasons due to the interest rate risk involved.) How many people have bought houses that stretch them pretty thin and/or are exposed to substantial risk that could really strain their budgets? The problem is that we honestly don’t really know since we don’t have good data on that. However, I’d wager that most people who have bought houses in the last year or so don’t have much slack in their budgets. Just think – if your mortgage payment went up by $250, $500, $1000 per month, could you continue to afford it? How exposed to your are the risk of those possibilities if interest rates rise 0.25%, 0.5%, 1%? Rates will go up at some point, so those with floating rate loans will have to face that possibility.

“Some of them moved their equity up” from Saraf’s post on 10/11. Colleagues of mine tell me that this is exactly what is driving a lot of the price gains in markets like California – people whose houses have appreciated sell their houses and use their gains to buy a more expensive house. The problem with this is that it unravels at some point. The difficulty is that you need someone at the bottom to buy the low-end houses so that every current homeowner can swap out for a more expensive house. But what happens when the bottom end is too expensive for entry-level buyers (which, Saraf, must still exist somewhere in this market)? The whole pattern, which basically is operating like a big Ponzi scheme, rolls back. And who knows what will happen then.

“I'd be shocked if people were actually slashing the prices of their homes $200k” from 10/5. I just want to point out that we need to know the cost basis relevant for this price cut. $2 million? Saraf might be wrong in that case. $500K? Saraf is probably right. But note that, more generally, when people talk about how the “high end gets hit hard in real estate slumps”, they’re generally talking about absolute changes in prices. But we really care about the percentage changes which are much more uniform in slumps.

Last point: People like to argue that real estate is not as volatile as something like the stock market since people can always sit in their homes rather than selling. That’s true, as long as we ignore the presence of speculators. However, that’s a two-edged sword. The lack of liquidity might keep observed sales prices from falling, but also affects your ability to cash in your gains. So people are sitting on a lot of paper money right now, but it’s just that – paper money. Without cashing out, you cannot guarantee that your value has risen, just as you can also “avoid” it falling.

nice post, Bubba.

I just hate it when people say "real estate market isn't like stock market and prices won't drop so dramatically". The fact is that the 'crash' will be much more violent b/c idiots using exotic loans (who call themselves 'investors') feel the panic to sell

stock brokerage firms allow 4:1 leverage to trade stocks, for futures market these firms allow anywhere from 20 to 50:1.. in real estate, people normally leverage 100:1 or more to buy the overpriced houses. In the above case, that lady committed to the IO loan to get 143:1 leverage to buy her condo.

What do you think will happen when Fed increases another 100 bp over the course of next year?

Sorry for posting again so soon, but here's a story that I think is illuminating about the DC real estate market. I was getting my hair cut recently in Arlington, and the hairdresser and client next to me were talking about real estate prices. The hairdresser was talking about how she'd recently sold her condo for twice what she had paid and had bought a new place that was substantially more (notably using an interest-only loan.) The person in her seat noted how houses on her street were selling for $1+ million. "And they're not really that nice!" she exclaimed (at which point, I wanted to ask "So, are you selling soon?"). Both mulled over the rise in real estate prices and agreed that they didn't really understand what was going on. At which point the client stated, "I just figure that God provides for us."

At which point I wanted to turn to her and yell: "That's it!!! God's responsible for the run up in real estate prices!" That's as good an explanation as any that I've heard. And equally untestable.

(It's also fundamentally wrong when casual conversation in something like the barber's chair turns to a topic like real estate. It reminds me of multiple conversations that I overheard in restaurants and coffee shops in San Francisco back in the summer of 2000 about how "great" everyone's stock options were.)

this was a good blog until now ....that last few comments are really bad.

Guys,

Only post I made was on 9/28. Subsequent posts were not made by me and are not my opinions. I am not sure if it is a computer glitch or someone using my name to make comments on my behalf. In fact, in one post the imposter changed the order of my first and last names as could be expected by someone not sure of the order of names.

Anyway, my opinions are as I provided in my post of 9/28 and I have been wrong several times in my life and take those opinions with that understanding.

The thread was good and informative other than someone using my identity to make personal comments and I hope the thread retains its original nuetral character to be useful to all!

I read Bubba's analysis of my post on 9/28 and here are my observations. I can not speak to his analysis of the OTHER Sampat Saraf's comments--

1. The hypothetical situation which I posed of buying a $400K condo at 6% vs. $300K condo at 8% was with first-time home in mind. If someone is renting and is hoping for prices to fall before getting into homeownership, he is also running the risk of Long-term interest rate going up. True, it will not feel good to a new homeowner to see 25% of the value drop off EVEN if the interest rates have gone up to 8% from 6%. However, analyze analyze the reverse sitution-- The first-time homeowner can buy the 400K condo at 6% rate in 2005 with 50K down payment and his principal/interest payments for next 30 years would be $2,098.43/month. On the other hand, he holds out buying the condo till 2007 (say the price drops to $350K). His principal+interest payments would be $2,201.29 at 8% rate for next 30 years with the same 50K down payment. Even though, he may think he had financial smarts to wait till the prices fell, he had actually made an imprudent financial decision because he would end up paying higher monthly payments than by buying outright.

I would agree he may be cusrsing himself if buys a condo and sees 50K of equity evaporate in two years but if he has plans to stay in the house for 15 year plus, the equity erosion is just paper loss with no financial significance.

2. As I said before, 7/23 and 5/25 mortgage products make sense in certain situations for an "informed" consumer (who understands the risks as well as benefits of such products). These products would be lousy for someone who DOES not understand the risks assosciated with them. Which mortgage product makes sense for an individual depends on his/her opportunity cost of funds. If the individual is going to get superb return on stock market on the borrowed funds or is going to wipe off high interest credit card debt, the exotic mortgage products may offer a solution.

3. A lost of posters have raised that housing has become unaffordable in DC area because prices has outstripped salaries need to also understand to below factoids--

a. Fairfax and Montgomery conties have rated among the top 5 counties in household income in past 2-3 years. Average Fairfax County household income was in excess of $86K/year in 2005.

b. There are several regions in US as well as abroad where housing is even less affordable. CA housing has been unaffordable for last decade or so but if one keeps on waiting for the housing to become affordable in CA, one would wait for several decades and prices may continue their upward march.

I personally feel that slow adjustment to balance supply and demand has already started but one should not look for prices to fall abruptly specially in the lower price range properties. UK has already descended somewhat from its peak but it did not cause a CRASH there while it was even less affordable out there.

For all of you who argue about the stability of jobs; go to the Fairfax county website on Demographics. AVERAGE SALARIES IN FAIRFAX COUNTY HAVE GONE ----DOWN--- IN THE LAST 5 YEARS DROPPING 10%. If salaries are going down, interest rates are going up (i.e. you pay more for each dollar of home sale) then how can home prices keep going up?

Alright, alright. Sorry, folks, for getting caught up in the personal stuff. Let me join Saraf calling for a return to a civilized level of discourse here (at least as much as a passionate string like this can have.)

Let me also note one point that Saraf (officially, on 9/28) made that did give me pause for thought (which I conveniently managed to overlook in my post about his/her comments): "The 130% gain in last 6-years (some threaders wrote about) needs to be balanced with 0% gain in 8 years preceding this period. A better way to look at the rate is 130% in 14-years total, which is not much more than historical long-term average growth rate of 5-6% per year." Taking all figures as true (which I have no reason to suspect they're not - although I think that 6-7%/year would be a closer rate for the final gain - especially if you wish to debate the 1992-2000 price performance), this would indicate that DC was extraordinarily undervalued in 1999. Historically, is 6-7%/year out of whack for real estate price gains? Perhaps a bit high, but not too much (maybe 1-2% too high - which could be substantial after compounding.) So, as Saraf is pointing out in his/her post, maybe people were buying in a cheap market in 1999 and have experienced a delayed run-up in the last few years. But if prices move in this lumpy, run-up-then-stagnate fashion, I'd still be a bit worried about having bought a place in the last 1-2 years. (After all, how can one buy when everyone agrees that it's a "seller's market"? Doesn't seem to make sense.)

What I'd really like to know to resolve all of this debate: Of people who've bought in the last few years
* what is they're mortgage payment vs. income?
* how much savings do they have?
(i.e. last two points: how much slack do they have in their budgets)
* what is the form of their loan (e.g. interest only, negative amortization, ARM, etc.) in addition to the earlier info? (i.e. what risk do they face?)
* did they buy the house as an investment vs. a primary home? (i.e. what incentives do their debt maintenance obligations give them to sell vs. hold)
Presumably, mortgage lenders have all of this info, but it's difficult to gain access to it. A recent Washington Post article (http://www.washingtonpost.com/wp-dyn/content/article/2005/10/14/AR2005101400886.html) points out that a large fraction of people have paid off a significant portion of their mortgages which would seem to imply that most people aren't facing a great deal of risk. But I would be interested in breaking that data down by region and time of purchase (particularly since a large number of purchases have been made in the last couple of years when prices have been running up in DC.) Only then will we know whether people have bitten off more than they can chew. And, honestly, despite my tendency to believe that market discipline leads lenders to appropriately monitor risks, we have no idea about what people face since we don't have data on this.

For all of you who argue about the stability of jobs; go to the Fairfax county website on Demographics. AVERAGE SALARIES IN FAIRFAX COUNTY HAVE GONE ----DOWN--- IN THE LAST 5 YEARS DROPPING 10%. If salaries are going down, interest rates are going up (i.e. you pay more for each dollar of home sale) then how can home prices keep going up?

This is a good comment. Back in 2002, I thought that prices would stagnate for this very reason. Turns out I was wrong.

I think you (and I) had the equation right - housing price is a function of income and interest rates. If incomes stay constant, a drop in interest rates can increase housing prices. If interest rates stay constant, a rise in incomes can increase housing prices. If both go up at the same time, you get a huge boom, but even one is enough. When the Fed dramatically lowered interest rates from 2000-2002, housing prices went way up.

Interestingly, though, prices continued to rise after 2002, even though interest rates were at 1% - with nowhere to go but up.

What you (and I) missed is the rise of previously exotic mortgages. Interest-only adjustable rate mortgages, which were very rare before 2002, are now common. I went to an open house the other day, and the real-estate agent seemed most interested in letting me know that 1) nobody buys on a 30-year fixed anymore, and 2) they can work with me on "no money down" (sounds kind of like a car dealership, doesn't it).

Of course, interest rates will rise, the principle will kick in, and the people taking out these loans may find themselves in deep water without a floatation device. That's why my take on this has changed in the last two years. Previously, I figured that there would be little movement in the housing market for a while, but no major decline either. But the rise of exotic mortgages has greatly increased the possibility of a more substantial retraction. People who bought on a 30-year fixed with a substantial down payment are the sort who can ride out a temporary setback. I'm not so sure about the 0% down adjustable-raters who are stretched to the max.

If you read the Fed's recent attempts to "talk down" the housing market, you can detect a real concern over the rise of these rates.

Bubba - Lenders don't monitor risk. They sell the mortgages into the secondary markets, as "Mortgage Backed Securities." So, bondholders, like, say, the Chinese, your pension fund and my girlfriend's Aunt Lucy are holding the bag. And there's no way for them to monitor the risk.

Folks, historically, any investment theme that is captured in the public imagination builds into a bubble, and ends badly. And the upside always ends with hysteria. We have seen that in DC, with escalator clauses on purchase offers, striking of protective contingencies from offers to purchase, and the general fear that "I will never get a house if I don't get this one."

We are seeing a cooling, yes. And with it will come an orderly price decline, as is always the case, followed by panic. That is where it gets ugly. Despair follows the panic, and then the cycle resumes, sometimes.

That's my two cents. Timing? Lord only knows, and He is in the barbershop in Arlington, apparently.

http://www.cepr.net/publications/housing_fact_2005_07.pdf

Read this publication, but only if you want to be scared. All of you supporting the irrational run-up in home prices, ask yourself, how mad were you when your retirement fund was decimated by the stock market crash. This time it will be worse. But don't take my word for it, read for yourself. http://www.cepr.net/publications/housing_fact_2005_07.pdf

We bought a townhouse in Fairfax County last year with a 5/1 ARM for 400K. We are completely comfortable making the payments and feel that the 5/1 ARM provides us a reasonably lower monthly "mandatory" payment than fixed rate mortgages. We plan to make extra payments as frequently as we can allowing us to build equity up faster.

We are a young couple and my wife just moved into this area after more than 1.5 years of living separately and maintaining a long-distance relationship. After much debate about wether it is a housing bubble or not, we finally decided to take the plunge into home-buying. I mean last-year house prices were going up in real terms on every 2-week basis but the bubble was still theory.

I feel most households in our situtation have to consider the risk of not buying now versus extra monthly payments later. One thing is sure I do not see salaries going up as fast as house-prices and also the fact that you have currently a declining dollar.

Bubba brings out some intersting points which I am intersted in knowing as well. Whats the ratio of buyers to investors ? That holds the key to finding out if the price declines will be a momentary pause in the supply-demand cycle or will the slightest decline cause many more sellers to dump more inventory on the market.

One thing that I can add is that when we were mortgage-shopping we came across atleast 2 mortgage-bankers who were aggresively trying to sell us Option ARM which could have negative ammortization. Does anyone know if this mortgage has been pooular ?

Also how does the greater Washington DC area stack up against other metro areas population wise ? I mean compared to many other metro areas, we have so much lesser high-rises as well as a very concentrated public transport system ? New development is rampant in Loudon and Prince William counties with no sign of how these people are going to commute daily.

My 2 cents. This discussion is one of the most factual and non-judgemental amongs the plethora of housing bubble blogs.

An interesting thing about the Northern Virginia condo market is that year over year inventory is way up and sales are down modestly, with pricing up as well. http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100386

This has to bode poorly for the market since where I live in Arlington, there are a lot of condo buildings going up and conversions going on, so those properties, many of whom were bought pre-construction by investors will be coming on the market over the next 12 - 18 months. If that leg of the market gets wobbly, I suspect other legs will get wobbly as well. Any thoughts?

Bubble, no bubble? hum...I have been reading everything I could find with Google and the key words "DC Bubbble". This is one of the best threads I have read yet.

In July, I decided to purchase a new single family home in Prince William County- now you can tell why I am reading everything I can find! Am I nervous- yep, nervous about the "bubble" and about rates (haven't locked in rates yet as estimated close date is April 06). But do I think I made the right choice in buying now- yep. The development is in the earlier stages, outlooked to be completed in 08. Interest rates are still low, and even will be historically low by standards at the end of 06 . I just got married and with 2 incomes now we can use a bigger tax write off- which I hear no one mentioning when talking about buying a more expensive place. I was also lucky enough to buy a townhouse 2.5 years ago and that has almost doubled so I'll have 20% to throw down, no PMI, on the new house (plus some nice savings). Also this means I'll have enough equity to make sure I am not upside down on the loan if there is a bubble and the market readjust to -20%, that's -20%! And if apprecaition slows/crawls, meaning that apprecaitions slows to single digits, even if it's 1-2% a year I come out ahead- greater investment= greater return than townhouse. Even if appreciation stalls at 0% I haven't lost anything. I know there are risks and I could lose more on this new house IF the bubble pops and there is deappreciation; however, for me the positives out weigh the negatives. I feel comforatble knowing that the DC area is supposed to continue to add more jobs than housing and Prince William County is going to conitue to grow. I'm also buying a house that I can grow into with a future thought on kids.

My point to all my rambling on is that one should not be trying to time the market. DC is an expensive market, as a matter of fact it was named one of the 5 most expensive places to live in U.S. (http://money.cnn.com/2005/10/18/real_estate/buying_selling/most_expensive_places/index.htm) and will probably continue to be for some time. (Side note, look how at our median average vs the other 4) While I'll agree the appreciation rates of 20%+ can't keep going I'm not sure I see why it will go negative. I'll even buy into the stall theory, appreciation stays at 0%, for a few years to allow the markets to catch up but like I said I'm comfortable with that. I'm buying a house that I plan on staying in for 5+ years, a place that will be my home not just an investment. There are more reasons to buy a home, or not buy a home, rather than if there is a bubble or not. If your waiting to buy a home because of this bubble I talk I would ask that you please look at all the other factors in why you want to buy a house and consider those along with the bubble theory. Here's some ref material for those interested-

http://nvar.com/newsdetail.lasso?articleno=nvarn100595

http://www.realestateconsulting.com/local/local200404.html
The next few years should be interesting, good luck to all!

I think this post by Kent Beuchert back in July described what is happening now "When investors get nervous (and the question isn't whether, it's when) they will dump those properties that they are holding at sizable costs (and can't rent) and the market will go plop."
The number of houses on the market in Northern Virginia is the highest it has been since 1999. Investors are starting to sense that prices aren't rising anymore and are unloading their properties.
This isn't limited to condos either. Many builders and homeowners treat single family homes as an investment and are looking to cash out now, before the market really begins to collapse. Realtors are advising potential sellers to list far below what they were hoping to get.

The rising interest rates will accelerate the sell-off, the mortgages that people are able to qualify for will get smaller and smaller, fewer and fewer investors (and homeowners)will be able to qualify for mortgages. In addition, very few investors took out 30 year mortgages to buy these properties. Many more will be forced to sell when their mortgages balloon. With all this additional supply, prices will naturally drop.

Some more interesting reading, BTW Tim K. read this article http://www.cepr.net/publications/housing_fact_2005_07.pdf
, it gives you the information you are looking for.

Some more data out today:
Home builder NVR Inc. reported yesterday that new orders in the Washington area fell almost 19 percent in the third quarter from a year earlier, adding to evidence that the region's booming housing market may be cooling off.

"We've seen a little air come out of the D.C. balloon," said David A. Lereah, chief economist for the National Association of Realtors. As interest rates have climbed and supply has increased, Lereah said sellers have not yet adjusted their prices for increasingly cautious buyers.

"The Washington market peaked about six months ago, and in the past 60 to 90 days, it has been measurably weakening," Mark M. Zandi, chief economist at research firm Economy.com, said in an interview after speaking at the National Association of Home Builders' fall construction forecast conference in Washington.

Man, am I nervous - after waiting for 2 years, this June we finally bought a 10 yr old town house in Fairfax/Fair Oaks area for 450K - with a 30 yr. fixed mrtg.

The place is decent and the area is great - but the thought that I could see the value drop by 50-100K in 1-2 yrs is making my life miserable..

I just hope to somehow break even in 4-5 yrs - the formula that I have read is that one needs around 15% appreciation and 5 yrs staying put.

In this market - it sure seems like a uphill task.

The funny things is that for the past 2 yrs. my gut adviced me against buying a house - for all the reasons talked about in this forum- but with a 1 yr old who needed a decent place to grow up in - I finally relented and bought this townhouse which I can barely afford.

Oh well, Lets see how this rolls.

Doesitmatter, nest time please post the whole article or at least a link to it. I see that you just picked out some parts of it...here's the whole article from the Post.

Housing starts nationwide took a surprising jump in September after falling for two consecutive months, according to government numbers released yesterday, but housing economists and analysts said there is evidence that the market in the Washington area and other hot spots is softening.

"The Washington market peaked about six months ago, and in the past 60 to 90 days, it has been measurably weakening," Mark M. Zandi, chief economist at research firm Economy.com, said in an interview after speaking at the National Association of Home Builders' fall construction forecast conference in Washington.

Zandi said the Washington area was "one of the first markets that peaked because it was so active before." He said the area has been "the most-juiced up market" in the Northeast corridor and one of about 75 markets nationwide in which housing is overvalued.

He based his conclusion on anecdotal evidence. Northern Virginia is seeing "more of the weakness," he said, because it has seen the biggest bulge in building in the area.

Zandi, who has long warned of a downturn, told the builders that "my view is that the [national] housing market is peaking and the first thing to go is home sales. . . . The next thing that will weaken is housing price growth." He predicted that prices would "essentially go flat in 2007."

Other analysts at the conference agreed that the market nationally and locally appears to be softening but emphasized that the slippage is following several years of record sales. And several,including Zandi, acknowledged that they have been predicting a turn toward a more normal pace for months, only to be proved wrong.

"We all agree that there is something unsustainable going on out there" in the hot markets, said David Seiders, NAHB's chief economist. But "the overall outlook for housing is very good. There is certainly no disaster pending here."

The Ryland Group Inc.'s chief executive, R. Chad Dreier, said yesterday in a conference call on quarterly earnings that Washington sales "leveled off around July." But, he said, "although we have not been able to increase prices and margins since then, we have been able to maintain the high margins we already have."

David A. Wyss, chief economist for Standard and Poor's, said in an interview at the builders' conference, "Clearly Washington is seeing sales dry up quicker than the rest of the country . . . but I don't see the area weakening that much, with the federal government" as a big, consistent employer.

The builders group revised its national housing forecast to add about 30,000 new units this year for post-hurricane rebuilding.

Seiders said housing-start and permits data released yesterday by the Commerce Department "fooled me once again."

Despite expectations that starts would fall, they rose 3.4 percent for September to a seasonally adjusted annual rate of 2.1 million units, after upward revisions to the July and August rates. The September pace was 10.3 percent above a year ago and remained above 2 million units for the sixth month in a row.

Builders sought permits at a rate of 2.19 million units, up 2.4 percent from August.

September drop biggest in a decade
By Chris Sicks
THE WASHINGTON TIMES
Published October 21, 2005
The Washington-area real estate market continued to cool in September. Home sales were down 12 percent compared to September 2004 -- the largest monthly drop in a decade.
Only 9,287 existing homes were sold in the region last month, compared to 10,611 last September. Historically speaking, it is quite impressive to sell 9,300 homes in a single month. No September did that prior to 2003.
But, coming so soon after a record-breaking spring market, it is a shock to see home sales fall so sharply. Sales were down throughout the region, with only two counties posting a rise in sales. Charles County was up 10 percent, and Anne Arundel was up 12 percent in September.
The largest drop occurred in what had been the hottest portion of the metropolitan area: Northern Virginia. The jurisdictions of Fairfax County, Arlington County and the city of Alexandria were down 27 percent last month.
Sales also dropped sharply in the popular communities of Loudoun, Prince William and Stafford.

The bubble has popped, at least in Dupont, where I've been looking. Anyone who looked at the Washington Post's real estate listings saw that about half of the listings there had "Price Reduced" headings.

I hope everybody that just recently bought a home took a 30yr fixed and plan to stay there for a while. Cause housing prices are rapidly decling in the dc metro area. Also, this articles gives good reason about why not to buy.
http://money.cnn.com/2005/10/21/news/newsmakers/barrack/index.htm

I feel so sorry for the guy ("nervous") who just bought a TH in Fair Oaks for 450k. My friend bought a TH(3bedroom, 2 gagrage) 3 years ago in that same area for just 310k. Also another friend of mine bought a single house 6 years ago in nearby area (Stringfellow Rd.) for just 240k, which now maybe selling for 700k.
I hate flippers but feel sorry for REAL buyers and loose-minded followers.
Northern VA is so bubbled that I think over 50% price drop is innevitable. I would say most of the crappy new TH worth at most 200k. Sorry they're just craps. I'm an architect, and I don't think any 700k houses around my area are even DECENT in my view.

Washington home market softens as investors sell
NEW YORK/WASHINGTON, Oct 20 (Reuters)
In the Washington D.C. area, once one of the strongest residential real estate markets, things are going soft, and that's becoming hard on home sellers and some home builders.
After hitting a high in May, the number of contracts in Washington D.C. and its surrounding Virginia areas of Prince William, Loudoun, Fairfax and Arlington counties have fallen by about half, according to the Greater Capital Area Association of Realtors. Meanwhile, inventory of houses for sale has doubled and in some cases tripled, and homes are staying on the market 30 percent longer...

From the Metropolitan Washington Council of Governments, http://www.mwcog.org/news/press/detail.asp?NEWS_ID=168

Cooperative Forecast Predicts Growth
The region’s latest forecast for population and household growth – approved today by the Board of Directors of Metropolitan Washington Council of Governments (COG) – reveals a robust economy that will continue to experience steady employment and population increases in coming decades.

The Round 7.0 Cooperative Forecast predicts that by 2030 the number of jobs in the region will rise by 1.4 million – an increase of 49 percent -- from initial employment figures in 2000. During the same 30-year period, the region’s population is expected to increase by 2.1 million people and more than 821,000 households. The region’s largest jurisdictions will experience the most growth, with half of all new employment expected to occur in the region’s inner suburbs of Montgomery, Prince George’s and Fairfax Counties. Forecasters also anticipate the greatest population growth to occur in Fairfax, Loudoun and Prince William Counties. Diversity in these jurisdictions is also anticipated to increase, as international immigration continues to account for large share of net population growth.

“The good news is that we are growing and that we have a very robust economy,” said COG Board Vice Chair Jay Fisette. “The bad news for our jurisdictions is are potential issues of congestion as a result.”

The annual forecasts have been a staple for regional planners since 1975. They predict population, household and employment growth, and are used both in transportation planning and air quality analysis. Most recently, the regional growth patterns shown in the cooperative forecasts formed the basis for discussions at “Reality Check on Growth,” a one-day summit that brought together planners and elected officials to prepare for expected growth spurts.

Round 7.0 Forecasts show building and development patterns fall behind projected job increases by approximately 92,000 households, meaning the number of new jobs foreseen outpaces housing available to employees.

“The Metropolitan Development Policy Committee and Planning Directors believe it is an important acknowledgement that we as a region must do more to increase the number of affordable housing units within the COG footprint,” said Committee Chair Elizabeth Hewlett. “After consideration, we agreed the most reasonable assumption was that local jurisdictions over time would re-plan and rezone land sufficient to provide for the additional housing that was needed.”

-----------

Release Date: Oct 12, 2005

"Directors believe it is an important acknowledgement that we as a region must do more to increase the number of affordable housing units within the COG footprint"
With all the new condos being dumped on the market by investors along with the units that haven't even been built yet,the ammount of affordable housing should increase dramatically over the next few years.

"The Round 7.0 Cooperative Forecast predicts that by 2030 the number of jobs in the region will rise by 1.4 million "
I really wonder if they carried a brain on their shoulder when they amde such a wild prediction. I laughed to pick my jaw from the floor.

I've read all the real figures and heard both sides of the argument, but for me, it all comes down to common sense and personal experience. People who argue that home prices won't fall are usually the people who have just overpayed for a home in my opinion.

One of the most telling sings for me, was recently when my girlfriend's mother, who is a real estate agent in NOVA, bought 3 homes (2 for investment), and is now unable to sell those 2 homes at a price high enough above what she bought them for to justify selling. She is now renting them for less than the mortgage in order not to take a huge loss. My guess is that this is happening in many places and that in a year or two, when people feel they can't make a long term profit from renting properties, they will begin selling them for less than what they bought them for.

Also, I moved to DC in January 2003 and have always had a roomate. Our rent has stayed pretty close the same even though we have moved up in quality each time we move, which is yearly. Our rent on a 2 bedroom condo in Tysons Corner is about 1400 a month. They have been selling these same condos for over 400,000 recently. I couldn't figure the disparity out until I looked up the selling prices of condos in my development for the last 4 years. In 2003, these condos went for well less than 200,000. And these condos aren't especially nice. Converted apartments I believe. It seems like there is a large enough supply of homes bought pre-boom that are being rented and still making a decent enough profit for owners, that new home buyers will not be able to get rental prices much over this existing base of properties.

Now this is just the type of place somebody like me (25, making over 60K, single) would normally look at buying and settling down in. But that is no longer the case for myself or anybody else I know between 23-30. First time buyers, like myself, have been priced out of the market. In fact, many of us are looking to move elsewhere in a few years. It has in many ways, become a hassle to live here; traffic is terrible, prices are crazy, and the public infrastructure (metro, roads) is crumbling and not being updated. City and county planning here is terrible. I know a lot of jobs have been added to this area recently, but government pay does not increase that much year-over-year and at what point do all of the negative factors start to prevent people from being able to move here?

Sold our single family home in NWDC for about 750k; bought for 400 more than five years ago. Why anyone would believe the realty trade assns, the builders, the COG.... Please, people. Reality is setting in -- I saw it during our sell process. I think we were lucky as others are sitting...and that is smack in NWDC. Good luck to everyone but a softening is a must for this market.

Just want to mention something that I find puzzling about real estate markets these days:

One phenomenon well established by corporate finance observers is known as the IPO underpricing puzzle. This puzzle involves the empirical observation that over short-run time horizons, especially immediately after an IPO, newly listed companies tend to have significantly positive excess returns relative to the overall stock market (throughout, I’m talking about “average” behavior since unusual outcomes will obviously exist in both directions - and statistically significant differences for those of you who are really stats geeks.)

Why is this odd? Well, IPO underwriters make substantial fees off the amount of funds that they obtain for the issuing company. If the stock price jumps on the market shortly after the offering, then the underwriters aren’t acquring financing that they could otherwise obtain for their clients. And they’re correspondingly foregoing fees that a higher initial price could bring for them. In other words, on average, IPO underwriters are making mistakes in their offer prices, and they keep making the same mistakes in the same direction (i.e. pricing too low) again and again despite the large amount of money at stake. To see this so consistently as occurs in the data, you’d have to believe (especially as a buyer of IPO offerings as they run up in price) that the underwriters are systematically underestimating the value of the many of the stocks that they offer.

What in the world does this have to do with real estate in DC or real estate more generally? I just wanted to point out the parallel between this phenomenon and something that's been happening in condo markets (especially in markets like Florida although I also have friends doing this in DC – like those lined up on U Street to buy newly offered condos in the last few months.) Developers offer new or pre-production condos to the public. A condo is snapped up by an individual who then “flips” the condo for a substantial profit. Often this flipping occurs while the condos are still in the pre-production stage, and a condo will not infrequently change hands multiple times before even being built.

This is basically like the IPO underpricing puzzle where you simply replace “underwriter” with “developer” and “stock price” with “condo price.” And it similarly doesn’t make much sense. To buy one of these condos, you have to believe that developers, who are presumably pretty sophisticated about this market and are terribly interested in making money, are consistently undervaluing the properties that they’re selling. That is, they also are making mistakes by underpricing their assets again and again. (Pre-production flippings are especially disconcerting, although I suppose that if you believe that one agent has undervalued an asset, there’s no reason not to believe that another hasn’t as well. Thus, you buy the property from a “sucker” flipper before it’s even been built.)

I find that hard to swallow. Instead, I think that people are getting caught up in the hype, just like they get caught up in a new IPO. (You may argue that the developers are trying to induce a frenzy for their current and future properties, but they do seem to be leaving a lot of money on the table. And, moreover, that would imply that they’re just suckering current condo buyers.)

A final footnote. It turns out that, while new IPOs outperform the market in the very short-run, they also tend to UNDERPERFORM (again, on average) more established companies at longer time horizons. (You could view the “established companies” in the IPO analogy for real estate as other assets not subject to the same frenzy as we’ve seen in real estate markets.) Will a similar fate befall condos built in the last few years or real estate more generally? Only time will tell. As with IPOs, if you can time the market correctly, you can make a lot of money. Don’t leverage yourself too much though because if you’re left holding the bag in the event that the market turns down, things could get nasty. (I really just wanted to offer this post as an observation, but I suppose I'll inject some personal opinion. Personally, I think that the only issue is whether things will be a bit unpleasant or an outright bloodbath.)

Well said "It's Ova." This is my belief as well and many people who make the "average" salary which is ~40k can just afford to pay the bills, and live paycheck to paycheck. I have friends that are looking to move out of this area for this very reason. Full brand new houses are going for ~$200k in less "booming" areas (booming being the key word), so why would many people stick around here? Yes, people always say "but there are jobs here," but you know what, there are jobs many other places. Companies are usually not located in just one area, and plenty of jobs are to be had in other locations.

Despite how much someone may like a certain area, making 50k/yr and buying a 200k house which is comparable to a 400k home here makes life much easier on that individual. This is a BIG incentive to move.

To relate to your story, I know somoene that purchased a brand new condo/apartment in manassas preconstruction for just under $400k. Just a hint, they make

The real estate market is CLEARLY inflated. The insanely low interest rates just sparked home buying and even gave people that already owned homes more $ through refinancing. Some areas in dc will CLEARLY be worth more than others since land is limited and building up isn't an option. But.. in the suburbs like fair oaks and dulles, manassas etc. where there is still PLENTY of land to build, prices are very inflated. People can try and justify why prices will flatten, but as investors dump property and people default on their mortgages, you can count on prices coming down I'd guess at least 25%.

OK, I bought a overpriced house which may fall by 10-20%..I can live with that ( for a while ofcourse!) But this is what I honestly belive about the DC market..

1) Compared to places like San Diego, DC/NoVa had actually created jobs in the past 3 years..NoVA really didnt go through a recession as bad as the rest of the country

2) I have always thought that the price of a TH in Fairfax/Falls Chruch area should be similar to that in Bay Area, Northern NJ..bubble or not. If you believe that argument..u will see that till 3 yrs back, the prices of homes in NoVa were way underpriced

3) yes, prices will fall..the question is where and by how much..I am willing to bet the outskirts of Loundoun/Gainsville/Leesburg areas will fell some pain ..and also the 800K + homes inside the beltway..

Nervous, I dont' think you can compare San Diego or San Fransicso with the DC area. People live in DC to work, period. Both San Diego and San Francisco are cities located directly on the water. San Diego has some of the best weather in the World and San Fran is considered to one of the most beautiful cosmopolitan cities in the world. There is plenty of demand coming from wealthy people who just want to live there and this drives up prices. I don't think you will ever be able to say that about DC.

Reply to the post by "Nervous"

1) Compared to places like San Diego, DC/NoVa had actually created jobs in the past 3 years..NoVA really didnt go through a recession as bad as the rest of the country

- Bubbles in those areas are already bursting. So I assume you are suggesting NoVA will burst as well?

2) I have always thought that the price of a TH in Fairfax/Falls Chruch area should be similar to that in Bay Area, Northern NJ..bubble or not. If you believe that argument..u will see that till 3 yrs back, the prices of homes in NoVa were way underpriced

- Have you recently been to Falls Church area inside the beltway along Rt. 50? Houses there are sitting on the market for months without being sold.

3) yes, prices will fall..the question is where and by how much..I am willing to bet the outskirts of Loundoun/Gainsville/Leesburg areas will fell some pain ..and also the 800K + homes inside the beltway..

- Sorry Fair Oaks fell already....

Reply to the post by Winston

Yes Winston, if you already havnt realized, I am quite nervous about the bubble bursting - cause that will hurt me. I dont think there is a debate about. And I also see prices fall in Fair Oaks - I dont think u have added any new 'insights'

My point was to compare DC to other regions and see if DC might behave differently from say San Diego or Miami, etc - and within DC/NoVa if we might see shaper declines in specific locales, compared to others.

If you have any comments on these issues, please let us know - but otherwise stop gloating at other peoples concerns.

Nervous, I'll take a stab at your comments.

1) Compared to places like San Diego, DC/NoVa had actually created jobs in the past 3 years..NoVA really didnt go through a recession as bad as the rest of the country

Everywhere had a recession of some sort. I don't buy that NoVa/DC was spared. I live in FL and that's all we heard here "we actually grew and the recession isn't felt here". Whatever. If growth is considered $5.25/hr hotel maids and retail associates then that's true. Many higher paid people actually lost their jobs and could only find work at lower wages, much lower in some cirumstances. While it's true that Ohio/Indiana/MO recovered more slowly, that's due to the large manufacturing bases in those states.

2) I have always thought that the price of a TH in Fairfax/Falls Chruch area should be similar to that in Bay Area, Northern NJ..bubble or not. If you believe that argument..u will see that till 3 yrs back, the prices of homes in NoVa were way underpriced

Based on that statement, everywhere was undervalued. In FL that's an argument that is ofter used to justify high prices. "Buyers were getting a steal". Yet prices were set at what the market could bear until all the speculators started piling in. IN 2000 a new 1500 sq ft. house in suburban Tampa, FL was ~110,000$. Comparing ST. Louis houses were the same price there with a full basement. Now (2005) the $110k house will sell for $200k and in St. Louis that house there will sell for $140k. The wages in STL are approx. 10% higher as well. Houses in Florida were appropriately valued before the boom; now they're just overvalued. There is no reason houses have darn near doubled in the past 5 years.

3) yes, prices will fall..the question is where and by how much..I am willing to bet the outskirts of Loundoun/Gainsville/Leesburg areas will fell some pain ..and also the 800K + homes inside the beltway..

I believe prices will fall almost everywhere with the exception of nothern rust belt cities that are still appropriately prices.

I'm a little nervous about the market too because of the ancillary effects on the economy.

It just amazed me that no one ever mentioned how many jobs created here are the AFTERMATH of horrendous gov spending and the war to bring democracy to Iraq. Gee did I forget WMD? ;) Those smart folks projected 1.4 million new jobs by 2030 probably were thinking that the gov can still be able to spend tax payer's money like this in the next 25 years? Give me a break.
The political climate is changing now, so does the job market here which is so related to politics. Once the gov cuts spending and the contractors stop getting sweet fat checks, tens of thousands of people will move out, and the housing boom will be over.
Historically DC area has never been a good place for real estate inverstment. Thanks to Greenspan and Bush for bring such a beatiful bubble.

Having grown up in DC, and lived in both SD and SF, I am shocked when I see the prices of these TH's and Condos in the DC area. Talk about overpriced. Aside from a few neighborhoods in Arlington, Alexandria, and Bethesda, the DC area is a disaster. The worst climate (extreme cold and humidity), the worst traffic, and some of the worst people (military, gov't employees, attorneys, lobbyists, and politicians). DC was actually built on a swamp! Expect a big crash guys. There are so many other great places to live, and I'm glad I left.

Folks, please! This thread began so well a few months ago. Arguments were based on logic, reason, statistics etc. I'm affraid we've degraded to the point of using United States foreign policy and gross generalizations regarding the character of the residents of D.C. in order to make assesments of the area's housing market. As a long time lurker who values the discussion, in its former iteration, please get back on track.

It's just fun to read the blog from July to Oct and see how sentiment has changed.

If this is not indicative of a correction, then what is?

Re TJ's post

Maybe I've gone too far in my previous post, but the point I wanted to make is that DC's housing market has been fuled by both astronomical gov spendings and speculators. I sense that speculators are retreating now, but this alone may not be enough to pop the bubble. I think dramatic cuts in gov spending will eventually correct the market.
How much will the price drop? I would say +50% for most areas. Sorry I just don't think those vinyl shacks worth half of whta it is.

It appears that supply is way up, but prices aren't really tanking. I don't expect them to either. Sellers are still getting bids on reasonably priced properties and those that have dollar signs in thier eyes appear to have properties on the market that are just sitting there. It will be interesting to see how this plays out, but I think that no one really wants to sell at a loss and this psychology will keep prices from declining dramatically. Of course there will be one off situations where people that need to sell at a loss do so, but the majority of people will just sit on thier properties. I have no idea how the condo supply bubble will play out, but I can't imagine it will be pretty. All in all we are in for a few very interesting years in the DC market.

Re John Davis' post

"...but I think that no one really wants to sell at a loss and this psychology will keep prices from declining dramatically..."

Sorry I have to disagree with your assumption. If people lose more sitting on the property, what do you think they would do? Remember a lot of folks used exotic loans to buy the homes. They understand how overpriced the houses are, but they bet the price will continue shooting up in the sky to make them gain. I just don't think they can compete with the time.

Prices won't "tank", because thats not the way the real estate market works. As the market slows down, buyers no longer see a need to rush, take their time, and in some cases adopt a wait-and-see attitude. The psychology of the market begins to change and speculators/investors drop out. As John points out, those that don't have to sell withdraw their property from the market after their expectations aren't met.
This will cause the number or transactions to drop steadily. I believe this drying up will impact the economy since housing has contributed greatly to job creation directly and indirectly in so many ways. Prices are determined at the margins though, and those that do have to sell because of job change, divorce, financial reasons, etc. will determine price. Just because prices won't tank, doesn't mean prices won't bleed for the next several years and add up to a very significant drop.

No one has a crystal ball, but my personal opinion is that we may see a perfect storm in real estate resulting from a confluence of factors. As someone else mentioned, I don't believe that the current levels of government and consumer spending are sustainable.
DC will be impacted by the eventual and inevitable federal budgetary crisis. We are a very leveraged country right now and there is very little room for error. Consumers are the backbone of our economy in this country and the savings rate is close to zero now, so they are doing all they can. Energy costs are rising and will continue to do so for the forseeable future though with a lot of volatility. The Fed will continue to do raise interest rates as they must to support the dollar, as our trade and budget deficits are exploding. The vast majority of mortgage-financing is sourced from foreign creditors since there is so little savings from within. If they lose confidence in us, long term rates can rise dramatically, the economy be damned, and there'd be nothing the Fed could do about it they since can't directly effect long term rates as Greenspan noted in his "conundrum" speech recently. As rates rise it will immediately impact credit card, home-equity, piggyback loans etc. as these adjust fairly quickly. All of these factors will put a real crimp on the consumer just as the government may be forced to raise taxes, as their borrowing and debt servicing costs rise and a slowing economy reduces revenues, further exacerbating an already difficult situation. This may all sound somewhat alarmist, but as Greenspan pointed out recently, risk premium has been reduced as speculation rampages and he is warning that just because things have been clam doesn't mean they will continue to be so. As Warren Buffet says, "You don't know who is naked until the tide goes out". I believe we are about to find out as the great deal of fraud/winking that has occured in the appraisal/mortgage origination business will be laid bare.

All of the above said, I think that the one thing that "makes things different this time" is the extreme mortgage financing and low equity that has fueled this boom. Their is no historical precedent for this, so we are in uncharted waters. It is precisely that I think could cause to really get dicey when the market slows. And it won't take much as this article clearly explains.

http://realtytimes.com/rtcpages/20051101_exitstrategy.htm

Cheers.

Looks like they've gotten religion in New Zealand!

Reserve Bank of New Zealand Governor Alan Bollard said he is willing to raise interest rates ``in a way that really hurts,'' to dissuade people from unrealistic expectations they can keep borrowing against their homes to spend. People need to stop using their homes as a source of cash, Bollard told Radio New Zealand today.

Full article here:
http://www.bloomberg.com/apps/news?pid=10000081&sid=ajvUxeqYNSCE&refer=australia

DC's situation is much worse than other hot markets. Gov spending has played such a big role in this area during the last 5 years. That's why I have projtected +50% drop in the coming years.
Let's wait and see how many folks with all sorts of exotic loans can continue paying the bills and hold the property off the market. This winter might be REALLY cold for some people.

Winston,

While I think that a 50% drop wouldn't be out of the realm of possibilities, I think it highly unlikely. More likely is that prices decline moderately or stay flat for an extended period of time just as they did from the late 80's through much of the 90's in DC. That implies a pretty steep decline in real values, but not so much in nominal values.

Your point about exotic mortgages is valid given that we are heading into uncharted territories, but human psychology is well charted and I think despite the fact that people are underwater, they will continue to make payments any which way they can. Therefore, only if something happens that forces someone to leave like an illness or job loss will cause someone to willingly sell at a loss. Most others will simply sit tight, unhappy knowing that they live on top of a money pit.

Given that the amount of housing stock that has turned over and the amount that has been equity extracted significantly is a relatively low percentage of the overall stock, the financial damage will be limited. The vast majority of people who feel rich because thier house seems to have appreciated so much will just be a little bit less rich.

Other markets where significant nominal price decreases occurred (LA in the early 90's, Boston in the 80's) had wildly cyclical economies. DC is decidedly much less so, even with the coming budget crunch, if it ever comes, will be mild in comparison. Democrats wail when the rate of growth of a program is cut, however those programs still grow. To expect a program to be truly cut more than a few percentage points is a bit far fetched. The more likely place for dramatic cuts would be in the earmarks of pork for local districts far away from DC (including base closures).

The wildcard in all of this is the condo market, while in sf and th markets, you have more owner occupiers and what I discussed above tends to make sense. In condos, you have a much higher percentage of investors. They will cut and run when values drop, even moderately. Given the vast oversupply coming on the market and the shrinking of demand at current valuations, there could be blood on the streets. When that equity evaporates, it could have knockon effects for the rest of the market as well, but it remains to be seen. I am eagerly awaiting the October NVAR numbers to see how inventories and sales moved.

All in all, I am happy that there will be more housing available on the market that I can sift through and take my time looking at rather than having to jump on anything that came up, even if I do have to pay more because rates are higher.

Every one of the 25 largest metro areas
— home to more than 40% of the U.S.
population — has experienced a decline
in house prices at some point during the
30 years for which data is available.

While house price declines can have different
causes, in most cases, substantial
depreciation has followed unusually
rapid and sustained appreciation — typically
several years of double-digit price
gains.

http://www.nmhc.org/Content/ServeFile.cfm?FileID=4616

I am not among those who are able to speculate whether there will or will not be a sharp decline in the price of D.C. area real estate. However, having lived in this area for the past thirty years, I would like to offer my personal opinion regarding the supposed "uniqueness" of the D.C. Metro area. That supposed uniqueness purports to exempt the D.C. Metro area from all laws of economics that apply elsewhere throughout the world, including the 50 states of the United States. My opinion: no such uniqueness exists.

During the late 70's, the D.C. Metro area had the same double digit inflation and high interest rates as elsewhere (I know, I was here). During the early 80's, the D.C. Metro area had the same unemployment and business failures as elsewhere (I know, I went out of business and was unemployed for a full year). During the 90's, the D.C. Metro area had its fair share of the savings and loan crisis (I know, my own savings and loan went under).

Talk about this real estate bubble reminded me of the last. I recall the experience of a real estate broker whose son was a co-worker of mine. The father purchased a mansion in Leesburg at was then the exhorbitant price of $750,000. The father, mother and son all worked one or more full time jobs just to pay for the house. For all their efforts, they eventually were forced to liquidate at a loss.

Population density is largely irrelevant. If it were not, real estate would be most expensive in some of the biggest slums in some of the poorest sections of the D.C. Metro area.

The D.C. Metro real estate market may go up or may go down. But it will do so much the same as any other locality that is similarly situated in terms of the recent run up in prices.

Another factor to be considered is the massive amount of construction/overbuilding in the DC area. 47,000 new condos are due on the market within the next three years. The more flooded the market gets, the lower one has to price one's condo to attract buyers. The bottom line is that a lot of people are going to be selling pre-existing condos at massive losses. Keep in mind that DC is a transient town. A great number of us do not want to live here permanently, and use DC as a steppingstone to better jobs in other areas of the country.

Frankly, DC isn't the greatest city to live in. This is the only city that I've ever been to in which the homeless have their own newspaper. People who have overpaid/speculated in the housing market over the last two years may well have invested in pyramid schemes. I'm happy that I didn't buy, since coming here 14 months ago.

Yea Jerry, but this time its different. We're in a new era! :)

You don't need to live in a big city to be successful.

Warren Buffet lives in Omaha, Nebraska
Bill Gates lives in Redmond, Washington
George Bush lives in Crawford, Texas

Technology and the internet open up the possibility to work in cool, small college towns that are affordable.

You don't have to buy a 400K condo!

Just wanted to point out a few nice points that John Davis made on 11/3.

“Given that the amount of housing stock that has turned over and the amount that has been equity extracted significantly is a relatively low percentage of the overall stock, the financial damage will be limited.” Uncle Alan (Greenspan) made a similar point in a recent speech. Most homeowners have seen enough appreciation in their homes that they can weather a pretty serious downturn without finding themselves in a negative equity position.

But those who’ve bought their houses in the last year or so, in the process fueling the run-up (and a non-trivial number of people have bought in the last year), may find themselves in a pretty uncomfortable position. As might those who haven’t had the sense to lock in a low fixed-rate loan, particularly as Uncle Alan (or Cousin Ben Bernanke) continues to raise the fed funds rate which is highly correlated with the floating rates on ARMs. It might also be nasty for those who are counting on appreciation to “upgrade” their current home. And, lastly, what the heck will the speculators who are holding all of those empty homes and condos that you see on the market in the DC area do? (Which reflects the additional point made by John that the “wildcard in all of this is the condo market.”)

Another point that I’d like to make. In real estate, it’s really difficult to know how prices are changing. Unlike the stock market, we almost never see the same asset (i.e. the same house) sold at close points in time and, as such, it can take some time to know whether prices are falling (although casual observation indicated that it was pretty clear that prices were running up at a brisk pace over the last few years.) We can look at unconditional median sales prices or can run hedonic regressions relating prices to home characteristics, but it’s fundamentally tough to track what’s really going on in real estate markets. As a result, we tend to focus on observables like the housing stock on the market (hopefully seasonally adjusted housing stock), but those types of indicators are imperfectly correlated with the item that we’d really like to know, i.e., sales price for a particular home. Regardless of what we think will happen or is currently happening, I suspect that it will take 2-3 years to get a real perspective on whether the market has slowed, crashed or continued on its brisk run-up. Hence, I propose that we reconvene this thread in five years to revisit the real estate market of fall 2005 and the run-up to that point (kidding – love the thread, but seriously folks.....)

Here’s my favorite property in DC: 2020 12th St NW. There are at least two dozen condos from that building alone listed in the MLS (ranging from a completely absurd $1 million to a moderately outrageous $500K), and who knows how many are being held off the market b/c the owner, in his/her deep wisdom, is looking to "time" the market or is just plain scared. You see things like "$65,100 LESS THAN DC5333795, IDENTICAL GILLESPIE MODEL!!" for places listed there. Who's thinking that a 2BR condo in the U St. area is worth $1 million?!?!?! If you’ve bought that place from some speculator, shame on you. If you’re selling it, good luck.

I think that we could go through the MLS in DC, property by property, and could easily identify sellers who are completely crazy like those at 2020 12th St. Problem (for sellers) is that those outrageous expectations will bring everyone else down as well.

And I also hate the phrase: "Seller reserves the right to reject or accept any offer at any terms at any time." Basically that says that if I offer my house at some price and a potential buyer proposes that exact price, I can appeal to seller’s remorse (a common occurrence in any market) to reject the buyer’s bid at my ask price since, darnit, I know that my house is worth so much more that I initially decided was reasonable to ask.

Things will change. They must. And I cannot wait until that time at which point the "S.R.R.toA.orR.A.O.@any P/T" people have to face their hubris. Along with their obnoxious agents who encourage such behavior (actually, their agents will probably be out of the business by that point since they don’t really have much skill anyway – it’s not too hard to sell a house when a market is red-hot, but I suspect that it’s much harder when things start to tighten up – they’ll have to do more than hold an open house and bake brownies for the open house.)

The National Association of Realtors and all of the individual realtors in the market keep pushing company line – the market is strong, we’ll see or are seeing a minor correction, but things won’t change that much and we’ll continue to see robust growth in the market. But that’s what they’re paid to say especially since they want to get you into the market. Is a realtor or their paid consultants at the NAR really going to declare a downturn in the market? Please. Find a unbiased evaluation if you want to see whether things might be changing. Why the Washington Post, CNN, or anyone else continues to quote these people is beyond me.

I agree with Dube. Real estate agents like to categorize/spin the bubble bursting as a "market correction" or a "slight slowing down." These agents have the biggest incentives to fuel the housing frenzy - higher commissions, faster sales (and therefore less work) and less sales-pitching to clients. You can't credit their take on the market as anything but self-serving and dishonest. Frankly, most real estate agents belong on the lowest rung of hell (even after used-car dealers and lawyers).

U Street is a dump. Who would pay 1 million for a condo to have to smell fried fish the minute you walk outside the building? Has anyone mentioned that the U Street area has one of the highest crime rates in DC?

I think many brokers will soon be working at the Trader Joes that's due to open shortly.

Arlington will loose 18,000 jobs due to the base relocation, but at the same time 47,000 more condo will be on the market in the coming years. Really curious to see how the market looks next year.

Bought a condo for 97K 6 years ago, Worth 350K today. Got married and family in past year. Bought a house in Fairfax Ct for 730K and put all the equity i had in condo (200K)in new house. I took a 10 year interest only on new house which comes to about 2900 + tax 520 so i pay about 3500 month. Is that Bad? I will be at substancial risk in 10 years when the principal on house is due but hopefully the cycle would be in a upward trend.
Just wanted to indicate that its posible to cash in, move up and be comfortable...Even with an exotic loan.
Well for ten years anyways.
Who knows, I might have retired to Bermuda in 10 years.

CondoGuy,

Please tell me when your variable loan goes above the amount you can afford. I'll gladly buy your foreclosure.

Just wanted to indicate that I can sit on the sidelines and cash in on bad financial decisions.

Guess I'll take the profits and move to Bermuda for you.

CondoGuy: Are you making over $120K per year? If not, you’re paying a heckuva lot of your monthly income for housing (really, you’re paying a substantial percent of your income net of taxes – accounting for tax deductions - unless you’re making quite a bit more than $120K.) Why didn’t you get a 30 year fixed rate mortgage for your new house? (If you’d put $200K down on a $730K house and got 5.75% for 30 years – not unreasonable up until the last few weeks – you’d be paying a bit over $3K/month for your loan.) With an interest only loan, you’re literally renting your place with the only difference being that you enjoy any appreciation in the value. And suck up any fall in value. But with the fixed rate loan, you’re at least paying off some of your loan balance each month. Does your loan rate float at some point? If so and if that $192 which characterizes the difference between the fixed and interest only loans is really that big of a deal (darn that flat yield curve) then I’d be pretty concerned in the event that your house could fall in value. Even if your loan doesn’t float, historical increases in value would imply a pretty weak return on your investment.

If people are trading up houses with the loans that CondoGuy appears to have taken, I think that things could be nasty. Who’s right on the edge in terms of their financing? Did they just buy a house, potentially with a loan that will have a floating rate at some point, that could make their finances a bit uncomfortable? (BTW CondoGuy, if you planning to retire to Bermuda based on your savvy real estate investments – and I agree, buying a place in the DC metro area in 1999 showed a heckuva lot of foresight, intended or not – I suspect that such an undiversified portfolio will be pretty darn disappointing.)

Well if we take that the house i bought for 730K i actually paid 530K for with 200K from condo Dont consider equity my money until it is cashed out) i am considerably ahead and it would take a few years for depreciation to catch up with me..
Loan i got was a ten year interest only at 6.25
Next adjustement is in 2015. And yes, joined annual income is above 120K a year.
In ten years
a) I would have paid down significantly on the principal.
b) Make more money which helps back with point a. c) Retired and moved, sold the darn place.
d) Refinanced to a more conventional loan, or be riding another upward cycle..

Can someone show me how or where i am not coming out of this with my head above water?

Interesting discussiong with CondoGuy and his income/payment situation. Please provide me with advice on my situation. I currently rent in a high rise in Arlington. My wife and I live significantly below our means. Our rent is $2200 a month for a two bedroom. Our combined income is highly variable, but appears to be in the neighborhood of $270k - $350k, depending on how I do in my job (her's is stable). We are planning on having kids soon and so she will be out of the workforce lowering our combined income by $50k. We want to buy something, but with the market as unreadable as it is and our situation fluctuating so much, we don't really know what to do. We have up to $150k to put into a downpayment. I need to live fairly close in because of the hours of my job, so we are boxed into fairly high priced neighborhoods. How much of a house do people think we could reasonably afford and how do people think we should proceed given the market turbulence?

CondoGuy - couple issues here. First, I am a HUGE bear on DC real estate. I, too, bought in '97 and panicked in '04 when I realized the rental market had tanked, so I sold. I rent now, but am not married nor do I have kids.

Your situation as described is hardly as precarious as many will no doubt face. However, we are operating in an "easy money" environment not witnessed in generations. We've all heard the "lowest interest rates in 40 years" tune. That suggests that it may be a VERY long time before easy, cheap money returns.

You are a familly man and you've got to provide a home for your kids. Rather than selling the house and buying a $200 tent to raise your kids in, why not re-finance the house, while you can, at a low, fixed rate of interest for 30 years?

That way, your housing cost is locked, no matter what. If I am wrong, and interest rates do not revert to their historical mean, you can refi again in the future.

If you don't take the simple step of paying down your debt with a fixed-rate, amortized mortgage, you risk being under water. No one can see into the future and "show me" an unforseen calamity. So I'd just take a simple step to help avoid facing a refi, with no increased equity, at, say, 10 percent? If your loan rate floats in a down housing market, much of your equity will (temporarily, hopefully) be gone, and you may not be able to get a new loan at all.

Sorry to babble, but our parents got rich paying off the mortgage debt, the old fashioned way. I guess they learned the hard lessons of their own parents, who bought with 10-year "balloon" mortgages in the 1920's. When those notes came due there was no credit available to refi. The lucky ones had at least bought that tent....

My two and a half cents. Congrats on your original windfall.

Are you sure you can keep having two salaries in the next 10 years to pay your house? Have you ever thought of either one of you losing the job in the future? Sorry I have to ask this question.

CondoGuy,

The reason your situation doesn't matter.

1) you make well above the average income in this area - therefore are not a valid representation of current buying power.

2) you paid the average price for a home with your well above average salary (starting to see the problem yet?).

3) you are planning to be able to stay in the home for 10 years, statics show that the average person lives in their home for <5 years.

You may come out ahead on this, but that is completlely irrelevant to the fact that the current market is overpriced and that there are people who are in over their heads and creating a very dangerous situation for the economy (which NAR likes to tout how the only thing driving the economy is the housing market).

So, since your situation is irrelevant, I wish you all the best of luck in your move to Bermuda; and thank you for so pointedly making my case.

This is front page news on the Washington Post today 11/11/05. For those of you who doesn't think there's a bubble, listen to stories of those people who already lost $100K before they can even move into their new homes, or "flippers" who can't sell their properties and are left holding the bag.

http://www.washingtonpost.com/wp-dyn/content/article/2005/11/10/AR2005111002241.html

Posted by: Drew at November 10, 2005 11:16 AM

Why refinance now and pay higher monthly when i wont live in the house for more than 5 years. As it is now, i get a decent place to live and raise a family, then if the market slides south all i would loose is the equity that i tranfered.

One other gain others are not factoring in is the rent i would have paid for 6 years if i did not buy the condo, i still had to provide a roof over my head. That comes out to almost 110K in 6 years.

Posted by: Winston at November 10, 2005 12:24 PM
Thats a dumb question, i could easily ask you if you are sure you would be able to make it into work today and not be killed on th highway by that SUV. But that does not stop you from going to work right? Should i just buy a wheel chair now and start practising?

Posted by: Doesitmatter at November 10, 2005 06:25 PM
My situation is not typical i know, but that still does not make the information i am sharing less valuable. There are some people that are in my same situation.
The market is overprice but as they always say, the demand was there thats why the supply price was maximized.

Posted by: Ballard at November 10, 2005 11:09 AM
I would not advice anyone to buy right now if you are not transfering equity and depend on savings or other for down payment etc.. If you did not make the money in housing dont put in in housing just yet.
Wait 2 years, its either going to flat out or go down, no way i goes up when the interest rate is going this way. Plus builders have too much supply and they will be giving mad incentives next spring to try to ofload.
Another point is new fed chief would want to make his mark so would come in with something drastic to close the Greenspan era. I am a feeling he is going to raise IR one more time before december.

Lynn: Thanks for the article, it's certainly a prelude to what we will shortly see all across the country.

"Howell and others point out that the Washington area is unlikely to experience a major decline in prices because of its continued job growth and the prevalence of government jobs, which tend to be more stable than private-sector employment. "We're the most insulated of any market in the country" from extreme price volatility, Howell said." (Of course he's going to say that, his job is a mortgage broker)

CondoGuy: I think you're crazy to do interest-only mortgage but in any case with your long time frame you should be OK. I see worst case you are walking away in 10 years selling for the same price you bought at.

re CondoGuy's reply.

"Thats a dumb question, i could easily ask you if you are sure you would be able to make it into work today and not be killed on th highway by that SUV. But that does not stop you from going to work right? Should i just buy a wheel chair now and start practising?"

Sorry your reply seems dumber than my original question IMHO. I know I might lose my job some day, so I work hard and make some savings; I know I might be hit and killed on the hwy some day so I buy life and auto insurance. I really wonder if you need to have any sort of insurance based on your logic in the reply.

I feel so sorry for you...

Check out the stats on NVAR site. Numbers tell everything. The housing bubble actually burst a few months ago. People keep making the same stupid mistakes just because their greedy minds intentionally ignore common sense.

I still believe we'll see at least 20% drop within next year and over 50% drop in the next 3-4 years. Look at the those new vinyl shacks right off major hwy - 4 levels above ground, 18 ft wide, crappy material under MARBLE counter top, .... I wouldn't buy a such even if the price drops 50%. SORRY THEY'RE SHACKS.

It's so hilarious that Bush has defended this unprecedented housing bubble as a result of strong desire of owning an "AMERICAN DREAM" house. Do you believe what he said?

I really wish this page can stay alive for 3-4 years so I can see if I'm wrong.

http://www.nvar.com/market/mktstats.lasso

For Condoguys consideration.

Point 1: The secret to investing is buy low, sell high.
Point 2: Something you did with your townhouse.
Point 3: Something you did not do with your current house purchase.

You say it is only equity till you cash out. Guess what, you did. Only to roll over your profits into an overpriced investment with much greater downside than upside potential. Consider this alternative to help you retire in Bermuda.

Sell at the peak ($200,000 in profit) and rent for a year or two (which is the same thing as buying an interest only load except you do not incur the equity risk). Take the $200,000 and put in a safe investment such as 1 year CDs paying around 5% right now. If prices decline 10% over the next year (which is a very strong reality with the current market situation) and your investment goes up 5% you could then purchase your $730,000 for $657,000 and since you won't require all $210,000 that you have you will end up in the same house, with the same payment but now with $83,000 in the bank.

What you fail to understand is that risk involves the potential alternate use of money (and make no mistake, you just invested $200k which is a rather large sum) so you can fail to come out ahead with your current course of action because you failed to consider all potential uses of your profits. Sure your situation means you will not be in financial distress, but can you really afford to be that careless with $200k?

If these posts are indicative of the types of buyers that are fueling this frenzy then we most certainly are doomed. (Although, there are some well written and thoughtful posts!). Oh, and one note for CondoGuy/Boy, who sounds so proud to announce his $200K windfall from his condo sale: Do you know how to spell DIVERSIFICATION? So savvy of you to invest ALL of your profits into a down payment on a new house in this market. And a ten year interest only? Who sold you that paper?
It's big time "moguls" like you that have contributed to this mess. If you do make it to Bermuda, you'll be scraping the barnacles off my 60 footer when I sail into town.

Suppose that you (CondoGuy) got an interest only jumbo loan at 6.25%. And intend to either refinance sometime in the future (or ride the current or future wave up more.) That seems a bit nuts to me (both the rate on the current loan and the intended strategy for the future – I seriously can’t understand why, given current interest rate conditions, a 30yr fixed rate jumbo loan doesn’t make sense if the buyer is affluent enough to get it.) It only makes sense to refinance in two situations. 1) Long term rates fall below the rate at which you bought your house (notably enough to offset any fixed costs associated with refinancing.) 2) Your house appreciates enough in value that you are able to move into a more favorable loan category. The first seems unlikely. Historically, 7-8% was a pretty darn good rate to get on a 30 yr mortgage. Below 6% was almost unfathomable until 2003. Currently, the Fed keeps banging on short-term rates (which, in the process, will start smacking people with ARMs that are tied to Libor or Prime) and seems pretty perplexed about the stickiness of long-term rates. At some point, long-term rates are going to give (not necessarily due to anything that the Fed does.) If rates start reverting to their long-run average, will CondoGuy or anyone else be interested in refinancing? People are using the exotic loans to get more or less temporarily lower rates at the very time that rates are as low as they’ve been in over 30 years. It just doesn’t make sense to refinance when rates are higher than when you bought, and it’s important to recognize that attractive refinancing is not a given. Personally, I cannot imagine making a bet based on the possibility that rates will fall below where they’ve been over the last couple years, especially in light of the Fed’s concern about this. Unless you get price appreciation so that those with seriously jumbo loans can refi at moderately jumbo loan rates. Counting on price appreciation sounds fine looking back on the past few years (note that it’s always easy to pick out the right strategy after the fact), but counting on that to continue into the future is a pretty risky bet.

Also, regarding 1, 5, 7, 10, 15 yr ARMs, I don’t care how long one plans to stay in his/her house – s/he never can guarantee the value of his/her house until its actually sold. You cannot buy a put option for your house to insure the price (unlike in other asset markets where such strategies come at a non-trivial price) – you can, however, guarantee the monthly payment if you get a fixed rate loan which is smart to lock in when, hmmmm let’s see, interest rates tend to be low. The best that you can figure is that if you stay in your house for a long enough time frame, you can weather any ups and downs. But you still don’t know where the market will be when you actually sell. Moreover, holding the house long enough to weather ups and downs is basically an argument based on long-term appreciation in real estate as a rationalization for purchase. And long-term real estate returns aren’t that impressive. That’s why wise financial advisors call for diversification as the way to get the best returns over the long-run. As with the dotcoms of the 90s or real estate of the new millenium, you won’t have fun at parties talking about how much money you’ve made in the last few years, or how much your house has appreciated, but you’ll be a heckuva lot happier 30 years from now as the ups and downs run their course leaving you with the long-run averages. And, as a nice byproduct, you’ll sleep better at night without worrying about this stuff.

Man, just cant understand where the animosity is coming from.

Posted by: shark tank at November 13, 2005 03:16 AM
"If these posts are indicative of the types of buyers that are fueling this frenzy then we most certainly are doomed."
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Is real estate that different from any other investments, stocks/bonds etc...?
If you get in early on an IPO and hold until it goes up 20-50-100% and then sell, are people calling for your head on the guillotine?
If you leave your current job because you got offered another job with a 30K raise, should your old employer be angry?
Why do people demonized others that invested in real estate, be it flippers or just ordinary folks like me who while wanting a roof over my head made money in the process is beyond me.

Posted by: shark tank at November 13, 2005 03:16 AM
Who sold you that paper?
It's big time "moguls" like you that have contributed to this mess. If you do make it to Bermuda, you'll be scraping the barnacles off my 60 footer when I sail into town.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Like i said, i believe in simplicity.
Wont be scraping nothing off your anything buddy.
All i want is a 2 bedroom shack, a fishing rod and a bicycle to ride into town once in a while. My 401K has almost taken care of that, anything else is like extra toppings at pizza hut. Will be good, but i can do without.
God speed to you and your 60 footer.

Posted by: Wes at November 11, 2005 10:54 AM
CondoGuy: I think you're crazy to do interest-only mortgage but in any case with your long time frame you should be OK. I see worst case you are walking away in 10 years selling for the same price you bought at.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Wes, i really appreciated your comment and that is the same outlook i have.
Even if i loose 10/20 percent, i have had a good home, good school district for my kids. Lovely neighbors and a happy family.
That has more value to me than 500K in equity.

Posted by: winston at November 11, 2005 12:30 PM
Sorry your reply seems dumber than my original question IMHO. I know I might lose my job some day, so I work hard and make some savings; I know I might be hit and killed on the hwy some day so I buy life and auto insurance. I really wonder if you need to have any sort of insurance based on your logic in the reply.
I feel so sorry for you...
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
We all lose our jobs or switch, be it retirement, death, health, wealth etc..
But that factors very little into our 5-10 year plans, thats why we put money aside for retirement.
We all have the insurances and asking me if i am going to make a decision on buying a house based on the possibility that I MIGHT lose my job is dumb, lose one, get one, if need be get a second job.
I have a family to feed...Or should i just chill and claim unemployment?

--------------------------------------------------------------------------------
People generally tend to over analyze and make a situation more complicated than it needs be.

I am not a financial guy, nor claim to be.
For all i care, i bought, i sold, made some money, upgraded. IT WAS NOT A LONG TERM RETIREMENT STRATEGY.
My wife wanted a bigger kitchen, i have a growing family and needed the space and i also wanted to move from a condo.
1) The HOA fee (571 a month) was not money coming back to me.
2) Noticed the condo market was sliding way back in april/may when apartments all around my area started morphing into condos. Plus 14,000 new units in next 2 years.

Its good talking to your handles online and what ever ego or vulnerabilities that are behind it.
I wanted to just have a feel for what others where going tru in re to the real estate bubble prediction.
Was not gloating, bluffing, redicling or pointing fingers. Got some, good practical view points and some nasty ones, but i guess you get the ying with the yang and my query is fullfilled.

After sitting and reading this thread, I have learned quite a bit. Months and months have gone by and I personally have noticed little change in the markets around the metro area. I previously rented a 2bed 1.5bath TH in Lorton, Va for just $995 per month. Talk about a steal since the tiny house was worth $350+. But for someone who doesn't want to rent I'm finding it hard to buy on my single income. I'm not waiting for house prices to drop, just waiting for the house I want. See a perfect pad for my price range, call and its been sold. Getting tired of it but growing my savings in the mean time.

Posted by Condoguy:
"I am not a financial guy, nor claim to be."

Thats an understatement and indicative of the irrational expectations that drove the housing market to its current situation. Anyone else wonder what is going to happen when the last leg of the economy goes bust? Stools don't stand on no legs.

CONDOGUY:

You have thus proven my point, again. Your initial property tripled in value over a 6 year period. Did it not occur to you that this is simply ridiculous? No. You took what was a substantial windfall and squandered it by buying back into the inflated market. A more prudent individual and true business man would have put some of the $$ into another form of investment to DIVERSIFY, which obviously you DO NOT know the meaning of.

And no, I'm not attacking you. You're simply indicative of many buyers in this market that have helped to contribute to the inflated prices. Many others, through either Re-Fi's, home-equity loans, or hack investments, have also contributed in a similar way by putting all their money into RE.

Eventually, supply will catch up with or exceed demand, interest rates will rise enough to deter buyers, investors will sell, and prices will fall.

As far as your Bermuda dream:

The 401K you are talking about is probably a mutual fund with investments spread across several industries, thus DIVERSIFYING your investment and helping keep your retirement dreams alive. Imagine if your entire 401K consisted of Google Stock.

Chic,

I wouldn't expect an INSTANT change w/ the real estate market. This isn't the stock market after all. Things work much more slowly so it may take a little while before things really cool down and things become more apparent. You said it's been months and months, but the market just started really cooling at the end of summer, so it's really only been <3 months, which is not that long. With more houses/condos/townhouses popping up everywhere, prices will drop over time. Not to mention that interest rates are going up..

The people that got into the real estate INVESTMENT market late will get burned. Stretching to ride the bandwagon is very dangerous and many people that purchased investment property on interest only loans will help bring the prices down when they have to foreclose. I would think that continuing to rent would be the best bet for at least the next year or two until prices have come down.

Guy/Chic:

I suggest reading the WSJ front page today if you want some good reading about the housing market. I'll take this quote as the most important one:

"The [house-buying] frenzy is over," says Steve Murray, president of Real Trends, Littleton, Colo. Mr. Murray says it may take six to eight months before sellers accept that the market has softened and reduce their asking prices. He said some of the brokers surveyed were surprised at how rapidly the market seemed to be cooling in recent weeks."

While it's true that markets don't reverse overnight there are early indications the peak was in July/Aug/Sept for the housing market. I expect that, similar to a sinking ship, the market will bouy for a while before beginning the long anticipated plunge.

Remember that the stock market peak was in March 2000 yet the bottom wasn't until March 2003. The housing market may take equally as long to correct.

Chic, by that time you might have enough money saved to pay cash! Good luck.

What a shame that the media has also been using the term "INVESTMENT" on the housing market for the latst few years.
It's all about SPECULATION and GREED! America will soon feel the pain of wealth effect.

Just a comment for those who argue that "land in DC is scarce" as a rationale for high prices in the DC area. Land is presumably scarce in Japan too since they aren't building any more land on those islands. Yet, real estate prices have managed to fall or, in the best years, stagnate there for the last 16 (!!!) years (despite interest rates approaching zero.) I don't mean to suggest that we'll see something similar happen in DC (altho the "coastal property is scarce" argument could really end up kicking people in places like California and Florida where I think real estate is absolutely, undoubtedly, unequivocally inflated), but it's a possibility that people must note. Real estate doesn't fall often (altho I think that the focus on national price figures often masks substantial regional fluctuations.) But it also doesn't always rise and episodes of severe corrections do exist, especially after substantial run-ups like the one that occurred in Japan during the 80s. (Or Boston in the 80s. Or NYC in the 80s. Or DC/CA/FL/AZ/Las Vegas/NYC in the 00s?!?!?!)

BTW, let's back off on CondoGuy. I think that it's healthy to hash through these issues, but let's not make it personal. Tough to do when so much $$ is at stake, but I suppose that one point of other posts that praise the virtues of diversification is that it's tough to be objective when we let the stakes get so high.

What Bubble???

I brought a townhome in July 05, and it has appreciated by 54K. Research has shown that its a buyer's market in the winter months...its cold, its the holidays, daylight savings, and etc. And, then it becomes the sellers market in the spring. This so called bubble was talked about in early 2000. I wish I would have brought then, instead of listening to the incorrect speculation. Also, DC historically has been undervalued. And, crack took over the city for most of the 80's and early 90's. Noone wanted to live here. But, the homes were still historically rich. Also, the White House, government aint moving. And, last I checked the budgets for terrorism and natural diasters keep on increasing. Thus, the economy is here...Fortune Magazine actually has an article out this month citing DC is the number 1 economy.

I'm also weighing whether to buy a house now to lock into lower interest rates (and during the slow holiday season) or wait a few months for more clarity on what is happening with housing prices in the DC area, but risking a higher interest rate and typically more people buying in the spring.

I've been looking at a 2 BR TH in Arlington or Alexandria, current asking price is $450, down from $470 2 months ago. Have money for down pmt and closing costs, but the $2800 monthly mortgage pmt makes me gasp (but I'm definitely not going to get suckered into anything risky like an ARM). Renting a reasonable, albeit smaller, place in the same area would be about $1200.

I want to have something to anchor me to this area besides my job and don't envision renting for more than a year because I don't want to be "wasting" my money on rent; the question is whether I make a very aggressive low bid now (i.e., during the slow season) on something that has been on the market for more than 2 months or wait a couple of months to see what happens in the market, but also be competing with more people looking to buy in the spring.

I've plugged all this into online calculators, but would appreciate some human insight.

Re Ms. Jones

"Also, the White House, government aint moving. And, last I checked the budgets for terrorism and natural diasters keep on increasing. Thus, the economy is here...Fortune Magazine actually has an article out this month citing DC is the number 1 economy."

The No. 1 economy based on the budgets for terrorism and natural disasters???!!! Is Fortune alone spreading such joke?

Ms. Jones,

If you could have purchased a place in 2000, that was your mistake for waiting. The price of housing was flat for a long time and I certainly don't recall there being ANY speculation about a bubble in 2k. The real estate market was fairly flat, and prices were half of what they are now..

Anyway.. it seems that people who own houses or just recently just bought houses are trying to use any reasoning to justify to themselves that the housing market will flatten or go up. If you look at the FACTS, it's quite clear that the housing market certainly cannot sustain the increased growth.

A few simple points. The big boom in the real estate market has had little to do w/ the idea that "DC historically has been undervalued." Notice it has happened all across the country? This ridiculous real estate market was caused by the government. It was because of the ridiculously low interest rates which caused a huge incentive to purchase property. It made houses cheaper for new homebuyers AND it gave more $ to current homeowners by refinancing. This increased wealth is what caused the huge growth in the real estate market. People started borrowing against the equity of their house as it went up to purchase investment property. The people that got in early enough will be fine, it's the people that got in late which are in for hard times.

Interest rates rising, ARMs, energy costs increasing, are all BIG problems for people who jumped in at the tail end of this "spike" or "bubble," whatever you choose to call it. Just because you bought a TH at the tail end of the spike and you THINK it gained 54k is very misleading. People get too caught up in paper wealth which is very dangerous.

Regarding facts.. The market is in clearly a "worse" scenario than it was this time last year. This signals that the end of the bubble is approaching. Builders are becoming more hesitant regarding new property because they predict the prices to fall, and don't want to be stuck w/ too much property. The fact that ~50k condos WILL be built w/in the next 3 years will certainly increasingly soften the market.

Believe what you want, but the DC area is not impervious to fluctuations in the job market. If Kerry would have made it in office, government spending and national security spending would have been reduced meaning less jobs.

Every increase has always been followed by a period of decline in the real estate market. This happens to be a very large increase this time around, so I wouldn't expect things to be any different. Heck, globally this hypothesis is true as well.. You could argue that MAYBE we haven't hit the peak of the bubble, regardless of how unlikely that is. Failing to admit that the market will drop at some point is just being silly.

Ms. Jones:

Even at a seasonally adjusted rate (which is basically what you're appealing to), things have changed. More homes on the market, more price reductions, all once we've accounted for seasonal effects. Something very different is going on this "off" season compared to the past few years.

(Best way to think about the run-up reversing is to envision a potential buyer right now. Prices are really darn high. Do you want to buy at the high point in the market when it seems that prices might fall? Especially as interest rates rise? Hmmmmm, maybe you should pass on that crappy $600K house - perhaps a bit moderate price which just speaks to the insanity - in Capitol Hill/Logan Circle/etc. and wait to see what pops up next week. But then even once those new houses show up, maybe you should wait until a better place appears. Eventually the momentum may turn in the opposite direction for no reason other than buyer sentiment. That would finally be the pop in the bubble.)

And, your $54K capital gain is meaningless w/out knowing how much you paid. ($200K, you're a freakin' genius!! $1million, not so impressive.)

Hey Terry,

No one can actually answer your question. You have to figure out your view of the risks that you face. How do you think that the following items will move: interest rates, housing prices? In each case, figure up or down. Then think about how much up and/or down. And figure out the transaction costs to refinance a mortgage. If you're comfortable sitting on a particular rate with a particular house price for some amount of time, then do it (noting that none of those items are guaranteed.) If you feel uncomfortable about the way that either house prices or interest rates might move, I'd keep renting esp since rent is so darn cheap.

Terry,
Wait. Keep in mind that 47,000 new condos are due in the market over the next three years in the DC area. I wouldn't worry about Spring buyers-there is plenty of inventory. Plus, the longer stuff sits on the market, the more people will reduce their prices. Just take a look at the way people are lowering their asking prices on Craigslist and MLS.
Anyone who buys now is simply nuts. The market is heading downwards, not upwards. Ms. Jones is simply deluding herself about what is undoubtedly turning into a bad investment. But then again, I'd feel pretty lousy if I bought at the height of the market, only to have values come crashing down on me.
Rent for another year. The 1600 monthly price differential should be saved, and can further increase your down payment when you eventually do buy.
Good luck with whatever you decide.

Terry: Take one piece of free advice: go and buy a copy of "Home buying for Dummies," in any bookstore. In it you will find a discussion of renting vs. buying. In a "balanced" market, the two should be more or less equal. If you are telling us that you can rent a property for $1,200 that would require a $2,800 fixed-rate mortgage payment, then the neighborhood you are looking in is even more out of whack than mine is. The exception to the rule, according to "Dummies," is in very affluent neighborhoods, where it always costs more to buy. I understand your desire to own - most of us share it. But if you are patient, you may well make out like a bandit. I hate to re-hash this whole thread, but there has been a fantastic and un-precedented run up in Northern Virginia housing prices. If you drive around you can now find what appear to be entire neighborhoods up for sale. It is bound to get a lot worse before it gets better. My two cents...

Terry,

You are not "wasting" money on rent. Instead, you are "wasting" $1600 (thats 130% of your rent)on an overpriced Mortgage. Lets assume that homes continue appreciating at 10% a year. The annual cost of your $450k mortage is 33,600. Your "appreciation" is $45k. Your "savings" from renting is $1600 x 12 = $19,200.

$33.6-$19.2 = $14,400.
Now, don't forget the annual tax $14,400-$7000= $7,400
and insurance -$1000=$6,400
and maintenance (which experts says runs 10% of home value per year on average - don't believe me? just google search; but I'll use 1% just to be conservative).
$6,400 - $4,500 = $1,900.

This means you only need to make a 1% return on your money save by renting over owning in order to break even. BTW current money market rates are over 3.5% which means your money will grow 350% faster if you rent vs own.

So I don’t have much to do on my Friday night and I decided that take up Bubba’s challenge about finding actual data regarding what’s going on with prices. It’s tough to get up to date info from the MLS and sales/list/dom (date on market) records unless you’re an agent, but you can get data about current list prices and adjustments. I’ve included some below where I did a search on the MLS based on: 1) price less than $2million, 2) Neighborhoods = Dupont Circle, Capitol Hill, Georgetown, 3) any bedrooms and property types. I recorded neighborhood and list price along with interesting comments from the agent’s listing. I got tired downloading data around $500K, so that’s where it ends.

A few comments about this data:
- I only downloaded listings that had something interesting like “PRICE REDUCED.” Obviously there were lots of listings that didn’t have that type of info. But I’d argue that many agents don’t want to convey their client’s desperation to sell so, if anything, the listings described below understate how much adjustment is going on in prices (i.e. this doesn’t get movements in these prices over time.)
- Who knows how many properties are being taken off the market since they’re having problems selling.
- All of the properties from U St. happen to be from 2020 12th St which is a place that Dube really loves.
- Despite the belief that high end properties take the hit when prices fall, it seems that the anxiety is pretty evenly distributed across high and low price properties. And across neighborhoods in DC. In percentage terms, the reductions are probably about the same.
- Note that we’re basically talking about really outrageously priced properties. Who the heck is thinking about paying $600k for a place in Eckington. Or $900K for a place in U St.
- Personally, I love how some of these listings rely on “professional appraisals” to justify their prices. Who the heck are these appraisers? And do they have incentives regarding house prices that are any different from those of real estate agents (i.e. they want to pump up the market.)

Sorry for the information overload, but you wanted data, here you go folks....

* Dupont Circle - $1,975,000 “**REDUCED**We want OFFERS**”
* G’town - $1,600,000 “Open Sun 7/17 12pm-2pm” (Note the July open house date)
* Kalorama - $1,598,000 “102K UNDER new ind appraisal ... Open Sunday 10/09 from 3-5pm.” (Note the Oct open house date.)
* Cap Hill - $1,500,000 “*REDUCED $150K*”
* G’town - $1,250,000 “MAJOR PRICE REDUCTION! 250K!”
* Dupont – $999,000 “$100K PRICE REDUCTION means amazing value!”
* U St. – $985,900 “Just reduced!”
* Cap Hill – $965,000 “JUST REDUCED $15K”
* Cap Hill – $949,000 “DRAMATIC PRICE REDUCTION !!!”
* Columbia Heights – $939,000 “Price Reduced on this fabulous corner lot Victorian ... $10,000 closing credit for buyer. Nr. Metro-bring offers”
* Cap Hill – $889,000 “HUGE PRICE REDUCTION, INSTANT EQUITY!HOME APPRAISED AT $965,000”
* Eckington – $849,900 “Make an offer.”
* Columbia Heights – $829,000 “New Price!”
* Logan – $799,000 “New price is equivalent to $599k because LEGAL rental unit ($1,200/month) pays first $200k of mortgage ... Great deal!”
* Cap Hill - $799,000 “Open Sunday 9/11 2-5.” Note the Sept open house date.
* Eckington – $785,000 “Owner is RE ... Preferred august closing.” (Hee hee hee, august closing desired. Good luck buddy.)
* Columbia Heights – $769,000 “New Price!”
* Columbia Heights – $759,000 “New Price!”
* Dupont – $750,000 “REDUCED FOR A QUICK SALE!AS IS WITH WARRANTY!”
* Eckington – $749,900 “JUST REDUCED!!! All reasonable offers will be reviewed.”
* Columbia Heights – $749,900 “PRICE DROPPED 50K FOR QUICK SALE! OWNERS NEED TO MOVE QUICKLY SO MAKE OFFER AND GET THE BEST DEAL IN COLUMBIA HEIGHTS. NOTHING COMPARABLE ON THE MARKET FOR THE PRICE!”
* Cap Hill – $735,000 “PRICE REDUCED!!QUICK SETTLEMENT!!Don't let the outside fool you ... ***SELLER SAYS BRING ALL OFFERS!!***”
* Glover Park – $734,900 “GREAT NEW PRICE!!”
* Mt Pleasant – $719,000 “PRICE REDUCED!”
* G’town – $715,000 “RECENTLY REDUCED!!”
* Glover Park – $699,000 “Large price reduction on this attractive rowhouse with lots of potential.”
* Dupont – $675,000 “GREAT PRICE!!”
* U St. – $674,900 “Reduced $50K!”
* U St. – $674,000 “REDUCED!! ... Eager Seller!!!!”
* Dupont – $670,000 “Price Reduced!”
* Cap Hill – $649,999 “Make that bid!”
* Dupont – $649,000 “~MOTIVATED SELLERS~ REDUCED $40,000!!”
* Kalorama – $649,000 “30K reduction!”
* G’town – $639,000 “GREAT PRICE REDUCTION! ... ALL OFFERS CONSIDERED.”
* Eckington – $625,000 “NEW PRICE!”
* U St. – $609,000 “Price reduced 40K for this brand new 6th flr 2BD,2BA CORNER loft w/fireplace & private balcony offering extraordinary city views”
* Cap Hill – $599,900 “JUST REDUCED!!”
* Cap Hill - $599,000 “NOW AT A !!GREAT!! PRICE!”
* Dupont – $599,000 “REDUCED FOR QUICK SALE!!! BELOW COMPS”
* Palisades – $598,500 “NEW PRICE”
* U St. – $595,000 “Drastic price reduction for immediate sale, best buy in building.”
* G’town – $589,000 “JUST REDUCED!”
* Eckington – $580,000 “$5,000 Closing Help for quick settlement”
* Adams Morgan – $579,900 “PRICE REDUCED!”
* Cap Hill – $575,000 “PRICE TO MOVE”
* Columbia Heights – $575,000 “Just Reduced!”
* Columbia Heights – $569,900 “MOTIVATED SELLER!!BRING ALL SMART OFFERS!!”
* Cap Hill – $569,000 “Value & location. Bring all offers. Seller Closing Assistance and will pay recordation tax”
* G’town – $559,000 “JUST REDUCED!”
* Eckington – $550,000 “PRICE REDUCED!”
* Columbia Heights – $550,000 “Just Reduced!”
* Cap Hill – $549,900 “PRICE REDUCTION!”
* Cap Hill – $549,000 “PRICE REDUCED!! ... Motivated Seller; will look at all offers.”
* Cap Hill – $540,000 “Make an offer!”
* Cap Hill – $539,000 “Price DROP! 30K. $1000 bonus to selling agent at settlement. Owner said to bring offers!!”
* Adams Morgan – $529,000 “MOTIVATED OWNER IS READY TO SELL!”
* Cap Hill – $525,000 “PRICE SLASHED!!! ... What a steal at this lowred price!!!” (Love the literacy level of real estate agents.)
* Columbia Heights – $525,000 “Just Reduced!”
* Dupont – $524,999 “*ALL REASONABLE OFFERS CONSIDERED*”
* Dupont – $519,000 “Price reduced!”
* Adams Morgan – $509,000 “$10,000 Closing Cost Credit!”
* Cap Hill – $505,000 “PRICE REDUCED!”
* Adams Morgan – $500,000 “PRICE REDUCTION!”
* Cap Hill – $500,000 “Looking for a QUICK SETTELMENT.Reduced 50k.Investors/handyman special.” (Again, love the spelling ability of REs. Don't you guys have spell checkers?)
* Eckington - $500,000 “* ALL REASONABLE OFFERS CONSIDERED *”
* Cap Hill – $499,900 “BRING ALL OFFERS!”

So, you still wanna buy a place in Capitol Hill? How're you feeling about the rest of DC? Still think that things will keep running up like they’ve been doing? You might try to argue that this is all b/c the fall season is slow for real estate, but I don’t recall these types of desperate notes in property listings over the last few years even in the fall.

http://www.usatoday.com/money/perfi/housing/2005-11-09-home-price-futures_x.htm

Looks like the big boys are getting ready to rake in the profits from declining house prices. Notice it says "not designed for ordinary home owners". Guess who's about to get stuck holding the hot potatoe.

Doesitmatter,
Your analysis is brilliant and thank you for sharing it. I should say however, that the anticipated "appreciation" of 10% per year is probably not going to happen. Property values will most likely decline in the foreseeable future if interest rates continue to rise. With 47,000 new condos under construction, the market will be flooded with too many properties for sale thus causing property values to fall. It was reported that 1 in 4 properties sold within the last 4 years were by investors. Now there's hardly any investor to be found. Many had been burned by properties they could not rent nor sell. Some are smart enough to get out of the market before it crashes.
One other thing: You can now earn as much as 6.7% interest on your money by investing in I-Bonds. This is the safest form of investment you can get guaranteed by the federal government. Check this website: http://www.treasurydirect.gov/

Terry -- I notice that you say the town house you want with a $2,800 mortgage is larger than the $1,200 rental apartment you describe. So it's not really an apples-to-apples comparison. This is common. Often, when people consider moving, they aspire to a larger house. Part (though only a part) of the increase in housing prices over the last few years has been due to the fact that the average house size has been increasing, and quality has improved in terms of wiring, kitchens, baths, etc.

So, in terms of price per square foot for houses of equal quality, the increase has not been quite as large as the increase in average or median home price you see in the headlines.

So, when house prices peak, it can partly mean that people are buying larger houses than they can afford. Relatively small houses may hold their value better at the top of a market. Perhaps you'd do better to consider something smaller. On the other hand, when the next wave of house-buying enthusiasm hits, that little house may seem dumpy by new standards and increase in price less. Sometimes they just get "scraped" (torn down) and only the land keeps its value.

I think this phenomenon has been going on for a long time. I was reading a writer of second century Rome commenting on how small and cramped houses from the Republic seemed, and considering investing in real estate. I suspect prices in Rome peaked around the time of Marcus Aurelius, and probably did not return to those levels in real terms for over 1500 years.

I see here that you guys have solid evidence as why a new home buyer should not buy in today's market. I live in Tampa, Florida in smaller house a top community (my current section in the community is the oldest and most investor driven)and I plan on upgrading to a nicer house within the same community in a much better section. However, I was wondering about an existing home buyer who has had their first home for over two years and would like to upgrade as soon as possible. Do you think it would be wise to upgrade now before interest rates go up or should I hold off until the market tumbles. Another, option, however, a bit riskier of an option is for me to attempt to sell high now and rent in an apartment for some time to allow things to drop. However, if they do not drop at this crucial time period but increase a bit longer and level off then my purchasing power is diluted substantionally. Any opinions?

In a softening market, I've heard people say that housing prices never really decline, but either stay the same or increase more slowly. I've tried to find data about this from the last housing crash in DC in the early 90s, but haven't been able to find the data.

I'd be interested in hearing from people who were tracking housing prices in the DC area in the early 90s. Do housing prices decline or just even out? Also, are the economic indicators now similar to what they were then?

I am really impressed with the comments on this blog and would just like to put in my personal observations on this market.
I have seen a decline in the market over my price range, but I will say, the lower price ranges (tounge in cheek $200-275K) are just as competitive now as they were when I began looking during the spring "peak". I have been outbid twice on what I call "worth the price" condos since I refuse to pay above asking cost.
SOAPBOX: I think the flippers (I would like to call them something more harsh, but I will hold my comments) are partially to blame for this and they will hopefully stop driving-up prices soon. I recently saw Baltimore is passing a law that insures buyers live in their homes for 5 yrs. or pay a penalty. What a great idea! For us "normal" people working in healthcare and non-profit careers I hope DC govenment wises-up.
Anyway, down from my soapbox, I do not make an outragous amount of money, but I did save enough for a sizable down payment and finally bought a condo with everything I wanted for (after tax breaks) the same amount I pay for rent 8 block from my new home.
I think if your ready to buy, you should buy. You must remember every individual has a different situation. Find a place you really want to live in with all your requirements and enjoy. Isn't home ownership more than just a morgage payment and prospective profit?!?

Tracy: There are a number of agencies, state and Federal, that track real estate appreciation/depreciation over time. I've attached a link to one of many reports, from one of Federal agency, tracking fluctuations in "home prices" in D.C. compared to US generally and Maryland, during period about 1980 - 2002 (Chart 3).

http://www.fdic.gov/bank/analytical/stateprofile/2003_summer/ny/MA/MD/MD.pdf

Note how all three graphs may corelate.

In my earlier message, I suggested that D.C. Metro area was not immune from laws of economics applicable to rest of nation. I think that, as far as "home prices" are concerned, the attached graph may tend to demonstrate as much.

I recently read that trends in stock prices may be more closely linked to inflation than to some of the more traditional barometers of stock prices (e.g., earnings, book value, etc.). It may be that real estate prices are similarly linked. Just my uninformed observation; others may disagree

....Jerry

Tracy,

The link below has the house price index by metro areas. The usual statistics of median/mean house prices quoted in newspapers can be impacted by square footage of the houses as peoples preferences change. The below index is generated by tracking same house over years to see how the price changes.

http://www.ofheo.gov/media/pdf/hpi_msa05q2.txt

For Washington metro, I saw index fluctuated plus/minus 3-4% between 1989-1995, which I would call essentially flat rather than steep decline. However, other areas such as Peoria, Illinois and Oil Patch have shown serious declines in past. Washington area has shown more resilience because of 1) because of stable source of Govt. Employment and 2) because during recessions Federal govt. primes the economy by deficit spending and Washington gets disproportionately higher share of such deficit spending.

Here are few more thoughts on why the bubble may not "burst" as some expect---

1. US in general and Washington in particular has had a disproportionately higher influx of immigrants (for Information Technology and Y2K work) in past decade (90s) and that has added relatively high earning home buyers to the real estate market of this decade. Impact of immigration and immigration policy on house prices can not be ignored. Current pool of illegal immigrants (who are mostly renters at present) is also a potential source of homebuyers.

2. Mortgage Industry has developed several risk management products and would develop a few more soon (such as the one mentioned in USA Today article about Housing Futures). These products let Institutions diversify their risks and thereby "risk premiums" in the mortgage market reduces.

3. Looking at House Price index for Wash Metro during 1975-1982, price index went up by 80-90% even though mortgage rates went up from 8-9% to 14-15%. So, higher interest rates would definitely lead to a fall in housing prices is not a given. Construction cost increases also affect what houses would cost in future. We have just started seeing some of the inflationary pressures on construction costs. If a scenario such as 1975-82 (stagflation) plays out house prices may go up even while the interest rates keep on going up.

My favorite real estate interaction from this week’s market:

While checking out a partially completed condo development near U St. (I’m not buying, but am curious), the enthusiatic listing agent breathlessly queried “Do you know that the 2020 Lofts are completely sold out?” (Note that the 2020 Lofts are the ones that I noted in an earlier post.) “Sure,” I said, “But who bought them?” Turns out, lots of them are back on the market again since they were initially bought by flippers looking to turn a “quick buck.” And are now having problems selling.

Of course, we could appeal to some change in fundamentals as a rationale for the run-up in housing prices. Interest rates are historically low (or have been until recently). Lenders are offering “innovative”, albeit really risky, loans (or, again, have been until recently.) In the past, however, real estate prices haven’t increased as rapidly in response to such changes as they have in the past few years (e.g. initial introduction of ARMs, fluctuations in interest rates, etc.) In addition to crazy loans, people are using their homes as (adjustable rate) piggy banks. (For chrissake folks, we almost have a negative national savings rate!!! That’s insane.)

It could be that a fundamental change, like higher interest rates, lead to a flattening of the market. But if fundamentals didn’t drive the upswing (and we could argue this until the cows come in) then a fundamental change doesn’t have to lead to a downswing. It could certainly precipitate a fall. But an exogenous decline in purchaser sentiment (what, forgive me, Keynes referred to as “animal spirits”) could alone send the market into a downspin. Who wants to buy when things are heading down and the market looks unstable? Just as it was difficult to envision when the run-up would end, we won’t be able to envision when people will dive back into the market. As long as people aren’t too leveraged, they can ride things out (albeit at the loss of their piggy bank.) But people who face a lot of interest rate risk and/or are highly leveraged could be in for trouble. And my honest fear is that lots of people are facing a heckuva lot more interest rate risk than they anticipated and, given the low national savings rate, are a heckuva lot more leveraged than they want to admit.

Looks like Sampat Saraf must have recently just bought a home in the metro-DC area. READ THE ADS IN THE WASHINGTON POST, or Fat Guy's most recent email.

No Saul ... I did not buy anything recently. Latest rental property I bought was in 2003. Principal residence was bought in 1993...I have contract on some new construction in Anacostia but I am not sure when if ever it would be consummated.

Sampat Saraf,

Could you please expound on your immigratin theory? Immigration is not new to the 90s and you are making alot of false assumptions about immigrant wages compared to natural born citizen wages. What percentage of the IT workforce is immigrant vs. natural born citizen? What percentage of homebuyers are IT immigrants? Nice ideas, but no proof that they make any impact.

As far as DC spending, why didn't house prices go up in the nineties during one of the largest budget increase periods? What happens when the budget decreases? Do home prices = Govt budget? I would need to see some data correlating the two.

The housing industry has not implemented adequate risk management. Just search online for Greenspan's numerous talks about the reduced risk premium the nations investors have been demanding for riskier environments. Again, your argument is backwards and makes false connections in regards to cause and effect.

I am sorry to say, but it is this kind of misinformed investment decision making that has caused the precarious situation the housing market is in.

We are in a bubble...it isn't demand for housing but it is how it is being financed....40% of mortgages in this area are variable rate interest only or neg. amoritization....people can't afford their houses.
Gov't is about to cut back.
Thousands of new units are coming on to the market.
Interest rates are rising.
Housing is going to go down.

Sampat,

With regard to your #3 reason as to "Why the bubble may not burst", during the time period you referred to (1975-82) there was major wage inflation as well as price inflation. Now we have price inflation but little wage inflation. There is little wage inflation because of globalization and immigration. Without wage inflation I don't see how you can support higher prices or even stable prices in a rising rate environment. Also, we didn't have the massive exposure to variable rate/exotic financing as interest rates rose during that period. Truly this time it is different.

Doesitmatter,

Sorry, I do not have hard statistics to answer all the questions about how IT work force has led to more demand and increased home values, I just have anecadotal evidence because I have myself been in IT field for 20 some years and consulted with several IT companies in the region. The anecadotal evidence is:

1. H1-B (temporary worker) visa program hardly allowed any workers in 1980s. Due to pressure from IT industry in 90's H1B visa program was increased to a maximum stay of 6 years and cap was increased to 65,000 and then to 200,000 for Y2K work. The cap is back to 65K a year but still much higher than it was in 80's.

2. Accross the US you can compare population and price growth of cities like Pheonix vs. Buffallo or Pittsburg vs. Minneapolis. A pattern which emerges is that if the city could not transition and embrace IT sector (e.g., Buffalo or Pittsburg) its real estate prices have not gone up as much. Washington on the other hand is premier employer of IT workers so it has benefited from this new IT based economy.

3. IT worker salaries are geneally higher than other workers, even Federal govt. had diffrent pay scales for IT workers and others by having special Schedule for IT workers, specially during Y2K period: http://apps.opm.gov/SSR/tables/index.cfm

My contention was not that immigrant worker wages are higher than natural born but that IT workers have (or had) higher wages than those for other occupations. Washington being a major region employing IT workers has benefitted because of that. Also, higher % of IT workers are immigrants than of other occupations. Now immigrants are special from real estate market's view point because they are a net addition to the buy side of the real estate market. Natural born citizens, on the other hand are not a net increase to buy side as they are usually selling one property and buying another to replace their current residence.

I am aware of what Greenspan indicated about risky mortgages, but you also have to understand that reduction of rates down to 40-year low level in history may be partially responsible for whatever "bubble" which is being observed.
In 1970's when Fannie and Freddie were created, it reduced the geographical risk from the mortgage marketplace and risk premium in mortgage money was reduced elevating the homeownership %. Similarly, we are witnessing another level of reduction in "risk premium" due to several new risk management techniques. Similar observation could be made about the credit card debt market. When I went to college, it was so difficult get a credit card as a student. Now the students are bombarded with credit card offers. In past, financial industry in general was reluctant to lend to sub-prime borrowers (be it students or homebuyers). Now, with risk management techniques, the financial industry has started to provide some of the same services to sub-prime borrowers as to the prime borrowers. So it has caused increase in homeownership %.

Of course, nobody knows for sure but in my opinion, we are witnessing a seasonal and minor retrenchment to relieve the froth from the marketplace and may see some flattening of prices for 1-2 years but slow growth would start again in after that.

Once China and Japan lose interest in american debt, US economy boom will stop. Period.

As to H1b worker, do you really think ending the 30k cap will help change the unemployment rate? Give me a break! Remember the word "outsourcing"? I bet GM will cut more than 30k in the next few years once Chinese cars hit US market. GM will either die or outsource auto industry to China.

Do you know why Greenspan and Snow traveled to Beijing? I believe they're not talking about democracy. US economy is so sick - corporate fat cats are enjoying the profits from war and outsourcing while US workers spending like tomorrow is the end of the world.

Natural born citizens increase the buy side because they must buy a first home just like immigrants.

If IT workforce immigration expanded almost fourfold in the nineties, how come prices remained flat until after the quota was again lowered to 65K.

I am sorry Mr. Saraf, but your cause/effect relaitonships are still not substantiated. Besides, DC has been an IT based industry through periods of housing flatness, declines and rises. In fact, it was flat during the late 90's IT spending boom when everyone in IT was getting rich off of stock options.

Now, you are correct that mortgage companies have reduced their risk premiums they charge; but, they are also in the process of reversing this trend.

Some of the decade-long decline can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a smaller real term premium that seems to be due to a moderation of the business cycle over the past few decades. Besides these factors, the worldwide trend reduction in long-term yields presumably reflects an excess of intended saving over intended investment. http://www.federalreserve.gov/boarddocs/speeches/2005/200509262/default.htm

The point being, IT workforce has no impact on the housing market. The trend of reduced risk premium has introduced a greater amount of risk into the housing market. Now, high risk is the method used to achieve high gains; but it also is the method that leads to high loses. The housing prices will experience a decline if the risk's taken lead to loss of value (in this case, failure to be able to meet montly mortage obligations due to variable rate interest loans that are rising due to rising short-term interest rates). If people can continue to meet mortgage payments in the face of rising short-term rates then home values will remain steady at worse. However, the other risk the housing market is facing is the 5 year declining trend in median household incomes. This means fewer people can afford to enter the market. Notice that new listings for homes at the bottome of the market are reducing listing prices currently (sorry, due to daily volatility I suggest you look at this yourself). When the bottom of the market falls, those people loose any equity gains and can't "flip" to a larger more expensive house. The next evolution in the pricing change is that the next layer looses move up buyers and adjusts to meet the affordability of those who enter at that level. You really need to take a macro view when you deal with trends in a market place with over 1 mil consumers. Sure, there will be isolated pockets of exceptions, but the current market is showing that buyers do not agree with the current values of houses (which is why sales have dropped way off). Once prices decline to a level where buyers feel houses are appropriately valued then they will start buying again. Off course, since you deal with a sine wave affect you will more than likely see values decline below fair buyer value (due to psychology of the market place). This means that investors will find bargains again and bid the market back up. Its not a matter of if this trend happens, its a matter of when and how long the cycle takes. Smart investors buy low and sell high, not the other way around.

Buyers determine the value of houses, not sellers or real-estate agents or home appraisers. If they don't like the value they simple don't buy; especially when given an attractive alternative which renting currently offers.

I am looking at closing on a one-bedroom condo in Adams Morgan in March. I am of course terrified--I only signed for it this May, so it is a peak price.

But other than relying on my appraisal clause, what good does it do me to worry. Certainly, I will not buy a place at a higher price than the market would bear--it would be more prudent to let go of the deposit, as much as that would hurt.

I do appreciate the comments on this blog, I agree with someone who said they are much better than elsewhere.

Also, I agree that listening to realters, lenders and anyone else associated with the industry is insane. While there are some professionals in all these industries, I met too many mealy-mouthed cheeseballs during my search, johnnie come latelys that reminded me of stock brokers/analysts in 20000.

But I wanted a bigger place, and felt it was time for me to buy. Only time will tell 1) whether I close on the condo and 2) whether it is a sound investment.

I do want it, it is a pretty little, unique place in a fantastic neighborhood with a balcony and a view.

Like I said, we'll see, I'll be biting my nails for the next couple of years, though

Historically in the DC area, how much would you expect housing prices to decrease after a boom such as we've seen in the last few years? In what time frame would one start to see these decreases -- as early as the spring buying season or after that when properties haven't sold?

I bought a townhome in Frederick County Maryland in April 2005 with a base price of $280K. At this time the builder is now selling new units starting at $320K. There aren't too many new townhomes for that price with 3 bedrooms and 2 baths within 30 minutes of Rockville, Maryland. I am hoping that since the price is more than reasonable compared to Northern Virginia that it appreciates and not depreciate. I am also keeping my fingers and feet crossed.

“Natural born citizens increase the buy side because they must buy a first home just like immigrants.” Sure the natural citizens (first-time buyers) as well as immigrants add to the buy side of the market but natural citizens are eventually going to be selling “inherited” family home at a future date while immigrants do not cause such increase to the sell-side of the real estate market. What we are talking about is “new household formations”. Immigrants, by default, result in a household formation but only a fraction of natural born citizens result in new household formations. If a region has a net in-migration (be it from within the country or from outside the country), the demand for housing in that region goes up incrementally. Immigration has always added to population and demand for housing (the reason 90’s IT worker migration is significant is because of higher wage level associated with this block of immigrants, historically wage levels of immigrants were much lower than IT immigrants of 90’s).

“Why did we not see a big jump is housing demand in 90s even when the cap was 200K but seen the jump now when the cap is reduced to 65K“-- because of delay associated between initial migration and accumulating enough job stability and capital for down payment.

I did not mean to imply that there is a direct causation between IT jobs and home price increases, rather there is causation between high-wage job creation and Real Estate prices of a region (IT is just a recent example). I would guess when Auto Assembly line technology was introduced in Detroit, it may have experienced similar price growth in house prices.

Median family income in Farifax county has been declining since 2001.

http://www.fairfaxcounty.gov/demogrph/gendemo.htm#inc

This means house prices should come down because salaries are coming down?

Littletiger,
Congratulations, you have absolutely nothing to worry about; you bought for the right reason, you wanted to live there not invest in it.

This discussion of IT jobs can stop now. Why no one was discussing DOD and DHS contractors? DC is dead meat if a small fraction of hundreds of billions of wasted money was used somewhere else.
Poor Bush! He had to beg chinese not to dump US debt.

I'm also interested in Stephanie's question. I think prices have fallen already, although I have not been able to find a real estate agent who will admit this. I wonder, though, for those who think prices will fall more, how can I tell when it is a good time to buy again? Price-to-rent ratios seem like one measure, but I'm having difficulty finding reliable statistics showing what historic levels have been or should be. Buy low, sell high is great advice, but I am finding it hard to follow.

John and Stephanie: No one can possibly know whether prices will fall, how long it may take, or how far they may go down. All we have is historical experience, and there is a good deal of that. Monthly cost to buy vs. rent is a good place start - unless you are looking at a very affluent, single family home neighborhood, they should at least be close.

The last property boom in DC (late 80's) resulted in a bust that brought condo prices down as much as 40%, where they remained for almost five years. DC and the area are showing signs (increased inventory, slower sales, "reduced" asking prices) that typically appear before a fall in prices. We know (just read the Post) that prices have already fallen, significantly, in some places.

That said, it usually takes years to play out. The bottom, historically speaking, will manifest itself when no one is discussing real estate any longer and when you bring it up, everyone will tell you that only stupid, crazy people buy real estate, because it is a terrible investment.

It's hard to plan your life around events like this. Just be cautious, and run the numbers (costs) very carefully before you buy. And hey, even at these inflated prices, it is still cheaper, over thirty years, to buy than to rent for that long.

John & Stephanie -

I also have not yet seen any concrete evidence of prices actually falling; what I have seen is asking prices that are down while final transaction prices are up slightly year over year. In some areas it seems that actual TX prices are flat. This is likely a precursor to a decline, because prices rise, level off, then fall in appropriation with the demand curve.

You are experiencing the perpetual investor problem - what is the low and when is the high? Judging from professional billionaire investors, the high was sometime in the past 18 months and the low will be sometime in the next 24-48 months. Look at Warren Buffet - he has stated he will invest BILLIONS in real estate once it crashes. Would you want to bet against a man like him? Or would you rather put your money on a real-estate broker (who will be bankrupt at the first crack in the housing market) that says the market is fundamentally undervalued because of the oft-quoted population, immigration, and employment growth.

Assuming that everything stays the way it is today (anemic wage gains, rising interest rates, 10%+ housing price increases), it isn't hard to see that a significant portion of the population will be priced out of real estate forever. Houses will stop being ATM's and become prisons as there will be no first time buyers, effectively stopping any trade-up buying further up the chain. It doesn't take a genius to see that not only are we in the midst of the largest and most dangerous asset bubble in American history, all of us who believe in the folly of the real-estate bubble are contributing to our own demise.

"This discussion of IT jobs can stop now. Why no one was discussing DOD and DHS contractors? DC is dead meat if a small fraction of hundreds of billions of wasted money was used somewhere else.
Poor Bush! He had to beg chinese not to dump US debt.

Posted by: winston at November 29, 2005 11:15 PM"

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Hey I find this all very interesting. I'm a 1st year law student at Georgetown and two of my friends and i are looking at buying a four bedroom in the capital hill area as we don't want to pay high rents and figure we can develop some equity in real property. As my parents will be fronting me the downpayment i want to be able to guarentee them about a ten percent/year return on their investment. If the housing price doesn't drop i can afford to do so, paying about four hundred - 700 hundred less per month than i would renting an apartment and will make some of my rent back when we sell. If anyone has any advise on short term buying to avoid wasting money on rent it would be helpful. And also, does anyone have any advise on where i can find area specific information on housing trends?

I may have spoken too soon in my previous comment, here is a website I found tonight that purports to show declines in Washington D.C. asking prices over the past 3 months. It's logical to assume that reduced asking prices indicates or will soon indicate reduced transaction prices.

http://www.benengebreth.org/housingtracker/location/DC/Washington/

Aparrently, the OCC (Office of the Comptroller of the Currency) which is responsible for the safety and soundness of the banking system, believes that the over and inappropriate use of extreme mortgage financing is a major contributing factor to the real estate boom. They are planning to apply regulatory pressure to crack down on this practice. They believe, like I do, that we are at the end of the current credit cycle and that a great deal of the recent demand for Real Estate would not have existed without this sort of financing. When this type of financing dries up so goes the market. This includes the DC area which currently relies very heavily on creative financing to keep the game going.

Read all about it here in the text of a speech from John Dugan of the OCC at the recent OCC Credit Risk conference in Atlanta:

www.occ.treas.gov/ftp/release/2005-107a.pdf

Geoff, while it is impossible to know yet if the current Real Estate cycle has peaked, most signs
point to that. Given your short holding period, I'd be very careful here. I know first hand many persons who bought in DC from 89-91 that had to come to closing with thousands of dollars when they sold since they had negative equity. Others who didn't sell had to wait until 99-2000 before they broke even, and this Real Estate cycle's rise has been like no other, so I suspect the fall will mirror it. One famous investor once said "my most successful investments were the one's I didn't make". Sometimes it pays to stay on the sidelines. You might want to read this Economist magazine article on the buy versus rent question:
http://www.economist.com/finance/displayStory.cfm?story_id=3722894

Got back from Dupont's open houses today. They were not busy, and several realtors told me that they would gladly entertain offers below asking price--some of which have already been reduced.

Geoff: 10%/yr in DC is over.

Phil: Unless you mean a decline - - but that number would be closer to 20%.

I really like the link that Al posted by John Dugan of the OCC (http://www.occ.treas.gov/ftp/release/2005-107a.pdf). What’s notable about Dugan’s speech is that no one in a position of authority likes to admit that things are a bit wacky. This is true for the OCC, the Fed, the FDIC, the Natl Association of Realtors and so on – all of these guys sound moderately concerned at worst which indicates that they’re probably much more concerned when they’re being candid. And a few of these candid points come across in Dugan’s speech. Let me pull a few of them out for you (which mirror comments that I and various others have made throughout this thread):

“It seems like only yesterday when a 5/1 ARM was considered a risky mortgage product. And it was – but primarily for borrowers, who, in return for lower initial payments, assumed the interest rate risk that had previously been borne by lenders. Today’s non-traditional mortgage products – interest-only, payment option ARMs, no doc and low-doc, and piggybank mortgages – are a different species of product, with novel and potentially risky features... By some estimates, interest-only products constituted approximately 50 percent of all mortgage originations last year.”

“Defenders of interest-only ARMs will tell you that they are not much riskier than fixed-rate loans. After all, traditional 30-year mortgages are typically refinanced or prepaid within 7 years... On the other hand, the potential “payment shock” of an interest-only loan is greater than it is for a traditional ARM, which raises concerns when IOs are mass marketed, especially to subprime borrowers.”

“Take a typical payment option ARM at the conforming loan limit of approximately $360,000 with an initial interest rate of 6 percent. If the borrower makes only the minimum payment each month for the first five years – initially $1200 – the payment shock when the loan begins scheduled amortization will be substantial, even if interest rates remain level. In this example, the minimum payment increases incrementally during the first five years to roughly $1600, and then jumps over 50 percent – to $2500 – when the amortization period starts at the beginning of the sixth year. And that assumes no change in interest rates. If interest rates should increase just two hundred basis points to 8 percent – which certainly is not unreasonable to expect – then the monthly payment would nearly double on the reset date to $3,166. By any measure, that is real payment shock. Of course, the borrower might be able to refinance, but what if interest rates have increased substantially, or house prices have dropped below the value of the loan? That would put the borrower in a far more difficult position.”

It’s an interesting speech and I’d suggest that people check it out. Note the main points that Dugan is making: risky mortgages are just that, risky. This is because, as with any asset market, interest rates and prices are unpredictable in the housing market. What’s really problematic right now, as Dugan notes although he doesn't really extrapolate to the aggregate implications, is that there are so many people out there in these risky positions. And they're in these risky positions at exactly the time when those positions don't make sense (i.e. historically low interest rates and high house prices.)

And a last, unrelated, point that I’d like to reiterate. I don’t think that we’ll know when the bubble has “popped.” As a colleague of mine said: “Bubbles don’t generally pop. They almost always slowly deflate.” Think about the stock market in 1999. In hindsight, it’s of course easy to spot the peak and the decline over the next few years. But during that decline, I can recall some people claiming that the bubble had popped while others were declaring that October 1999 was a great time to pick up bargains in the tech sector (what an analogy for today's real estate market - I've got some "bargains" in the U Street area for you to buy!) Even in the stock market, which people claim has prices that are so much more adjustable and informative than real estate, I don’t think that anyone really knew that it was over until, say, late 2000 at the earliest (and the bottom? we can certainly recognize it now, but who knew back then.)

Maybe it's time we all started calling people out on their overpriced listings, like this guy:

http://washingtondc.craigslist.org/rfs/116248758.html

You gotta check out this link that shows the latest numbers in Northern VA.
THESE NUMBERS ARE BEAUTIFUL

http://www.nvar.com/market/marketstats/Nov05/index.html

Holy cow Winston, that's a pretty serious uptick in inventory!! It's tough to get solid data on this so it's good to get the NVAR link. For those of you who claim that "seasonality" is responsible for the slowdown in the market, I give you the following increases in inventory on the market for 11/05 vs. 11/04:
1) Fairfax Cty condos – Up 269%!!!! (1262 v. 342)
2) Fairfax Cty single family homes – Up 138% (3865 v. 1622)
4) Prince Will Cty condos – Up 318.2% !!!! (230 v. 55)
5) Prince Will Cty single family homes – Up 185% (2812 v. 986)
6) Loudon County single family homes – Up 146% (2525 v. 1025)
and the big winner
7) Loudon County condos – Up 428%!!!! (285 v. 54)
You can claim that the fall is a slow season for home sales. True, but even a seasonal correction won’t possibly account for these gargantuan increases in inventory. The condo market will blow soon if it's not already on its way. Especially if they’re speculators, like the guy that Joe’s ragging on, they won’t be able to continue their debt maintenance for long. Then, there go the condo prices. Cut those prices and pray. And single family homes, which are substitutes, albeit imperfect ones, for condos, will follow. If you gotta sell to move or unload your debt, you gotta sell. Unless you fell comfortable paying $'000’s month after month after month.

BTW Bubba, if I’m not mistaken, the tech stock bust started in 2000. I think you’re about a year off in your dates. But point made nonetheless. (And all this bump up in inventory is happening with only a minor increase in interest rates so that the OCC guy's concern about crazy loans - and the future defaults due to them - haven't even become relevant yet. That's how the bubble bursts.)

Quoted from 12/07/05 article "Investors Retreat From Housing Market" of WSJ

"......In markets such as Las Vegas, Miami, Phoenix, San Diego and Washington, D.C., where investor activity had been heated, fewer people are competing to buy properties as an investment, real-estate brokers and housing analysts say. Some investor-owned properties are returning to the market for sale. With the pace of price appreciation slowing, some investors who were betting on quick profits are instead being squeezed.......

A softening in investor demand is likely to accentuate any slowdown in home sales, says David Berson, chief economist at mortgage giant Fannie Mae. He estimates that home sales will fall 10.4% over the next two years, largely because of a decline in investor and second-home purchases. Mr. Berson also figures that without the recent surge in these purchases, home sales would have been 7.3% lower in each of the past two years. That estimate assumes that investment properties and second homes account for 10% of total sales.......

Cancellation rates for condo units are also rising in many other markets, including Florida and metropolitan Washington, according to the National Association of Home Builders. "It's largely because of investors" pulling back, says NAHB staff vice president for research Gopal Ahluwalia. "A whole lot of condo units are sitting empty." Whether a buyer can easily get out of a deal can depend on a number of factors, including the builder's policies and the terms of the buyer's contract.......

Some investors are already getting pinched. Barry Fiske, an account manager, teamed up with a friend to buy a bungalow in the oceanside town of Hingham, Mass. The pair tore down the house and put up a three-story Victorian home that went on the market in October, priced at $889,000. After three price cuts, the asking price is now $799,000 and the opportunities to profit are "marginal," Mr. Fiske says. "We probably spent more than we originally intended to," he adds.

Robert Cayouette, a computer programmer, has put down deposits on 10 homes under construction in Florida, figuring he'd quickly flip them and make a profit of about $30,000 apiece. The first of those purchases, a three-bedroom home in Port St. Lucie, is expected to close this month. But Mr. Cayouette has learned he'll be lucky if the house fetches $285,000, or $10,000 less than his original purchase price. "I wouldn't be able to flip it if I wanted to," says Mr. Cayouette.

With home prices growing faster than rental rates, investors who decide to rent out their properties rather than sell them often can't make enough to cover mortgage payments, taxes and other costs. Arash Yazdi, an information technology consultant, decided to rent out his $465,000 townhouse in Merrifield, Va., this fall after a deal to sell the home fell through. He figures he's losing about $1,000 a month."

I just moved to D.C. metro about 3 months ago. My spouse will soon join me next month. Almost every aspect of our profile makes us as well qualified buyers: young couple, one in government and one in Hi-tech, combined salary >= 180K, plan to have kids soon, etc. But after researching the market for a while, we decided to stay put and not rush into buying anytime soon. I don't know how representative we are in the area, but at least all my friends who are as similar situation as us have no intention to jump into the market for at least the next one year or two. Another interesting observation: among all the people I talked with regarding the housing bubble, almost everyone owns a property denies there is any bubble but everyone else who doesn’t own a property believes there is one. Both sides are biased in their own way, we’ll have to wait and see.

Oddly, a friend of mine just had a bidding war for his condo in Arlington -- he was renting it out. Eventually he accepted an "escalation clause" offer from someone who told him he would pay $100/mo. above the next highest offer. I also see that rents on the websites we looked at when we rented our apartment in Northwest in September seem to have gone up fairly markedly (hard to tell -- maybe 5%-10%). Is there any good source of information about rent trends, or predictions as to what the situation will be when my lease ends next summer?

Check out the huge drop off in sales year over year. Let me see, supply goes up, demand goes down. From econ 101 this means prices go where?

Still thinking of a soft landing? Check this out.

http://www.boston.com/business/articles/2005/12/09/sellers_chop_asking_prices_as_housing_market_slows/

DC is following the same step now.

Here is another one. Please check out the comments too.

http://globaleconomicanalysis.blogspot.com/2005/12/rapid-shift-in-housing-psychology.html

What's gonna happen early next year will be really interesting to see.

A wealth built on selling each other houses. Krugman has a good article analyzing this sick economy.

http://www.pkarchive.org/column/081205.html

I really wonder why I read here. > I know the market is cooling, I am just tortured to think I made the wrong decision.

We'll see. My condo will be finished in March. I don't think I can get out of it unless the appraisal falls short, or I can't get financing.

littletiger, if you bought your place for the right reasons you will be ok. The right reason is needing a place to live. There is no doubt that there will be a drop in the market, it has already came down 7%(at least) in the last 3 months. If you plan on living in your place for the next 5-15 years and you really like your place then you will be ok. If you bought it just to "get in the market" or to make money in realestate then you are going to lose and lose big. I think the biggest losers are going to come from the condo market. I just dont see home prices falling by 50% or more like I think they will in the condo market.
As always the true test of housing market is the rent vs mortgage comparison. If you cant rent out your place for something close to your mortgage you are in trouble and you made a poor investment.
I rent a 2 bedroom apartment for 1500 bucks a month and can almost spit on the metro from my door. Its brand new, has garage parking. I couldn't buy a condo like my place for less then 2500 a month. I still find it interesting to read the posts in this column from people who said realestate would never fall. Is it to early to say you were all wrong?

Saying that there is no bubble based on the prior history of the DC market is just silly. Have we EVER had a market where people have seen 100% appreciation in 2-3 years? Where's the precedent for that?

It's true there are a lot of jobs here, but they don't all pay six-figures and you pretty much have to be a two attorney couple to afford a decent house as a first time buyer. My wife and I both work for the government and at any other time in history our combined incomes and strong credit would have gotten us a great first home. Right now, we would have to stretch to buy a 1000 sq ft condo. Something just isn't right and it certainly can't last.

For the time being, we are going to keep renting and saving some money until a little sanity returns to the housing market. If that doesn't happen, we are going to pack up and move to a softer market. We aren't the only ones in this situation, and if the DC area remains unaffordable for young educated couples you are going to see major consequences in both the housing and employment markets.

Sorry the link I posted earlier was not complete. Here is it again.

http://www.boston.com/business/articles/2005/12/09/sellers_chop_asking_prices_as_housing_market_slows/

What happened in Virginia?

"They ran out of stupid people."
It happens at every bubble top.

http://globaleconomicanalysis.blogspot.com/2005/12/rapid-shift-in-housing-psychology.html

This at the bottom of the article pretty much says it all.

Best comment from the link that Winston noted on 12/12 talking about the change in buyer sentiment:

Q: Why is the housing market slowing?

A: "Says insurance agent Joe Kelly over lunch downtown at the Leesburg Restaurant. 'They ran out of stupid people.'"

Perhaps a bit harsh...

Well, lets face it-people are stupid and act with sheep-like mentality. A whole country's economy (Albania) was destroyed because nearly everyone got involved in pyramid schemes in the late 1990s. The housing market in certain U.S. cities is no different. Everyone wants something for free, and the idiots speculating in real estate (or who otherwise bought really high because they feared the market would go even higher) lost.

Last year, I lost a condo on 16th Street (that I really liked) in a bidding war that started at the 375K asking price. Now, the very same condo has been lanquishing on the market for over a month, unsold at the ridiculously advertised price of 410K (for 575 SF). The broker at the open house indicated that I could probably get it for what I bid a year ago (375K), but I'm totally uninterested, given the fact that I am now much more educated about the market, and now recognize that even 375K is absurd.

I thank the current seller for having outbid me a year back. I heard Safeway is having a great sale on cat food, which he'll be eating for several years once he closes.

Saul's last sentence really made me laugh a lot :)
I guess most people here must have read the news today on the record hight trade defict of Oct. I'm almost certain the Fed will keep raising the interest rates to maybe over 5% by next summer unless the budget an trade deficits stop exploding. Sorry I need to adjust my estimate of the price drop for 2006. I would say over 20% is certain, and most probably 25-30%. Let's wait and see!

Saul illustrates the sentiment that can bring the real estate market down even in the absence of a serious uptick in something like interest rates (which would only exacerbate the problem).

On the way up, the sentiment was:
1A) "If I don't buy now, I'll be priced out of the market."
2A) "If I don't buy now, I'll miss out on all of the future price appreciation."

When things start to change, these attitudes can become:
1B) "If I wait now, I may be able to pick up a better deal later."
2B) "If I buy now, I may be stuck with a loss if I've bought at the peak of the market."

(Note that 1B and 2B respectively are basically the converse of 1A and 2A.)

Up until recently, sentiments 1A and 2A have dominated - those attitudes have led people to buy at previously crazy prices in the process taking out nutso loans. But is it that difficult to envision the sentiments in 1B and 2B arising? The past few years have conditioned us to think that 1A and 2A are preeminent. But why can't we have exactly the opposite sentiment in the market? It's just a matter of reaching the tipping point when things change and the buyers dry up. Then the opposite effect arises compared to what's happened in the last few years.

You can always sit on your house, but don't lose your job. Or get transferred. Or have a loan that starts to float at the time when the market is unattractive for sellers and interest rates are higher than when you bought and a refi is unattractive. And, hopefully, you're not making debt maintenance on a property that you're using purely for the purpose of investment.

Having only my modest means..it really blows me away to hear about people buying homes for $500K, $600K and $800K and carrying mortgages for $3K, $4K and sometimes $5K+ a month (which is my entire monthly salary). I have driven by countless new homes sites in amazement and wondered who can afford these homes? (and the hefty payments that go along with them) I have owned three homes in my lifetime. Two before I was 30 years old. The first, a condo I purchased as HUD foreclosure for $50K. I sold it for $85K three years later in the mid/late 90's. I thought this was great! I had put about $3,000 into fixing it up and everything was lovely while I lived there. I then purchased a SF home in the country (Waldorf, MD) for $115K. I Lived there and loved it (commute and all) for 7 years. Just last year I sold it for more than a 100% profit. I netted a neat $125K off that deal. I then rented/waited a year to see what the market would do as I considered moving from the area and heading south. I decided to stay in the DC area and I just recently purchased my third home. In preparing for that purchase and hearing about what people were paying for homes (new and existing)I was afraid of what I would be paying for a new home. I settled on a large, nice 3 level TH in PG County (in a desireable area, just outside the beltway) that I paid $250K for just a few months ago. Having sunk about $7,000 into it with new paint, carpet, wood flooring, cabinets and stainless appliances, I am very happy with my "New TH" Being a former Realtor, I keep up with the RE market and what homes are selling for. I noticed that in my new neighborhood, nothing is listed under $300K now and the homes are still selling in less than 30 days. There is a brand new TH community behind us still under construction with starting prices of $450K-$500K. I checked them out and my home is actually larger and better equipped (with all the new stuff than theirs), particulary my extra large bedroom sizes. I just can't see paying that kind of money for a new TH or any new home that starts at 1/2 a million dollars. Once again, I think I made another smart investment and do not think the "bubble will burst", at least for as long I plan to hold onto this property. So see, profitable gains are made on homes that don't have such huge price tags. And, there are still some out there. You just have to do some searching and be willing to leave your comfort zone for a comfortable cost of living. It truly dumbfounds me why people pay astronomical amounts for housing.

> I just dont see home prices falling by 50% or more like I think they will in the condo market.

That is silly--if one bedroom condos came down to $200,000, then people would jump back into the marked to buy, and the drop just wouldn't last that long.

I'm not saying prices won't drop, or that it won't hurt--ooooooh, it will.

But a 50% drop? Who would be selling in that market? That would constrict demand, and the cycle would come back up.

I think the naysayers that get furthest into the gloom scenario, and are waiting for all of "us" predators (how is one a predator for wanting to own real estate, and happening to only be in the position to do it when the market is hot?) to suffer are as bad as those that insist that real estate will increase forever.

> I just dont see home prices falling by 50% or more like I think they will in the condo market.

I think 50% is an extreme--no one would sell at that price. Then supply dries up. . . and that would help stabilize prices.

What I think will happen is that a lot of builders/developers will not be able to finish their projects. Unless they are carrying their costs completely, they cannot get financing without a certain number of contracts and sales at various stages. Many will stop and go into foreclosure before they can finish.

Which will put bargains out there for those who haven't yet bought. . . .

I also think the glee with which people are talking about those of us who stand to lose (I did buy because it is the right time for me, and I wanted a bigger place to live). . . you're nasty and I don't know why you'd take such satisfaction in it.

We're not all investors. Or cheeseball real estate agents, or appraisers and lenders with no ethics.

This is my "advise" to the first year Georgetown law student who posted on Nov. 30: Learn how to spell advice. I'd give you the benefit of the doubt, but you did it twice. Your use of the term "real property" is impressive, though. And thanks for sharing that you are a law student at Georgetown. I bet you have a law school sticker on your car. Good luck on those exams, buddy.

"I also think the glee with which people are talking about those of us who stand to lose (I did buy because it is the right time for me, and I wanted a bigger place to live). . . you're nasty and I don't know why you'd take such satisfaction in it."

Littletiger,

Eventually people have to pay for either their stupidity or greed when they buy in a bubbled market. If you think you bought your home at the right time and want to stick with it for 15 or 20 years until the next bubble comes, just realx and enjoy your house. I wish you didn't buy it with an exotic mortgage. If you did, sorry you have to figure out how to pay for it. Of course people all want big homes and nice cars, but they need to be able to pay and need to understand the risk!
Yeah, I am one of those "naysayers". My wife and I all have decent job, but we just cannot afford a shack (with a marble counter top maybe) which also requires horrendous commute everyday. Housing prices have been up more than 100%, some area maybe more than 200%, within just 4 years! This is why I'm so sure than the price drop will be more than 50%. Why? Look at your pay checks, and calculate how much they grew in the last 4 years.
BTW I just want to let you know, there's another way to get a piece of roof over your head - It's called renting. Good luck and stay away from this blog if possible.

I moved away from the DC area in June. My intent was to move back to the DC area and buy a Metro-accessible condo. Before moving I signed up for e-mail updates from more than a dozen condo complexes around the DC area. Recently I received an e-mail from a DC condo offering me “reduced prices” in return for occupancy “this year”. I’ve also received an e-mail from a Northern Virginia condo complex with has offered me “free upgrades worth $15,000” just weeks after their initial e-mail announcing the units had gone on sale. Since then I have twice received e-mail from them offering me “a free 42 inch plasma TV or a $3000 gift certificate” to a national electronics store if I sign a contract “this weekend”. This month I received an e-mail offering me $15,000 in free upgrades, a $3000 gift certificate AND $1000 discount on my closing costs if I sign a contract before the end of the year. So, if the real estate market isn’t cooling, then why do these condo complexes need to sweeten the deal to get me to buy? What’s next? No payments until 2009? If you don't think builders are getting ahead of demand just take a walk around the Clarendon Metro Stop: five condo complexes in various stages of construction all within a quarter mile of each other. I still want to return to DC but I won’t buy any property for years.

I saw an interview with a real estate analyst (sorry, didn't catch his name) on CNBC either December 1st or 2nd. Here are a few stats he mentioned…
* 75% of homebuyers with option ARMs are currently making the minimum payment.
* 84% of new interest only loans were no documentation implying that when it comes time to refinance most of these borrowers won't be able to refinance because they won't qualify for a fixed-rate loan due to tightening lending standards.
* $300 billion in ARMs/IOs will convert in 2006; $1 trillion in ARMs/IOs will convert in 2007.
* The advice he gave to his 20-something year old son: save your money because there will be a lot of bargains out there in two years.

Pretty scary numbers if they're accurate.

I won't feel any glee in seeing people get burned due to stupidity or greed but I won't feel sorry for them either. Besides, if the real estate market does collapse it will hurt everyone including those of us who do not own property. Consumer spending has been fueled by the "housing ATM". People employed in real estate, financials and construction will lose their jobs. And what happens when state and local govts collect less money in property taxes as home prices decrease?

Personally, I think we'll see a significant decrease in prices (esp. condos) but over a protracted period of time because the number of "exotic" loans has increased each of the past 5 years. As the loans convert the number of people who find themselves in trouble will increase each year.

Back to the job search!

> I just dont see home prices falling by 50% or more like I think they will in the condo market.

>That is silly--if one bedroom condos came down to $200,000, then people would jump back into the marked to buy, and the drop just wouldn't last that long.

>But a 50% drop? Who would be selling in that market? That would constrict demand, and the cycle would come back up.

Littletiger, I admire your optimism. But if 1BR condos fall to $200K, who's to say that they won't fall more? Just think, you're sitting there looking at a $XXX K condo which has fallen XX% in price over the last year. Is it a bargain? Or could you be passing up the possibility of getting a condo for less when prices fall further? And at the same time, if you buy now, you lose when prices fall? (The exact same dilemma faced those looking to buy Cisco back in the early part of the decade.) And what if you're sitting on that property as an "investment"? Do you have to sell or do you look to rent it at something near or below your monthly payment? Especially if your wacko loan then starts bouncing your payment around (and, unfortunately, up, up, up.)

Nothing made sense on the run-up in real estate prices around here so I can't see why people will be so reasonable that they won't panic (as sellers) or drop out of the market (as buyers) on the way back down. Can you sit on your property long enough and make the necessary payments? Then you can ride it out. How about those who own places in U St/Logan Circle/etc. who can't?

Housing prices projections for 2006...

http://money.cnn.com/pf/features/lists/re_growth_forecast/

Check out entries 70 and 84 in the table.

For Littletiger and the rest:

What seems to be poorly understood here is the impact that market psychology can have on prices. When they start to fall, and everyone knows it, fear prevents buyers from stepping in. Conventional wisdom that real estate is "a really bad investment" can have a debilitating effect on the market. DC has been through that in the past.

There are other issues as well. DC, New York and other cities suffered in the early '90's through mortgage defaults. This is common when more is owed on a property than it is worth in a given market environment. People just walk away...

Banks respond by selling foreclosed property at discount rates to get the properties off their books. That hammers "comparable sales," used by other banks to make new mortgage loans.

I don't want to be Mr. Doom and Gloom, but don't expect hoards of people to "jump in" and stabilize falling prices. Historically, the very opposite occurs. Fear and despair feed the downward cycle.

And BTW, it usually takes years. There are not going to be any Buy-One-Get-One-Free house sales in Cleveland Park next spring.

Why can irrational behavior only exist on the way up? Markets never travel in a steady line and always over and undershoot (usually by the opposite degree of the previous swing).

Re Nick

"Housing prices projections for 2006...

http://money.cnn.com/pf/features/lists/re_growth_forecast/

Check out entries 70 and 84 in the table."

Who cares what the analysts are saying? DC was even predicted to add 1.6 million new jobs by 2030 and was considered to have the best economy on the surface of the earth!

Those analyst really need to care about their own mental health. They'd be slapped on their face by reality not just once.

I'm locked in unless I want to forfeit my deposit--I'm not doing that on a bet that I may not win. If the market doesn't crash, even just stabilizes this year, I'm out that money for no reason.

We'll see. Later all, I need to stop worrying about this. Till later, same bat channel, same bat time.

I have to say, with some regret, that the bears have taken over this string. Loud people like bubba, doesitmatter, and winston (and myself) have effectively shouted down everyone who tries to defend real estate prices in the DC area. Initially, this string started with posts that attempted to rationalize the high prices. As time has gone on, proponents of the high prices have become less and less prevalent to the point where almost all posts are about how the market is crashing.

Partly this reflects the logic of the arguments against the high prices. Posts throughout this string have punctured almost every argument for why a crappy house in Arlington or condo in U St., that almost everyone agrees is crappy, could sell for $750K. While noting that if you bought that house/condo with a crazy loan and/or for investment purposes, you could be in trouble when/if interest rates rise.

But the verocity of the bubble posts also reflects the amount of money at stake and personal experience/bias. Just as the real estate market bulls are biased by the fact that they currently own or just bought homes, the bears are ticked off about the absurd nature of the current market for a variety of reasons. I'd like to buy a house in this area and I make enough money to do so (albeit with a loan that might be a bit crazy if I wasn't willing to liquidate my other assets), but I can't stand the fact that people that I consider to be basically stupid (sorry) are making prices so outrageous. Who the heck is buying these places? What are they thinking? Every week, I can pinpoint condos and houses that are sold, even now as the market is "crashing", that involve completely insane prices.

So I think that this post is done. We're just going to continue yelling at one another without reaching any resolution. The best that I could propose is to second bubba's suggestion that we reconvene this post in five years to see where everythings gone. What I'd really love is to get together at a bar somewhere in DC (say, the Brickskeller or someplace in Cleveland Park) to meet the interesting people who have contributed to this debate over the last few months on both sides. Alas, I suspect that Business Week cannot allow sufficient specificity to allow such a meeting due to liability concerns. But I have loved the string.

I second Dube's comments, however I will not be here in 5 years. My wife and I have decided this area is too expensive and that our paychecks will go further in other locals. Good luck to everyone who participated in this discussion. For nothing else, it was an interesting view into market psychology.

How about we all just get together naked in a big jacuzzi tub in Mount Airy Lodge instead?

From the headline news on CNN and NPR today: huge slowdown in new home sales across the nation, especially notable in certain regions, including DC. According to the experts, it's not a question of whether the housing bubble will burst -- it has -- but whether the sound is a sudden POP! or a slower ffffffpppppppt...

http://money.cnn.com/2005/12/23/news/economy/newhomesales/index.htm?cnn=yes

> I'd like to buy a house in this area and I make enough money to do so (albeit with a loan that might be a bit crazy if I wasn't willing to liquidate my other assets), but I can't stand the fact that people that I consider to be basically stupid (sorry) are making prices so outrageous. Who the heck is buying these places? What are they thinking? Every week, I can pinpoint condos and houses that are sold, even now as the market is "crashing", that involve completely insane prices.

Anyone of those "stupid" people who bought two or three years ago--and there was loud bubble talk then, too--are laughing all the way to the bank.

I know the risk I am taking, but I couldn't afford to buy in until now. If you could before, and would be enjoying 40% appreciation if you had, is THAT why you are perhaps angry at these people?

I too am angry at speculative investors who will put down a deposit on a $400,000 efficiency, but I applaud those who bought in a couple of years ago, for their courage and luck.

This a quote from a Fortune article linked to the CNN site about whether homeowners should cash out now at the beginning of the housing price slide, or wait to see if prices will rebound in the short-term:

Edward Leamer, an economist at UCLA, applauds this kind of thinking. "If you're choosing between selling now and selling in two or three years, do it now," he says.

I have been following these comments for quite sometime now and I have learned alot. My fiancee and I are looking to purchase our first home within the next year or two (or three) but we are like many others, young professionals (I'm an MBA candidate and he is a Federal worker) and totally priced out of the market. I recently had an argument with an acquantaince about this bubble and he told me the reason for it is the median income of a single person in Washington, DC is 85k. While I do believe there is alot of money floating around this area, that figure is a load of crap since the Fed is the largest employer and they do not pay well.

At this point, I am going to continue to sit back and watch as this entire thing unfolds. More and more I see homes on the market for an extended period (with reduced price signs and other little incentives to entice buyers) and I think it's only a matter of time before this all comes crashing down.

Re Littletiger

"Anyone of those "stupid" people who bought two or three years ago--and there was loud bubble talk then, too--are laughing all the way to the bank."
___________________
You really need to understand the definition of "stupid people". It refers to those who buy with exotic mortgages wishing to make big fortune by flipping or dreaming the market will never crash, without thinking about the risk as well as their ability to pay. Unfortunately you might be one of them. Sorry if this offended you.

"I know the risk I am taking, but I couldn't afford to buy in until now. If you could before, and would be enjoying 40% appreciation if you had, is THAT why you are perhaps angry at these people?"
___________________
I truly admire your courage to buy NOW knowing the risk you're taking. Not ALL are enjoying the huge appreciation during the last few years. I know some people who don't want to sell their home had to suffer the huge increase on property tax. They also found it impossible to get a bigger or better house even with the profit made from the sell.
Yes, some speculators did make money, but there will always be a lot more "stupid" people at the end of a bubble to take all the loss. Just like investing on stocks, short term day traders always lose at the end. Unfortunately people nowadays are willing to let greed make them "stupid". This is why why we have one bubble after another.

"I too am angry at speculative investors who will put down a deposit on a $400,000 efficiency, but I applaud those who bought in a couple of years ago, for their courage and luck."
___________________
I got lost here... If you're NOT one of the speculators ( I would not use the word "investor" for those you referred), then you are REALLY stupid to buy now knowing the risk. If you're one of the speculators, then you should be angry at yourself.

Re Lois

"I recently had an argument with an acquantaince about this bubble and he told me the reason for it is the median income of a single person in Washington, DC is 85k."

I really don't know where in the world they got the 85k number for A SINGLE PERSON. You guys have one of the best job combinations, so if you're priced out, this market is doomed for a crash.

You've made a good decision as any educated consumer would do. Believe me, you'll be happy to get a house with half the price in the next 3 years.

When no one is willing to catch a falling knife, it will eventually fall and cut the feet of speculators. No sympathy for them whatsoever.

Check out this link to see the real picture of a "wealthy" DC.

http://www.census.gov/hhes/www/income/medincsizeandstate.html

Littletiger, I congratulate people who win the lottery too, but I still think that they're stupid. In the lottery, it's always easy to identify winners ex post, but does that make playing the lottery a wise thing to do? Or indicate that the winning numbers were wisely, courageously, etc. selected? I think not. Luck is certainly a component in the lottery and, it appears, in recent real estate (and dotcom) investments. But luck does not equal skill or vision and probably does not have long term staying power. (Note that I think that Dube was exactly making the point that you "call" him on, namely that his comments are biased as someone who doesn't own in the market just as your comments are as one who does own.)

Also, those "laughing all the way to the bank" are only laughing if they cash out. O/w they're sitting on a mountain of paper that isn't trivial to unload. And I think that very few people "know the risk that (they) are taking."

So long Dube and Doesitmatter (if your last posts were your respective swan songs....)

It seems they are many out there who never got into the real estate fiasco and that's cool....it was your perogative. But now I sense a bit of sour grapes at (a) those who were lucky enough, smart enough, fortunate enough, etc. to buy before the run up in prices and can now sell at a huge profit. I also find it disturbing that those that refuse to buy (again your perogative) belittle those that do buy. I think many of those on here with disparaging comments towards buyers were the same doom and gloom folks that warned us about the real estate bubble in 2003, 2004, and yes 2005. I believe there is more than a little jealousy towards those who bought earlier being displayed. Also when is selling any property you own for as much as the market will tolerate greedy? Let's see I have multiple buyers willing to pay $700,000 for my home but just so I don't appear greedy to jealous individuals I'll sell it for $500,000. Doesn't make sense to me. If you don't want to pay these prices you can: rent or move..No one is forcing you to stay in these areas. Buying a house is not some god given right. I've always viewed this run up in housing prices as pure capitalism. There are quite a bit of people out there willing to pay a premium for housing around hot metro areas and as such the price shoots out of whack. When a majority of people refuse to pay a certain amount for real estate then it will come down to a level that majority will be willing to pay. Notice the phrase "A level that majority will be willing to pay"......Not necessarily a real estate bubble burst.

Looking back at economists' analysis of the DC housing sector over the last few months, I see that the talk has clearly turned from whether there is a bubble to whether the dramatic housing downturn both in DC and nationally will result in a recession or not. This morning on NPR one analyst was describing how the slowdown in housing sales may impact the nation's economy in the coming year. It wasn't a cheery forecast, but it will be especially dire for those whose livelihoods are related to housing and worst for those who were counting on continued housing appreciation. Those days, it seems, are over... at least until the next upswing of the housing market in 6-10 years.

Robert Pollin, professor of economics at U Mass, Amherst, on his take on the likely housing bust. His ominous response:

"The U.S. housing bubble began in earnest with the collapse of the stock market bubble in 2000, as investors, including foreign investors, moved their funds into housing as opposed to stocks. What will be the effects of the end of the bubble? If housing prices fall sharply, as is possible [as opposed to a "soft landing"], it could threaten the viability of Fannie Mae and Freddie Mac. These are two of the largest financial institutions in the U.S. and the world, and they are leveraged up to their teeth in mortgages, the collateral for which will collapse right along with the decline in housing prices. Homeowners have also been borrowing against their newfound housing wealth to sustain high levels of consumption, and that, too, will decline. A real estate market collapse will not be pretty: Japan has yet to fully emerge from its own collapse of 15 years ago."

This from a recent "2006 in Review" article in a financial daily: "There are a number of imbalances in the U.S. economy today that, when they provoke the inevitable adjustment, could send the economy spiraling downward.
The most important of these is the housing bubble. Home prices have increased by about 55 percent, after adjusting for inflation, over the past eight years. This is an unprecedented departure from their long-term trend -- from the early 1950s to 1996, home prices increased at the same rate as overall inflation. The reason for the vast run-up in prices is a speculative bubble -- the same kind of frenzy that drove the stock market bubble in the late 1990s.
When the stock market bubble began to break in 2000, it caused the recession of 2001. The housing bubble has driven the economic recovery from that recession, and has been responsible for most of the job creation since 2001.The housing market is already cooling, and when the bubble bursts it is very likely to cause a recession."

little tiger said,
"I also think the glee with which people are talking about those of us who stand to lose (I did buy because it is the right time for me, and I wanted a bigger place to live). . . you're nasty and I don't know why you'd take such satisfaction in it."

Its funny how when people were rubbing the thousands of dollars they just made selling there home in the faces of people who happened to move here in 2003 is ok. Now, when we are happy that the market is tankging, and yes it is just read the listings, its not ok for us to say I told you so. If you accept praise for your good accomplishments be willing to hear the negative comments for the idiotic things you do.

I've been house-hunting in Alexandria and DC for a couple of months. When I found a place I was interested in, I asked my realtor for the comps. She gave me a couple of recently sold listings and a whole ream of comparable places that have been taken off the market (presumably because there were no offers). Some properties, I've noticed, are now listed under "rentals." I know that numbers of unsold properties are increasing, but do these stats include the properties that have been taken off the market for sale and moved to rentals or taken off the market altogether? If the sellers plan to reintroduce these properties in the spring, do they have to list the number of days the house was previously on the market and the earlier listing price, or do they start afresh? I wonder what the prediction of sales inventory will be for this spring, with so many unsold properties in the last few months, in addition to all the others that will come online. Are people predicting that this spring will be a buyers or sellers market?

The Washington Post's Real Estate Editor, Maryann Haggerty, will have a live chat on DC area real estate this Friday, January 6, 2006 at 1:00 PM.

To submit your questions or comments before or during the discussion, go to:

http://discuss.washingtonpost.com/wp-srv/zforum/content/submit_realestate_live.htm

It appears that the thread is getting mor and more emotional...

Here is some fodder for the analytical ones(who can try to prevent emotions cloud their judgements):

1. It is a given that Price have ramped up at a fast clip in past few years and are seasonally or otherwise corrected in last 2 quarters. However, that in itself does not foretell impeding collapse on Real Estate Prices.

2. There are hardly any historical instances where economy is on a sound footing and Real Estate Prices have collapsed (They do, however, deflate slowly on occasion). More and more the economy is resembling 1970-1982 period. In that period inflation was high, oil prices shot thru the roof and gold prices jumped to 800+/ounce. We are in early staages of repeat of that cycle. Mind you, even with high inflation 75-82 period resulted in DC real estate prices jumping by 80% as cost of construction went up. We might witness that same situation for next 3-4 years where slow and steady growth might continue albeit the frenzy will stop.

3.In a normal economic sense, real property should be valued such that rental rates plus expected appreciation equal to cost of capital invested and maintenance. If these two factors equate, the real property is fairly valued. I have seen 1999-2003 time period when carrying costs of proprty were less than rental rates (i.e., market was expecting negative appreciation). Those invested in real estate in that period were "smart". Now, however, unless real estate appreciates by about 3%, the rental rates can not cover the carrying costs of real property. Is 3% is an outrageous growth rate? (NOT!!!). Yes, we may see few years of slight reduction in prices but as long as 30-yr rates stay in 6-7% range, we are not in for a collapse. However, if the 30-yr rates go up to astronomical heights, the collapse scenario could come into play.

4. Are 30-year rates going to go up astronomically? (Not really!!). The Bond market signalled inverted yield curve last week-- signalling that rates may have peaked and start coming down.

5. In current economic situation, neither US Govt, nor Chinese or Indian Govt want the US real esatte bubble to deflate with a thud as that has serious implication to soundness of us economy as well as exports of these other foreign countries because US is such a big cinsumer of their exports. The low Long-tern interest rates have been financed by Chinese who were willing to by US mortgage securities at a very low return because they had no other place to invest the US Dollars they earned throuh their exports to US. As long as this macro-economic scenario holds true, US mortgage market would continue to get subsidized by the foreigners.

6. There has been very little discussion as to how immigration and impeding babyboomer retirement affect the Real Estate Prices. US has about 70 million babyboomers who would retire in next 25 years. Now, no country can survive with such a large portion of its population out of work force. There appear to be two solutions proposed for it--
I. Allow massive immigartion (increasing US population significantly) for next 2-3 decades.
http://biz.yahoo.com/ap/060104/chamber_worker_shortage.html?.v=2 talked about the forecasted shortage of labor in US.

II. Delay retirement and babyboomers take jobs and live a semi-retired life. In this scenario, babyboomers would need to hold more real estate-- one closer to their place of employment and another near vaction/retirement meccas.

Either case, babyboomer retirements are a net positive for real estate demand in next 2-3 decades. Sure, we would see minor cyclical upturn/downturn in real estate demand but we are in this longer term secular real estate demand growth trend.

7. US is not alone in having a big run-up in real estate prices. Most developed countries have experienced this runup basically because of falling long-term rates and demographic reasons. UK real estate bubble showed some signs of deflating even before US but it was a slow orderly decline and would soon start inflating again. US may follow the same.

Of course, nobody knows for sure but I am placing my bets on a 1-2 years of orderly removal of froth and then steady growth again for next 5-6 years.

Check out

bubblemeter.blogspot.com
dcbubble.blogspot.com

Jason:

"But now I sense a bit of sour grapes at (a) those who were lucky enough, smart enough, fortunate enough, etc. to buy before the run up in prices and can now sell at a huge profit"

"believe there is more than a little jealousy towards those who bought earlier being displayed. Also when is selling any property you own for as much as the market will tolerate greedy?"

It's not about being sour grapes. For a vast majority of people, there is ZERO skill involved in making tons on house appreciation. It's a function of luck: the guy who bought for 100k in 2002, sold for 250k in 2004 sure felt smart. Then he felt stupid for not holding on until 2005 when he could have sold for 350k. That shows right there it's a game of russian roulette. For those people who are buying as a place to live and not an investment, I do feel sorry that they will be smashed in the aftermath of this bubble.

I don't feel a tinge of jealousy. I do admit to feeling a little anger though. When this bubble bursts it's going to be a mess and people like myself who have tried to live cheaply, within my means, and not get sucked into the greed game that housing has become will be forced to cleanup the mess left by thousands walking away from houses, SUVs, and rental properties they cannot afford. This will wreck havoc on the economy and then my job will be in jeopardy solely because someone tried to outsmart the next guy. It will be harder to qualify for mortagages in the future, I will likely have to put down at least 20% for any future purchase. Paperwork out the wazoo. Sound farfetched? It's not. Look at Sarbanes-Oxley; a result of the crooks that ran up the stock market. We're all paying for it in productivity and paperwork just to enrichen a few greedy souls.

Re Sampat Saraf's earlier post

"Of course, nobody knows for sure but I am placing my bets on a 1-2 years of orderly removal of froth and then steady growth again for next 5-6 years."

"orderly removal of froth"? Can you explain how this orderly removal looks like?

Re: Sampat Saraf,

It seems like you failed to factor in the fact that over the short to medium term, prices are driven solely by supply and demand levels. Indeed, you should seriously test some of the assumptions buried beneath your analysis before you join the likes of the 'day-traders of 2001' or the 'interest only condo investors of 2005' or the ‘FEMA planners of the day before Katrina’.

For example:
What will happen to prices when nobody will be forced to buy out of fear of being priced out of a market forever? Or when delaying as much as possible a house purchase to try to get lower prices will be considered a prudent and safe bet? Or when getting an affordable mortgage will become a headache?

-------------------------------------------------

Federal regulators proposed guidance to make it harder to qualify for exotic home loans.

NEW YORK (CNNMoney.com) - Attention homebuyers: getting approved for those popular non-traditional mortgages may be a lot more difficult in the near future.

Federal banking regulators recently proposed guidance to mortgage providers that urges lenders to assess a borrower's ability to repay interest-only and option adjustable rate mortgages -- products that have increasingly been used by homebuyers as a means of affording homes that may otherwise be out of reach.
...
But if real estate prices slow down or soften -- due in part to the new regulation -- that could also have a negative financial impact on those consumers that already used these products to purchase a home and were banking on selling their property or refinancing it before the end of their honeymoon period, experts said.
...

Welly, welly, well. I think the issue at hand is not that the renters are jealous of the owners for either buying early, or having the means to buy now. The issue is that the current owners and speculators contributed to this mess in the first place, pricing median households out of the market. Of course, the renters are upset. The smart people who understand what ARMs and No-interest loans are all about, and have walked away from them, are being burned b/c those who don't or who are willing to take risks have contributed to the price increases.

It's easy to spend money you don't own, and the banks have been willing to hand it out. Credit Card debt is at an all time high. 70% of people who take out home equity loans to pay off credit card debt end up in the same position again 3 years later. This market is a testament to human nature.

>>

Thank you, you express it better than I could.

I am now trying to decide whether or not to walk away from my significant condo deposit. I am not a speculator, or real estate agent--I'm looking for a home.

But due to my job/career situation, I could not have bought until last summer. And here I am.

AND, to point out the folly of trying to time the market--the bubble talk has been going since 2001, and condo values have doubled since then in the neighborhoods where I was looking.

So, we're just the ones who were caught holding the ball. No more sinful than those of you who couldn't afford it (when is it a crime in America to land the well-paying job of your dreams after consulting for so long to establish your reputation?), or those who bought in a little earlier, who were also worried about the bubble but got lucky.

Taking glee in other people's simple misfortune/bad timing (and if I keep my big, beautiful condo for 10 years I will be fine) WILL come back to bite you.

Now, for those of you who plan to buy when things go down, kudos to you for your good timing.

Those of you who are sneering at the rest of us (I don't yet own, but I am one of the "maligned" who put down a deposit on a condo that was a below market price at the time, but no bargain), well, many of you STILL won't be able to afford DC housing after values fall a bit, because they won't fall far enough.

But I won't return the favor and laugh at you. It's just how things are.

DC real estate started from a very undervalued position in 1999 due to Marion Barry and company and the crime rates--but the gentrification will not reverse itself for the ones who are the most gleeful at the downturn.

My professional friends, making almost $200,000 as a couple, still had to stretch themselves to buy during the LA downturn--desirable places to live are like that.

Just some context by giving an example of what happened to my property during both DC bubbles (the late 80's bubble and the current one). The unit was built in the late 80's condo craze and went for the mid 130's. Two bed, two bath, close to metro, off street parking. It was sold in the early-mid 90s (the burst) for 117. I bought it in 98 for 110. The seller did a FSBO to avoid selling agent fee. He gave me 2% toward my closing. He owed 97k on the mortgage. He was happy to get rid of the unit, stop putting up with renters and walk away with a few thousand due to the FSBO. I barely qualified for the FHA loan because of he high number of renters. I put 3% down. The brother of the current skins owner was a big investor in the complex, with 10 units. In a decade the unit lost 25k in value or b/t 15-20%. I lived in it from 98-2004. At about 2000 many other owners starting being liberated from their units, selling them as is in the 140k range and loving it. Then in 2002 they cracked the 200k mark. In 2003 they cracked the 250k barrier. In the summer of 04 one hit 275k. I sold in the fall of 04 as part of my relocation for a new job out of town and I got 295k. The buyer did an 80-20 split loan finance arrangement and borrowed from his 401k to cover closing costs. His monly payment was a little over 2k not including the condo fee. Mine was about 1300 and included the condo fee. I gave him nothing. He waived all contingencies but appraisal. In the spring of 05 they went for 340-350k. They still list for this amount but are not moving now. If this is the beginning of a slide like in the 90's then my place would experience a drop of upto 70k. But the prior bubble had only fixed mortgage products. I do not know how this would affect the current potential bubble burst, but I suspect it could deepen and/or accelerate the the burst rent coveage of the mortagage payment would be more problematic. I am not doing jumping for joy at my new job and I might be back in DC sooner than I anticipated. But I would not buy, I would rent so I could wait and see how this all plays out. All of these exotic products enter their increased payment zones. The large number units in the pipeline will be delivered and BRAC will be underway shipping jobs to Meade/Aberdeen and Belvoir. Also all the excessive DOD spending will be abating as we realize we can no longer sustain this level of military spending. This will translate into fewer gov't contractor jobs and DOD are usually the most generous. Metro DC is a very vibrant area, but it cannot defy the laws of economics. Right now no one should buy unless they can handle the downside potential and/or definitely will be employed in metro DC for a decade. Otherwise you are opening yourself up to a life long crippling financial threat/potential. Because of the much higher prices and the exotic products that may exacerbate the burst the magnitude of the harm will be larger and wages have not increased to offset this greater magnitude. Good luck in whatever decision you make, but think it all through carefully before you act. Its a good time to be conservative.

Joe

FYI, the skins owner's brother sold all of his.

“If one bedroom condos came down to $200,000, then people would jump back into the marked to buy, and the drop just wouldn't last that long”

Here are the people who will be buying condos at $200,000 but they won’t be bidding the prices up. They’ll be buying a their price… http://www.msnbc.msn.com/id/8132760/

Housing prices can take a very long time to recover from a crash… here’s an example…
"Oil patch cities, suffered even sharper declines. In Oklahoma City prices plummeted 26 percent from 1983 to 1988. It took 15 years for prices there to return to nominal 1983 levels. Houston home prices fell 22 percent from $111,000 to $86,800, and also took 15 years to rebound. Counting inflation, the average Houston home, which cost just $159,700 in 2004, is actually worth less now than it was 22 years ago. When, adjusted for inflation, a home cost about $219,000 in 1983. In Oklahoma City, the inflation-adjusted price in 1983 was $196,600. Today, it's just $135,100.”

Source: http://money.cnn.com/2005/09/19/real_estate/buying_selling/price_declines/index.htm

Here’s a link that shows a graph which depicts Robert Shiller’s analysis of the real home prices (i.e., inflation adjusted, etc.) over the last 100+ years published in the second edition of “Irrational Exuberance”. Make your own conclusions…
http://www.marginalrevolution.com/marginalrevolution/2005/08/bubbles_and_the.html

It doesn’t seem that anyone here has mentioned the following article published in The Economist this past summer. Thought those who haven’t seen it might find it interesting.
http://www.economist.com/opinion/displaystory.cfm?story_id=4079027

And a few random links that also might be interesting…

Japanese Housing Bubble Links
http://www.nytimes.com/2005/12/25/business/yourmoney/25japan.html (requires free registration)
http://moneycentral.msn.com/content/P116564.asp

Tulipmania (The Original Bubble?)
http://www.few.eur.nl/few/people/smant/m-economics/tulipmania.htm

And finally, perhaps a book worth reading (I haven’t read it… yet). Available at the online bookstore of your choice.
“Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay, originally published in 1841

I feel like I am in a no win situation. I believe there is an housing bubble in many areas including DC but now because of a job transfer my family will need to sell our house in Florida and move to DC. What to do? Lose 70K + renting in the area or buy an overpriced house and lose 100K over time and write off losses. I should only be in DC 1-3 years. Any thoughts?

oops... accidently trunacated "Irrational Exuberance" link...

http://www.marginalrevolution.com/marginalrevolution/2005/08/bubbles_and_the.html

"What to do" -

You asked for thoughts, here are mine:

First, there is no such thing as a "free lunch." This applies to housing, too. If you want to put a roof over your family's head, it will cost money, which is money "lost," as you put it. Second, if you plan to be in DC for 1-3 years, it makes little economic sense, even in a "normal" housing market, to buy. Transaction costs, etc.

Right now you will find you can rent a nice house for about half the monthly carrying cost of buying one. That means if you buy, you will be "out of pocket" twice as much, every month, than if you rent. In your example, you worried about losing 100k on an overpriced house. So, the arithmetic dicates that if you buy, you will "throw away" an amount of money equal to a comparable rental, every month. When you are done doing that, you will "throw away" an additional 100K when it's time to sell. Sounds very simple to me :)

I haven't included any tax implications because they impact each of us differently. If you choose to buy, though, you will be expected to pay property taxes and insurance (if you get a bank mortgage). You will also be responsible for maintaining the house.

To be fair, you're assumption that you will lose 100K on an overpriced house is just your guess. Could be more, or less. Why take the risk for a two year stint in DC?

Re: Winston

"I really don't know where in the world they got the 85k number for A SINGLE PERSON. You guys have one of the best job combinations, so if you're priced out, this market is doomed for a crash.

You've made a good decision as any educated consumer would do. Believe me, you'll be happy to get a house with half the price in the next 3 years."

We do have one of the best job combinations and though we could possibly handle a 350k mortgage, I simply think its financially irresponsible (and even more irresponsible to get a I/O ARM loan). We talk about having a family and I often wonder how people will have families when they are debted up to their eyeballs. What if one person loses their income? Some people are just a few checks away from bankruptcy.

I keep pressing the rent issue on my fiance. He stands firm on NO RENTING but why should we purchase a home at say 350k, the market takes a dive and we lose equity? I know I'm not the only one who sees the idiocy in this. These lenders have done nothing but fool consumers (and the consumers are at fault as well for not educating themselves) into believing "IF YOU DONT GET IN NOW YOU WON'T EVER GET IN" and these consumers are now leveraged into oblivion. Did number crunching become a thing of the past?

Here is my thought: Rent.

That's coming from a guy (as my earlier post states) that bought at the peak of the market, stupid me. Good luck

You are correct Dr. Nick about Oklahoma in the 80's..I have the severe misfortune of being in Louisiana during those years. We bought our first "starter" home and watched in tank in value. Complete neighborhoods walked away from their house and moved to other States. I've been in DC for 4 years now & have wanted to get out of our house for the last year. Finally put it on the market for 60 days last fall & had no bites - we were 50K cheaper than the same model homes in the neighborhood. And this in fab-o Clifton, Va. So much for the "everything is Government backed & supported in DC, the Market never goes down in DC, we have all the jobs here in DC" I've known this was a crock from the get go. I'll continue to drop my price till the house sells - I won't get stuck again

You people that think renting is better than buying are the ones fueling riches for the investors. I want to thank you all personally.
dug

For some reason, the "Irrational Exubarance" link I posted (twice) keeps getting truncated. Substitute "bubbles_and_the.html" for "bubbles_and" in the previously posted link.

Here are the main issues for those like Lois who are agonizing over the rent vs. buy decision. We are currently facing the greatest bull market in the history of real estate. Almost everyone agrees that the past few years have been a "sellers market" (although that sentiment may be changing a bit.) In the first few years of the ‘00s, we all shrugged and wondered what the heck was going on. At this point, it’s clear that real estate has outpaced everything. So at this point, we’re buying really, really high. Do you really want to buy when it’s been clear that sellers have been making a killing at the expense of buyers? Buying high isn’t generally a good strategy in investing. Nor is chasing the asset class that has performed best in the recent past since asset prices tend to exhibit reversion to mean performance over the long run where average performance for real estate isn’t historically that impressive despite the last few years.

In addition, interest rates appear to be rising (esp. short-term rates like Prime or Libor tied to ARM rates once they start floating.) And rental prices are lower than appropriately adjusted purchase prices. So we’re considering a purchase when fundamentals like interest rates don’t appear too attractive?

I’d rent. And wouldn’t feel any qualms about doing so.

From the latest (3rd qtr) Housing Market Analysis conducted by National City Corp, a financial holding company, regarding over- and under-valued real estate markets. The DC metro area is in the upper percentile of over-valued markets, at almost 40%:

See: http://money.cnn.com/2005/12/29/real_estate/buying_selling/handicapping_housing_markets/index.htm

"You've made a good decision as any educated consumer would do. Believe me, you'll be happy to get a house with half the price in the next 3 years."

The only way you're going to get a house for "half the price in the next 3 years" is if you move to Kansas. Most of this "bubble" talk does not originate from people with reasonable and rationale explanations for a market correction, but rather from people who are hoping there will be a crash so they can jump in and pick up the pieces. Well, good luck to you. People who sold last Spring had no clue they were selling at or near the top of the market until 8 months later. Just like the people who bought in hot spots like Adams Morgan 10 years ago or Logan Circle 5 years ago did not know they were buying at the bottom of the market until years after the fact. My prediction - even if there is a major decline in home prices (which very few economists are predicting) most of the bargain shoppers will miss it because they will be too busy obssessing over whether they are really buying at the true bottom or whether they should wait for a further bottoming out. By the time they decide to buy, prices will be back out of reach for them. This is the same thinking that kept them out of the market a few years ago when they were obsessing about not buying at the top of the market.

To Stewart:

"My prediction - even if there is a major decline in home prices (which very few economists are predicting) most of the bargain shoppers will miss it because they will be too busy obssessing over whether they are really buying at the true bottom or whether they should wait for a further bottoming out. By the time they decide to buy, prices will be back out of reach for them."

Let me tell you this, most of people I know are not bargain shoppers. The only reason we don't buy now is not that we are waiting for bargains but we are margined out of the market. With so many people around me making more than 75K/year can't afford a decent place in a nice area to live, I don't know who are buying right now. I am no economist, but there gonna be something not right here.

Here’s my situation. I bought a place in late 2002 in Arlington. But now I have to move out of the country in March and my fiancee and I want to sell since we don’t know if we’ll come back to DC or will want a bigger house when we return in a couple years and we don't want to deal with renting our place out. Things have gone up a lot since I bought so I’ll do fine in any case, but it’s getting pretty stressful to sell a house now.

We talked to an agent who said that “the market had changed.” He advised us to hold off putting our house on the market right now since it’s generally such a slow time of year and some properties are taking a long time to sell right now. He also said that he would dig around more to see what was going on in the market since he’s worried that lots of people are taking their houses off the market or holding them off to wait until the “hot” spring season. But, he said, if everyone plays that same game, then tons of properties will end up on the market in the spring at around the same time. If that’s the case, he said that we may want to stick our house on the market now or sometime soon to avoid such a glut.

Like I said, I’ll do fine in any case unless the market completely collapses which I don’t see happening. But trying to “time” something like this seems to be pretty unappealing (even though I think that my agent is at least thinking things through.) Does anyone else know about whether people who are holding properties that they want to unload are waiting out the slow season for the spring? I can see how many houses are on the market right now, but how many have been taken off the market without being sold to avoid long DOM (days on market)? And how many people are waiting to list their places until things pick up (if they do)?

Stew, you’re exactly right in your last comment – it’ really hard to know what will be the hot investment at any particular point in time. And it’s similarly hard to identify crashes in some asset market.

That’s why, over the long run, the best strategy is to diversify. Don’t buy a house that stretches your finances any more than has generally been thought to be reasonable. And invest most of the rest in some mix of low fee stock and bond index funds and money market mutual funds (while being sure to max out your 401k.) The allocation across those asset classes will be guided by your tolerance for risk. The key idea behind diversification is that you’re not putting your eggs in one basket to wait to sell high or buy low. Instead, some downs will be balanced by some ups within your portfolio so you’ll generally end up doing better than if you put everything in one asset class and wait to hit the jackpot (or not.) All of the empirical evidence indicates that a portfolio of low cost stock index funds along with bond and money market funds to alleviate volatility will beat active or focused investment strategies in the long run. Think about it – twenty years from now, all of these run-ups and crashes will balance out. Tech stocks in the late ‘90s, real estate in the ‘00s, energy stocks in ‘05, what’s next? What will do best overall? If you’re lucky and buy tech stocks in 1995, sell them in 2000, invest in real estate in 2000 and sell in 2005, then buy energy stocks six months ago and sell now, you can do great. But who has that asset-picking ability? Believe me, few people on Wall Street. Based on all historical evidence which speaks directly to this asset-picking ability, low cost stock index funds, bond index funds and money market funds allocated to suit your risk aversion will beat everything else over the long-run. (That’s what the data say. And I wish I was getting paid by Vanguard, but I’m not.)

Housing is such a big investment that it’s a bit different. But if you feel uncomfortable with the financial obligation and risk that you’re incurring when buying a house, don’t buy it. And you should forecast future price appreciation based on what we’ve seen in the past. Not necessarily the past few years (since that can’t possibly continue for too long), rather how real estate has performed historically. Consider the historical fluctuations in prices as your guide. You’re not waiting for prices to crash, but you’re also not counting on things running up at 20%+/year as they have in the past few years. If you buy and you’re comfortable with your interest rate risk and debt maintenance and are looking at a long-term time horizon, you’ll be fine. If you can’t find such a situation, renting is not a sin.

Don’t try to time things or pick the big winner asset. On average, you can’t (and despite the money that Wall Street spends to convince you otherwise, they generally can’t either – which is not an argument against investing, it’s an argument against managed investing.) You may be lucky and buy a house in DC in 2000. You may be unlucky and hold out in 2000 if you don’t feel comfortable with the purchase price. But just as people who wanted to short tech stocks in 1996 were misguided when they decided that the market was overvalued since Greenspan decreed that there was “irrational exuberance”, you’d also be misguided if you were waiting to buy until the real estate market in DC crashed. You’d be similarly misguided if you’re buying a house counting on it being worth 20% more next year. Buy diversified assets with prices that you can handle financially and risk that you can stomach. Then hold them. You’ll then do fine.

By the way, Dug, I have no idea how renters are fueling riches for investors. But good luck nonetheless.

Bubba - That is very level headed advice. The only thing I would add is that, in general, when you are dealing with any investment that has been captured by the public's imagination, rah -rah, go - go, prices will "never" go down, because it's "different this time," it's OK to sell that particular asset and concentrate funds on the less populuar ones. Just my two cents.

You’re right Stewart,

Some people are hoping for a bubble to pick up the pieces after a crash. But others who have bought property are living in complete denial that a decline in housing prices is even possible. And, yes, trying to time the market is difficult at best and often ill-advised. But it never makes sense to blindly jump into the real estate market without doing a bit of research beforehand (especially considering the run-up in prices and the way in which mortgages have been financed these past several years). Perhaps few economists are predicting a real estate crash but few economists predicted the NASDAQ bubble as well. Can you site one credible economist who is predicting that residential real estate price in the Metro DC area will appreciate at the same rate over the next five years as they have over then previous five years (i.e., double in value by January 2011)? That’s what a lot of people are betting on.

I remember during the NASDAQ bubble people making statements like “I know my shares of JDSU have gone down 5% but there is no way they can drop any further.” Later I heard the same people say “I know my shares of JDSU have gone down 10% but there is NO WAY they can drop any further.” They repeated this sort of thing over and over and refused to sell their tech stocks even after losing 90% or more on their “investments”. My broker told me of a client who had over $14 million at the peak of the tech rally and rode it all the way down to $250,000 because he refused to believe that his tech stocks could drop any further. If a housing bubble does come to pass (and I believe it will), I suspect some home buyers will use the same logic with their homes. Just substitute “condo” for “shares of JDSU”.

Yup, 10 years from now we’ll all be saying “D’oh! That housing bubble/non-bubble was so obvious, why didn’t I see that?”. Nonetheless, my current plan is to rent for at least 2 more years.

Doug - I've been tracking the Northern Virginia market since October 2005 and I have noticed a lot of houses being pulled (not sold) and believe that they will be relisted in the spring. (Some have already been relisted in January and others I have noticed are listed as rentals now). The market is pretty slow now (since inventory is at the highest point in the last 3 years) but I believe it could be worse in the spring (if as you mention - all of the listings being pulled are relisted along with many investors who now want out and those planning to move). Good luck.

Dr. Nick,
I don't know that many (if any) people are entering the market with the expectation that their home is going to double in value in five years. That's probably because, as you correctly point out, no credible (or incredible) economist is predicting that kind of growth. What many economists are predicting is a cooling off (which has happened), a pullback in prices (which has happened in many areas), and much lower appreciation rates - which are actually appreciation rates in line with historic norms but that seem really low when compared to the phenomenally high rates we have seen in this area for the past five or so years. It seems to me that we might be seeing a return to the days when people bought homes for the old-fashioned reason - to live and grow in them. As opposed to buying a home with the expectation that it will be the best performing asset in your investment portfolio.
If the market does dive, there will certainly be people who will find themselves on the wrong side of the yield curve and will have to sell. But there will also be many people who won't sell because they won't have to. Homeowners who can afford to ride it out - by refinancing, renting, borrowing, whatever, - will ride it out. That's the same thing that happened the last time the market in this area went south.
If the high tech investor in your example had $14 million worth of stock in Amazon and was able to hang on to it because it wasn't the only asset in her portfolio, she'd be sitting pretty right now.

Re: Number of houses on the market in the spring -- when I was getting comps for a house I was interested in in Nov, my realtor showed me comps for 2 sales in the area and a whole pile of places that had been taken off the market, presumbably because there were no offers. I've noticed that some of those places are now listed as rentals (hint: very good candidates for low-ball offers). With the current growing unsold housing inventory, coupled with newly-built houses, new listings, and re-listings, it seems like it will be a much more favorable spring for buyers than in recent years. In addition to the all-important long-term interest rate, the factor that may send DC real estate into a spin is whether sellers decide to sell now to get what they can before the market deflates further, rather than to wait for the next upswing (historically, in 6-8 years).

I've heard that the Fed has warned about the number of risky, sub-prime loans that have been made recently. Has this translated into action or revised lending guidelines yet? I read that a phenomenal 34% of home loans in the DC area in the last year were considered "risky," one of the highest percentages in the US. Does anyone have data about the basic structure of these loans, e.g., how many of them were 5- or even 1-year ARMs?

Anecdotally, I've noticed a significant drop in asking prices for 2/1 townhouses in DC since October, e.g., 12% decrease so far (or perhaps more accurately, a significant increase in the number of 2/1 THs in my price range, e.g., $350-400K). That's my novice analysis, but I'd like to know if there is a standard definition of "decreasing prices" in real estate -- does that mean a decrease in average asking prices for similar houses, a decrease in selling prices, or something else? It seems like the topic of dropping prices might be "de rigeur" in the coming months, but I'd like to know what is the correct way to analyze it, so I know when apples are being compared to apples. Thanks.

What are the "rules" for re-listing houses that have been on the market for a while, taken off the market, then re-listed a few months later? Do they have to add the DOM of the previous listing? If they are listed with a different agent, can they reset the DOM "odometer" to zero?

Stewart - While the NAR economists expect housing to revert to normal appreciation, everyone expects that the recent price increases that have been so far above the mean will stick. This cannot be true. The economy did not have a fundamental shift that allows these prices to stick at historical rates of appreciation (1.7% after inflation) and mortgage rates (>7%). Therefore, housing must and will drop to correct to the long term trend, and some places might have to experience a 30-40% drop before it begins to appreciate (slowly). There might be a couple 'exception' locales that can make some of the increases stick, but I doubt there are many. The other alternative is for housing prices to stagnate for many years (10 years to correct at last estimate) which isn't very likely consideirng the high numbers of investors in the game.

TTG - the number that really matters is transaction prices. Asking prices are a function of someone's dream and TX is what someone is willing to pay. Up to this point, the TX price has been positive (4% in Dec IIRC), but with the trend that AK prices are dropping, it's just a matter of time until TX prices turn negative. That is when the real fun will begin. Even -1% will have a tremendous affect on the psychology of the market.

Check this site:

http://www.anotherfuckedborrower.com

It has good posts regarding those exotic loans.

I am one of those potential home buyers who has been priced out of the market (despite making over $85,000 a year).

I’m curious about several things and wonder if people would comment on any of these.

First, the prices in DC seem to be completely out of wack with the kinds of salaries which are paid here. Basically, DC is a government town and federal employees do not make the kinds of salaries which enable them to buy $500,000 condos and $800,000 houses.

That said, I have a couple of questions. Well, less questions and more along the lines of comments. I’m curious to know what others think of these issues.

I realize that there are people who are not employed by the federal government here and these people make more money as a result. But with the Abramoff scandal etc., I cannot help but assume that there will be a major crackdown on lobbyists and lobbying firms (didn’t a lobbying firm already fold? Pretty surprising as we are still very much in the early stages of the scandal). To me, this would seem to indicate that lobbyists who are paid salaries which enable them to buy more expensive places will probably see their salaries decline as lobbying firms retrench. Many may even lose their jobs over the next few years. The same will be true of many government contractors who are tightly tied to and reliant on their lobbying firms to get business.

Please note: I am not saying that lobbying or contracting will disappear completely here but that there will be a scaling down of this. And this will impact those who can afford $500,000 condos and million dollar houses. I don’t think this will occur immediately but I certainly think this will spin out over the next five years or so.

So, there will be fewer people who can actually afford DC houses as they are listed at their current prices. And some people who own here will sell as their firms close or cut back, putting more houses on the market at a time when there will be fewer buyers.

Further complicating the mix is the heavy use of exotic loans here and in other bubble areas. Like one of the other posters, I have read the another f@ borrowed blog and been stunned by the kinds of loans being given and the type of low-ball qualifications needed for these loans. Many of these borrowers have a lot of balls juggling in the air and these will unfortunately come down as interest rates rise etc.

Moreover, I have read repeated stories about the number of new condos being built in DC. As a resident here, I don’t even need the stories because everywhere I go, I see the cranes and the endless building. The situation viz a viz condos seems ready to burst soon. And that bursting will undoubtedly impact the housing market as well.

While people can always rent their properties, I wonder about that, too. I’ve rented here for four years and my rent has not only not gone up, it actually went down $40 one year. Given inflation and given the fact that, as a government town, most workers here get an annual cost of living raise (so owners could easily raise rents), that does not seem to bode well for potential landlords. There clearly is a glut of rental properties here already and this is before all those condos bought on spec are built.

I’m not one of those predicting doom and gloom but I would assume, given the tremendous run-up in prices, that housing here must drop. I can imagine them dropping 30-40% given the tremendous run-up pretty easily (in some areas, the run-up was 30-40% so why wouldn’t it drop that level?). And because I’m a pessimist (I’m an historian—a real one with a PhD---I'll admit that I'm not an economic historian but I do tend to see things in the long term and I do tend to put things in that perspective), I’d guess that the market might drop slightly more to correct itself and then recover (i.e. it will bounce slightly below where it was and then recover fairly quickly from that really low bounce to a level where it was before this bubble emerged).

I’m not waiting gleefully for the market to drop so I can pick up bargains but rather so that I can afford a house or condo here. Seven years ago, earning my salary, I could have bought a house here with money down and money to spare. Nowadays, I can’t. I find it hard to believe that I am alone in my situation. And I doubt that I am alone in waiting for a correction.

As to when we will know to buy...ummm...how about when I can afford it and when I think it's worth it? Right now, I don't think it's worth it and I can't afford it.

THIS PICTURE IS BEAUTIFUL! IT SAYS IT ALL!

http://photos1.blogger.com/blogger/1783/1012/1600/signs_007.jpg

from http://bubblemeter.blogspot.com/

Quick question, and forgive me if this topic was already covered. Does anyone have any concrete statistics for Washington DC regarding who the buyers of these highly priced properties are? How much is attributed to speculants, versus folks upsizing (based on earned equity), folks leaving the area for retirement, etc?

This would be an interesting statistic.

Thank you.

Historian - You seem to have answered all of your own questions. With respect to incomes, I think you are correct. There are not a lot of folks who can "afford" $500,000 condos or $800,000 houses. We are in an "easy money" stage with respect to mortgage lending. Folks are able to borrow huge sums at very low interest rates, with virtually no questions asked. Many will do so, expecting their property to appreciate further, which will help alleviate the mortgage payment they can't "afford." That is essentially the very definition of a bubble - buying overpriced assets with the expectation the price will go even higher.

It is very difficult to make sense of the madness we are seeing. It is equally difficult to trust your own instincts when so many disagree. Regardless of anyone's measured opinion, both arithmetic and history demonstrate that housing prices are completely out of whack.

And your rental situation belies any "housing shortage" argument to the contrary. Rents are flat (falling if inflation is considered) because there are not enough people around to fill the available housing stock. It's that simple...

One point to consider is that compared to other major metropolitan areas (Boston, NYC etc.), real estate in the DC area was grossly under-valued up until about 10 years ago. Most of the city had the reputation of being a crime-ridden slum. The seemingly ridiculous increases in value have been the effect of D.C. values catching up with the rest of the country. Think about it. In the early 90's you could buy a 3 level 5-bedroom townhouse in average condition within a few blocks of the White House for under 100K. Today that same townhouse goes for 800k. Sounds crazy until you look at the rest of the metropolitan areas. Consider a similar property in Manhattan and what it would have sold for in the early 90's versus today. YOu would not have gotten it for 100K, thats for sure. These blogs seem to be filled with mean-spirited pessimists who can't wait to say 'I told you so'. The funny thing is that these people have been waiting for the 'bubble' to burst for the past 5 yrs. Obviously the 'hot' DC market has and will continue to level off but is this the housing version of the tech bubble? Of course not. I wish someone would come up with a better catch phrase than 'housing bubble'. 'Bubble' just does not apply here.

In early December, the OECD published a preliminary draft analyzing housing prices in the OECD countries. It

http://www.oecd.org/dataoecd/41/56/35756053.pdf

concludes that real estate in the US, as a whole, is not overvalued, assuming that long-term interest rates remain at low levels. Many other OECD countries are in worse shape.

It's quite interesting. While its conclusions are complex and qualified, it does caution against use of oversimplified data such as changes in historic price levels and price to rent ratios. It has a long bibliography of academic research, which is probably worth review for anyone seriously interested.

Bradh,
The main difference between DC and New York is that there is virtually no space for building new condos in Manhattan. It would be absolutely impossible to add the amount of new construction in DC to Manhattan. Also, there are no longer any bad areas in Manhattan. That's why New York prices are and will remain much higher than DC.

Not convinced that there is an absurd overabundance of housing availabile in DC? Why not take a leisurely stroll down 14th Street in Logan to see building after building after building being put up and advertised for sale? Or better yet, just take a look at the multiple listing service at how long condos have been sitting on the market, and how many have been reduced. Not convinced DC is in large part a slum? Take a midnight walk with your honey four blocks down on 10th Street, and enjoy the ambiance of muggings, crack-smoking, urine and bullets. Living by the White House? Enjoy the insightful articles and restaurant reviews contained in Street Sense, the newspaper you just bought from the homeless guy near the ellipse.

Sorry that medication doesn't exist for buyer's remorse. There's always liquor and lottery tickets.

BradH - "Bubble" is the best metaphor we have in it does indeed apply in Washington, DC. You've said property here was "grossly undervalued until 10 years ago." Actually, Brad, property was grossly undervalued 10 years ago because of the economic bust that impacted much of the country in the early 90's. "It's the economy, stupid." Remember that? And the prices you're claiming, while somewhat exagerated (it wasn't quite THAT cheap), were in many cases half of what they were just a few years earlier. Many in DC lost their shirts in real estate, just as they did in NY and LA. Then, as now, the mantra was that real estate "only goes up." Nonsense. If you're saying, "it's different this time," then good luck to you.

And BTW, you could buy a rowhouse in NYC for a song in the 1970's - no one wanted them, and it wasn't uncommon for people to walk away and abandon them, because they were unsaleable.

Next time you go to the beach, watch the tide come and go. Then try to imagine this process taking place in an eight year timeframe, instead of eight hours. Get it?

John - The key point is that "AS A WHOLE, US R/E is not overvalued". So the analysis looked not only heated markets such as SF, Florida, or DC but also those places in Ohio, Indinana, and Texas, etc. If it had a more thorough research on those heated U.S. areas, it would be more interesting to see.

Bradh - "I wish someone would come up with a better catch phrase than 'housing bubble'." Actually, someone already have. Mr Greenspan used the word "froth" in one of his talks May, 2005.

Quoted from investopedia.com:
"On May 20, 2005, while addressing the Economic Club of New York, Federal Reserve chairman Alan Greenspan commented on the state of the American real estate market.

"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern", said Greenspan while describing the increasing divergence between housing prices and many fundamental valuations of the real estate market.

While he did not confirm the existence of a real estate bubble, Greenspan declared that there may be "a lot of local bubbles" in the housing market throughout the United States. As anyone who has ever had a cappuccino knows, froth is the equivalent of a lot of little bubbles. Therefore, in the real estate market, 'froth' describes the presence of many localized real estate bubbles. Although others may have referred to this phenomenon in the past, Greenspan's unique way of describing economic conditions tends to result in new terms being coined."

Drew -- You're right that the analysis looked at the US overall, not individual markets. But it did find the same phenomena occurring across the US that we see in DC -- prices well above historical levels in terms of price-to-income and price-to-rent ratios. It concluded that these, in themselves, are not necessarily problems. So you can't say that just because prices are above historic trends, there's necessarily a bubble. There might be one, indeed, but the DC market is far from the worst in terms of these ratios, either within the US or within the OECD as a whole.

-Saul G. Most of the new condos I have seen being built in DC are on sites where older buildings had to be torn down for new construction to begin. If you live in or around DC you know that there are height restrictions for buildings. You don’t see any skyscrapers in DC. So there is not as much ‘space’ as you may think. The builders can’t build ‘up’. In DC, condos always sit on the market longer than SFR’s do, even in the hottest of markets. I would imagine it is this way in any metropolitan area. A ‘house’ is more desirable than a condo. A glut in the market for condos in DC does not mean ‘housing bubble’ . I live near Logan on 13th NW and I know that half of the city is still considered a slum. The point that I am making is that since the late 60’s through the mid 90’s DC was considered the most undesirable city to live in- in the country. Only Georgetown and maybe Kalorama weren’t considered ‘bad’ areas. When a guy in Iowa thought of DC he thought of crime and a crack-smoking mayor, not ‘our nations capital’. Today the city is being revitalized and the revitalization is moving albeit slowly from NW to SE. I am not trying to say that real estate in DC is ever going to match values in NYC. I am saying that relative to the rest of the country, DC had been undervalued for years and in the past 10 years has been catching up, relatively. “Muggings, crack-smoking, urine, bullets”?? Seems like I witnessed these last time I was in mid-town Manhattan, where you will find the most valuable real estate in the world. I’m sure these could also be found in a slum that has been revitalized- ever heard of Harlem? I propose that we call this the ‘real estate tire’. The air slowly leaks out and the prices eventually go flat.

Hi Smallbean,

Perhaps a better name for the current "housing bubble" would be "credit bubble" or "finance bubble".

Drew,

Your comment about the tide reminded me of two Warren Buffet quotes I read this morning...

"It's only when the tide goes out that you learn who's been swimming naked."

"The dumbest reason in the world to buy a stock is because it's going up."

Finally, Mayor Bloomberg is not too optimistic about NYC real estate values...
http://news.yahoo.com/s/nm/20060120/us_nm/economy_newyorkcity_dc_1

Bradh:

Your argument about DC could be modified to fit into almost every metropolitan area in the country.

"____________ is being reborn. Slum areas of the city have been cleaned up and suburban sprawl will slow down once people rediscover the benefits of the urban lifestyle including the excellent restaurants & shops, short commute times, and beautiful new condominiums that are safe & convenient. The city is undervalued so jump in while prices are still affordable."

The problem with the logic that DC is undervalued is that you fail to factor in the reasons that people left in the first place, i.e. crime, schools, noise, pollution, etc. Let's not even add jobs and potential terrorism.

A guy in Iowa probably thinks St. Louis is the armpit of the country as well.

I think people are arguing different points in this topic. First, let me come out and say that places in DC may not drop as considerably, but looking at the DC metropolitan area, I think you'll see much larger declines.

While I understand eople's reasoning that "DC area housing was undervalued," there are many reasons why the market could drop considerably as well. For modest townhouses 45 minutes outside of the city, they're selling for well over 400k. That's a little ridiculous. Condos in manassas are selling for 400k+.

It's been restated many times before, but the easy lending provided by banks and low interest rates fueled the housing boom. If you look at any investments they never spike and then level off immediately. They drop after their spike and then level off. Considering that many speculators will lose their shirts w/ expectations of prices to keep climbing, they will help the decline go further than it should have.

I am not cynical and angry towards people who made some $ during this boom. I say good for them. I merely want prices to go back to sane levels in a few yrs when I'm ready to buy. With builders still churning out more property in the next 3 yrs, the market should come down a reasonable amount in the suburbs. With ~50k new condos appearing in the next 3 yrs, I can't imagine the prices not dropping. People are forgetting econ101, supply and demand.

after reading all of your comments, i wonder if my son's recent purchase of a coop in dupont will be a mistake. he is making 49k. the condo costs 185k. he is financing with a intereset only arm.
is this a mistake?
it seemd logical that this was better than a rent payment of 1200 a month.
what about the tax breaks, etc?
there is only so much property in the district. most young people want to use the public transportation and be close to work.
what are opinons????
thanks

centex is offering 100K in incentives! this weekend. what does that mean?

Today's Washington Post has this report on the DC market.

"Real estate groups in the Washington area have reported declines to varying degrees. The Northern Virginia Association of Realtors, for example, said December sales were down about 24 percent from December 2004 in an area that includes Alexandria, Arlington and Fairfax counties. In Loudoun and Prince William counties, sales were down roughly 14 percent. Prince George's County sales fell about 5 percent."

"The 5.7 percent drop in the sale of existing houses, townhouses and condos to an annual pace of 6.6 million units (nationwide) was steeper than many analysts had predicted and was the first time since March that it had fallen below 7 million. Peter Morici, an economist and business professor at the University of Maryland, had predicted the December sales figure would be 6.9 million units."

"'Wow,' he said when he was told of the 6.6 million figure. 'Mortgage rates dipped a little in December, so I thought we were going to get a little bit of help from that. The housing bubble is pretty much over. We are in for an adjustment. The question is not will prices fall, because they have been falling, but how much prices will fall.'"

"Candy Clanton, an associate broker in Fairfax, has seen just how much the landscape has changed over the past several months. She listed a four-bedroom house in Woodbridge, with new siding, windows and driveway as well as a renovated kitchen, for just under $350,000. It was among the least expensive in the neighborhood, Clanton said, but last week, after three months, her client took it off the market. 'I think the buyers who do have money..are all waiting to see what is going on,' she said. 'My phones are not ringing and my houses are not selling.'"

"In a report yesterday, Goldman Sachs Group Inc. said the December figures suggest that 'housing market conditions are deteriorating rapidly.' The $7,000 drop in median home price from October to December, Goldman Sachs said, is the largest two-month drop in prices in years and must be taken seriously as a 'potential sign of a sharper-than-expected weakening in the U.S. housing market.'"

bradh,

I don't think most people are denying that DC area real estate was undervalued in recent history. It appreciated and got up to where it should have been but because of the numerous factors mentioned 100x before in here the values kept going up and appreciating quicker until the "bubble" happened. Basically it was undervalue, caught up to where it should have been and then went up another 75%. Noone is saying that every gain in the last decade is going to be wiped out but a percentage definitely will be in the coming years

Sorry if this was discussed before, but I couldn't find it in the thread. I know you're not supposed to try to time the market, but I can't help trying as I see repeated price reductions for the same houses over the past month.

Has anyone ever found a formula or a tool that would graph delta interest vs. delta price? I'm trying to calculate at what point would price depreciation exactly counterbalance a rise in interest rates (for a traditional 30 year mortgage with 20% down payment)

i.e. If you buy a $500,000 mortgage at 6.25% vs. $450,000 mortgage at 7.25%, (delta 10% vs. delta 1%) is it a wash? worse? better? of course I would have to account for a cash difference of 20% x total price.

I think this tipping point would be a good marker for me and many others who are sitting on the fence, because I think as the fixed rates start to rise, it will continue to, although at a slow rate. I think the prices will depreciate slowly accordingly, to allow buyers to make their payments. If you remember the beginning of the bubble (and it definitely is a bubble, for those of you who hate to admit it), the rise in prices were gradual and more reasonable, when interest started to creep lower. Of course, now we have truly irrational behavior as everyone started feeding into the hype, and everyone became a real estate agent. I think their may be some panicked selling in the future just as there was panicked buying recently.

At what point would changes in one outpace the other will be the critical factor, I think, for the rational buyer/seller (if any are left?) Obviously, I'm ignoring the people who still have ARMs and interest only stuff, and I really think those people have gotten a pretty clear message and hopefully are getting out and staying out of the market by now.

Barb - Your son's coop in "Dupont," I take that to mean Dupont Circle, not Ft. Dupont, correct?

I assume this is an efficiency apartment? I lived in one in that neighborhood for years. The current asking price for those things is generaly well above 200K right now, so, it looks like he didn't do too bad.

185K is a lot, in my book, for a very small apartment. But you can't "un-ring" the bell - he's already there. The only advice I would extend is to talk him into refinancing his mortgage into a 30-year fixed, while rates are still so low. His payment will still be under $1,200 and he won't be exposed to interst rate shock. It is beyond my comprehension why anybody, when rates are at "historic lows," runs out and borrows at adjustable rates...lock it in, now!

Prices keep coming back our way which is a good thing. One thing that nobody has commented on is this. Housing prices have outpaced the common laborer. Sure, contractors and tech workers can earn 100k plus and if they get married they can combine to make 200k or close to it. But Teachers, Police officers, Fireman, construction workers, grocery store clerks, mechanics etc.. Even if you combine two of their incomes they would be hard pressed even with special financing to purchase a home here. One question I have for everyone... If you had to buy your house again today, could you afford it? My cousin lives in Silver Spring MD, and he bought his home for 184k 8 years ago. If he had to buy his same house today he could not do it because it is worth 600k. So can anyone else buy the same home they are currently in?? The bottom will have to fall out soon. I'm with the rest of the posters here who suggest that in the next year or two all of the ARM's will be converting over and a major adjustment will take place. I think this year we will still see some home sales, and prices will drop slightly, but 2007 is when the real correction will happen. Too many people in this town have taken too much risk with the loans they took. The sad part is they hurt traditional loan people like me when they take these interest only loans and bid up the value of the housing market. Me and my wife are both geeks and make a little over 150k a year, and when it comes to housing we feel poor. It is a sad day when you can be in the top 5% of all income earners and not be able to afford a single family home within 45 minutes of the city. I like seeing some of this property sit on the market for 6 - 8 months. However, I see the day when some bank is going to offer a 60 year mortgage and that will further muddy the waters. Special financing is here to stay and until a bunch of these fools get burned by it all of the housing in this area will carry an inflated price tage because some people will do anything to get into a house or a neighborhood they like even if they can't afford it. It used to be you could only get a 3 year loan on a car. Then a 4 year loan came, then a 5, and now a 6 and 7 year loan on a car.. CRAZY. Same with houses.. All of these crazy interest only loans and ARM's... It's not that far off that a 40,( www.40yearmortgage.org )50 and 60 year fixed rate will be introduced. Anyone else think this is in our near future?

Condo Price Taxes/yr Condo Fee/yr 20% down Loan amt Principal Interest Total Monthly Tax savings Payment 30 year fixed%
$500,000.00 $1,800.00 $3,720.00 $100,000.00 $400,000.00 417 $1,916.00 $2,793.00 $507.30 $2,285.70 5.75%
$450,000.00 $1,800.00 $3,720.00 $90,000.00 $360,000.00 310 $2,025.00 $2,795.00 $540.00 $2,255.00 6.75%
$400,000.00 $1,800.00 $3,720.00 $80,000.00 $300,000.00 212 $1,937.00 $2,609.00 $513.60 $2,095.40 7.75%

----------------------------------------
Copy the above dash lines and drop it in first cell on excel

Ok folks, so the fun part starts soon. The conventional wisdom is that the hot spring housing season starts after the Super Bowl (since people apparently are so caught up in the game that they can't house shop.) Currently, inventory is up substantially (and you don't even need to take a leisurely stroll down 14th St - just check out the number of lockboxes on the back of the condos at 2020 U St, it's absurd.) But a reasonable spring season could clear that out, esp. since long-term interest rates haven't really jumped all that much. On the other hand, if the inventory spikes through the roof in the next three weeks or so, then we'll know what we're dealing with.

Regardless of the position that you take on all of this, the time of reckoning is near. This will be fascinating...

Hi ThomasL,

Assuming a 30 year, fixed rate mortgage...

Principal = $500,000; Interest Rate = 6.25%
Monthly Payment = $3079
Interest paid over 30 years = $608,291

Principal = $450,000; Interest Rate = 7.25%
Monthly Payment = $3070
Interest paid over 30 years = $655,126

Pretty much a wash.

Wes:
"Your argument about DC could be modified to fit into almost every metropolitan area in the country."____________ is being reborn. Slum areas of the city have been cleaned up and suburban sprawl will slow down once people rediscover the benefits of the urban lifestyle including the excellent restaurants & shops, short commute times, and beautiful new condominiums that are safe & convenient. The city is undervalued so jump in while prices are still affordable."
And your point is?? The fact is that there is a proliferation of people moving back into the city, DC and St. Louis included. One of the reasons DC was one of the first cities to experience this was that compared to other metropolitan areas, buyers could get a lot of house for their money. What made DC an anomaly is the fact that it is the capital of the free world and 80% of the city was a slum. “crime, schools, noise, pollution, etc. Let's not even add jobs and potential terrorism” In the context of this topic, are you saying that these are the factors that will help burst this ‘bubble’ or did you mean to post under another topic? These factors are and have been constants in any major city before during and after the housing boom.

Shane- I guess my contention is with the catch-all terms “housing bubble”, “real estate bubble” etc. and the implications that these terms denote. The term ‘bubble’ aptly described the tech crash. I think that true to their sensationalistic form, however, the media has latched on to the term and applied it to the housing boom and many other issues- oil bubble, china bubble etc. It seems the media loves to throw around catch phrases and there are a lot of armchair economists and chicken littles who are all too eager to go right along with them. Are there condo flippers who stayed at the dance just a little too long and are going to get burned? Of course. Is there going to be a glut of condos in DC this spring? Probably yes. Are there people who paid too much for their McMansion in Loudon County? Sure and I think these people will be the hardest hit if and when values do adjust. Does this mean home values are going to drop 80% like the NASDAQ did in 2001? I don’t think so. The differences in real estate and stocks are obvious and too many to go into. This bubble hysteria is as bad as the bidding wars and frenzied buyers that I hear so much talk about. The people that I feel the worst for are the people who have been renting for four or five years waiting for the bubble to burst so they can grab a bargain property. And believe me, there are plenty of those people if you have read many of these bubble blogs.

Just wanted opinions on a couple of things. Does anyone have any thoughts on the differences in the future for the market for DC proper and the closer areas like Arlington, Alexandria etc., vs. the areas further away like Loudon, Prince William, Fauquier etc.? Could we see prices close in remaining fairly stable and prices further out declining greatly? I think one of the biggest factors is that DC has the 3rd worst traffic in the country and it does not look like it will get better anytime soon. Also how closely do land prices follow home prices? I am looking to possibly build a home in the next few years somewhere in these outer-lying areas that I have mentioned. Anyone know of any sites that have statistics for Land values over the past few years?

Check this out:
http://www.washingtonpost.com/wp-dyn/content/article/2006/01/30/AR2006013001286.html

According to Hak's spreadsheet numbers, your monthly mortgage payment would be still be $200 less per month if you wait until prices drop $50K (e.g. to $400K from $500K), even if the long-term interest rate goes up by 2%.

If true, the lesson would clearly be to wait for the current price "correction" to play out, despite increasing interest rates. In other words, better to pay a lower price at higher interest rates than pay a higher price at lower interest rates (as is currently the case in DC).

Thanks for all of your responses.

I guess I wasn't clear in my last message, and I must admit,it is hard to explain what I'm trying to ask. The ability to calculate it may not exist, but here is the idea.

Like in the example above, a 20% reduction in the mortgage amount (which translates from a 20% reduction in the home's price) equated to a 1% rise in interest in a traditional 30 year fixed loan. But then, what does a 25% reduction translate into? (meaning at what rise in interest does this factor wash out)

The reason I bring up this point is that a lot of realtors are saying that the reduction in home prices will be wiped out by the rise in interest rates, so you should buy now while the rates are low (they've been saying this for 2-3 years now, and started the bubble this way, really)

I think we all agree at this point that rates will rise and prices will fall, but we don't know at what pace and how much. Now if one out paces the other, you'll either get a better deal by waiting, or even be worse off than now.

I'm trying to simultaneously watch the bond market(to which the long term interest rates are tied to,I think) and real estate market.

So has anyone seen a formula such as this? Any mathematicians in this group?

Thanks

ThomasL,

Good #'s Dr. Nick. One other thing to consider is that when buying a house w/ a higher interest rate and cheaper price vs. buying a house w/ a lower interest rate and more expensive price is that you can make a larger deduction w/ the higher interest rate.

Also, if the interest rate is somewhat high when purchasing the house, you can always refinance later on at a lower rate. These are both pluses for buying a place w/ a higher interest rate, assuming your monthly payments come out to about the same.. This is an advantage to the wait and see approach. If prices drop but the interest rate goes up, you're in no worse of a position.

I agree that it is much better to buy with a higher rate at a lower price than with a lower rate at a higher price even if the mortgage payment is the same. Besides the advantage mentioned above you are in a much better position to benefit from price appreciation should interest rates drop in the future after rising. The data I've looked at supports this in that historically housing prices are inversely correlated with interest rates. I disagree with the suggestion that it is a wash unless you are using conventional financing and you are planning on owning the house for the duration of the mortgage. The risk is great if you buy at 40 year low interest rates and historically high prices as we have now and there is a possibility you might want to relocate at some point down the road. Not mention that there are other risk factors that threaten the economy more than anytime I can remember. Namely, sky high consumer debt levels, pervasive and unprecedented use of extreme mortgage financing, rising interest rates, massive and growing U.S trade and budget deficits, globalization and its effect on jobs, stagnant real wages, inflation (food, housing, medicine, education, etc), rapidly rising energy costs, the costs of the war in Iraq, negative savings rate, etc. I really can't imagine the housing market continuing to rise anymore from here. In fact the latest data seem to confirm that the peak is past us. The biggest question is whether we stagnate or prices fall and by how much. The term "bubble" is being used to describe the current state of the housing market not just by the media but by esteemed investors like Warren Buffet, John Templetion etc. and leading economists from Goldman Sachs and Merrill Lynch. Currently it is much, much cheaper to rent than buy when you factor in everything (tax benefits, maintenance, insurance, taxes, etc). If I were in the market for a house right now, I would wait until the cost of renting versus owning were more in line with its historical norm than as skewed as it is now. That would be one of my guideposts. Given that it is so much cheaper to rent than buy, and the odds are very high that the next several years prices will stagnate or fall then I think it is a no brainer to continue to rent and save and invest the difference until such time.

ThomasL - You have asked a very good question. But, I will reiterate what I have said before. Price vs. interest rates is probably not the best way to measure value. The best way, IMHO, is to measure the monthly cost of owning a home vs. the monthly cost of renting a comparable property. Rents are the best measure of supply and demand. Interest rates have essentially nothing to do with pricing this commodity (housing), which is a basic human need. We will pay whatever we must for adequate shelter. And as we all know in DC, you can get that shelter for "pennies on the dollar" if you are willing to rent for while.

Two final thoughts. Real Estate agents don't get paid unless there's a sale. Don't ever forget that when evaluating their hocus-pocus about interst rates or anything else.

And your question suggests a degree of market efficiency that is unrealistic. I will defer to Warren Buffet on the latter point, who has said, "If markets were efficient, I would be standing on a corner with a tin cup." His insight is that prices will not fall commensurate with some external variable, in this case interest rates. Rather, they will likely fall a heck of a lot more.

BradH,

Good insights to balance some of the bubble talk, but I do disagree on one point.

"The people that I feel the worst for are the people who have been renting for four or five years waiting for the bubble to burst so they can grab a bargain property"

I don't think a lot of people were waiting just to grab a bargain, i think some were simply priced out and other simply didn't buy into the theory "If I don't buy now, I'll never be able to buy in the future"

Remember it's

Rent versus Mortgage Interest + Maintenance + Property Taxes - Appreciation - Income tax deduction.

Nobody seems to think about the maintenance and taxes.

Of course, if appreciation were to continue at this crazy pace, it makes more sense to buy than rent, but I think if you got into the market of late, I think you'll lose money over the next 5-10 years. Again, no one (I hope) thinks it will plunge like Nasdaq, but I think we should expect long-term stagnation and deflation of values over 5-10 years, which starts with a market correction (not 80% of course), which we're starting to see now.

As far a refinancing when interest rates drop, there is the added factor of penalties and transaction fees which may offset the gains for 1-2 years. I had a similar situation in 2003, when interest rates dropped and I could have refinanced, but I would have lost money if I sold the house within 2 years. (I did sell the house 15 months later)

Thomas,

By my calculations a 20% drop in the initial price of the home equates to somewhere around a 2.2% rise in interest rates when you look only at the final price you pay (house price plus interest over 30 years with a fixed rate). Using the same logic I came out with a 2.9% rise in interest rates to cancel out a 25% drop in the initial house price.

You can play with the numbers within excel by doing a search in excel help for "loan calculator" and doing a quick download of their loan template.

I would like to mention the many jobs coming to Military bases Qauntico and Fort Belvoir having an affect on the Northern,Va area realestate market and how housing is much needed in the surrounding areas as well as the commercial areas improving.

Guy,

If your son got that coop in Dupont Circle, for that price, he's doing great. Efficiencies in my old building with a relatively (but not outrageously) high condo fee were going for $250,000 last summer. This location is fantastic, I walk most places, metro everywhere else, there is a flexcar on every corner.

Certainly, if he's paying the same now as he did in rent, he got a steal. Even if he's paying a little more.

Efficiencies in my building rent out for $1300, and that's with no parking. And I've been able to rent out my apartment easily, on short notice, for 2 months at a time to people doing internships or rotations at the World Bank and IMF due to the location and because I keep it clean and well-decorated.

I don't think you have anything to worry about. Sounds like he found not only a good deal, but a great investment.

Excellent points of view, but another facter that I noticed, was the current loan programs that are offered that have driven this bubble of house appreciation. I'm a loan officer and those exotic loans are getting more and more difficult to obtain, the reserve requirements are getting higher and many people dont have 6 months of PITI (principal interest tax & insurance) in reserves. The famous pick payment lose my home in the future loan are being done at the end of the term of the interest when principal kicks in, is now being used as a qualification in affording the loan instead of the interst only payment (not the 1% payment either) and to make it more difficult is the reserve requirements are getting very high. Many people that opted for this loan earlier these last 3-4 years to afford the payment are going to be devastated when they dont have that option no more. The problem that I'm starting to notice is the tangable benefit for doing a mortgage loan against what they currently have. If you've been messing around on those short term loans and got a decent rate and didnt use the cash to fix your credit, your going to lose. Unfortunatly, many of the return customers that I get after a 2/28 ARM, didnt fix there credit with that loan. This years new HUD & RESPA laws are going to kill this industries lending practices which I consider has been very loose for to long and I dont know what the statistics are on mortgage fraud, but I bet you it is much worse then what they think it is statistically. Put this altogether with rising interest rates & BOOM!, rate dont need to go up for this to happen, just tighter underwriting guidelines, which I already see this new FED chief (Ben Bernarke) is doing. I get the latest on the industry since we are the front runners of how this business is shaping, all the news is a month prior.

Peter - thank you for sharing the info. Here is an example of what's going on in the lending business:

"Reasonable" Lending practices

Meet two brothers. Let's call them George and Al.

George bought a house in August, 2000 for 80k. He has refinanced the house multiple times over many years and today holds a loan balance of $338k plus a $68k second (Total of $406k) The closest comps to his house sold for $355k on 11/2005 and $395k on 8/2005.

George also owns two other houses. One he bought in 10/2003 for $365k and has encumbered to the tune of $494k on 3/2005 despite the closest comps selling on 10/2005 for $325k and for $359k on 8/2005.

The second he bought for $856k in 3/2005 and currently has encumbered for $836k.

Now meet George's brother, Al. Al bought a house in 4/2003 for $242k. He has since encumbered that house to the tune of $251k (7/2003) with a second for 60k (2/2004) and a third for 100k (2/2005) for a total of $411k. The closest comp to his house sold for $465k on 8/2005.

Al also has many, many, many more houses.

One was bought for $250k in 10/2003. He owes $392k on it taken out in 10/2005. The closest comp sold for $260k in 9/2005. One month before Al took out his loan, a similar comp sold for more than 130k less.

Al also bought a house in 2/2004 for $494k. He has since encumbered that house to the tune of 509k (12/2004) with a second for $100k on 3/22 and a third for 35k on 9/2005 (644k total). The closest comp on this house sold for $640k on 1/2006.

Al then went on a buying spree in 2005. He bought three new houses for 606k, 700k, and 965k. The first two, he was able to buy with 100% financing. The last one he actually had to put 50k down on (5%).

So the grand total is...George is upside down to the tune of a minimum of $140k and a maximum of $225k. Al on the other hand is only over encumbered by $80k or so.

Al is currently trying to sell the house he bought for $965k in 7/2005 for 1.1 million. His agent says that he's "motivated" and "upside down on all his investments" and will need a short sale. He's had all 6 of his houses on the market within the last year and pulled the previous 5 listings after they were on the market for 90 days or more. All 5 of the previous listings would have been short sales should they have sold.

So this begs the question....How was Al able to buy three houses to the tune of $986k dollars, then take out an additional $461k in equity, be completely upside down on those three properties, yet still buy three more houses with loan amounts of 1.7 million in a four month period? Not to mention his good big brother George who has also bought three homes for a total sales price of 1.3 million, which he was able to borrow an additional $455k against, all three of which he is currently upside down also?

And yes, this is a true story from an inside whiser blower. Really begin to worry about what's going to happen next to our economy.

Our 3/2 Alexandria TH has been on the market since September. In October, we moved out of the house and offered closing help. In November, we dropped the price. In December, we dropped the listing agent. In January, we put on a new coat of paint and did other minor touch-ups, and again lowered the price (now below comps). Now there are 2 similar houses for sale on our street and I'm afraid the DOM (now 100+) will make people think that there is something fundamentally wrong with the house. It's a good house in a good neighborhood at a good price. We get a lot of foot traffic, but no serious offers. I think people are spooked about what is happening here and not realizing there are good deals. I'm concerned about more houses being put on the market in the spring and whether that may exacerbate a cooling market if buyers don't pick up the existing bargains.

Beth,

When you say the house is priced below comps - what is the date of those comps? If they were last summer or even early last fall - they are probably too high. In my personal opinion, with all of the inventory coming on in the spring (not only new inventory but the large number of houses that were pulled last fall after not selling) - there will likely be more price reductions. I think the median price this spring will be lower than last spring - although we'll see. Hopefully your realtor will know the activity in your neighborhood and can advise you. Buyer activity is supposed to pick up after the Super Bowl but as you noted - you have to balance that with the increased inventory.

In response to Beth's post: I am a decently paid 30 year old Naval officer who grew up in Arlington, VA but who has moved around alot due to my job in the last 7 years or so; basically the whole period of the crazy price run up. I finally moved home a year ago and began looking to buy a place. I found that with a traditional loan I could afford the equivalent of a very small condo, and I wasn't going to pay 200,000 plus for a very small box. This story has been told many times, and here's my point: I've been looking for over a year now, and every time I go look at a property,(many Townhouses included), I get a ridiculous answer when I ask for the price. This has happens over and over. I go in with a very high number in my head, and the owner never fails in topping that number by a couple hundred thousand. This is still happening. I understand this is all anecdotal, but I had to share my experiences. What owners think are "good deals" are still WAY out of whack with fundamental value, and I'm glad most people have realized that here in DC, and are not paying whatever is being asked.

Every week, there is at least one if not two or more new ‘for sale listings’ in my new community of 100 or so new homes in laurel MD. Back in June one guy sold for $1 million and since them all the listings are at least $200,000 overpriced and they sit on the market for 90 to 180 waiting for a greater fool. After about 3 months on the market, you start seeing the price reduction and then it is downhill from there to ‘very motivated seller’.

It’s all about GREED followed FEAR.

The winner:

Congratulation to all those who have already cashed out and are now enjoying their spoils in a cheap rent.

The runner-up:

Congratulation to all those who bought more than 3 year ago with the good old 30 or 15 year fixed mortgage with 20% down and refrained from succumbing to the nasty HELOC addiction. It will not be fun to watch your paper money (equity) disappear in the next few years, but you should be safe from the "sharks" roaming the foreclosure waters.

The looser:

Which part of ‘Stay clear unaffordable ARM or IO or pick you payment mortgage or 103% financing’ you did not understand? Oh but they told you that you will be able to refinance or sell when your rate adjusts in the future...so you too did not read the fine print about appraised value and loan value?

Bankrupted:

Condo flipper, real-estate investor, and anybody who treated equity as income

Conclusion:

March 2001 ------ will be remembered as the end of the infamous dot com bubble
March 2006 ------ will be remembered as the end of the great real estate bubble

To comment on what Beth wrote, I don't think people are scared to buy, but I think people are not scared into buying anymore. To tell you about my situation, my wife and I have been looking at homes for the past 2 months, really just to feel out the market, not intending to buy right now.

As you've said, the DOM's keep going up for the properties, and at least 8-9 properties we've seen were taken off, then relisted with a different MLS number to restart the "DOM odometer". Also, it's pretty telling when the pictures of the house in the MLS or brochure have trees with either summer or fall foliage. As far as the comps are concerned, even listing below them doesn't seem to help because they're overinflated too, and they're giving you prices from 2005. I don't even look at them now, and only monitor how long other comps are sitting on the market,and how fast they're being reduced.

I'm not describing "undesirable" places. I'm looking in McLean, Vienna, and West Falls Church, all near Tyson's Corner, which should be a relatively bullet proof area to corrections, right?

Now my real estate agent is telling me to put in offers of $600,000 on a $665K and a $680K house in this Tysons Corner area and he's telling me that these are very reasonable offers...He wrote that (pause, cough) IT'S A BUYER'S MARKET! (Haven't heard that in a couple of years, eh?)

Maybe it's a gamble, but I'm going to wait until prices hover around $500K, which I feel, should be the CORRECT market value for a 4bd, SF home in a good area in DC metro. I think that will happen in the next year or so, and I think alot of others feel the same way, and are staying out of the water. All I was worried about was how interest rates will rise and negate this, but it's not a big deal afterall as I've realized (thanks guys)

Perhaps a British bubble afterall? Have the British financed their home purchases with ARMs and IOs also?

Concatenate the following strings...

http://news.yahoo.com/news?
tmpl=story&cid=2630&ncid=2630&e
=25&u=/afp/20060204/wl_uk_afp/
britaineconomydebtbankruptcyfamily

Sorry. Had to post it this way. This blog always trunactes long strings.

Wash DC Bubble is popped. See the data here:

http://www.housedata.info/DC/

Is there a website that a non-realtor can access that lists the price paid for recently-sold houses? I've found one site that lists the prices from sales 3-4 months ago, but in a changing market like this, it's not a very accurate gauge. Similarly, is there a website where you can see what properties have been taken off the market?

MG- Washingtonpost.com in their Real Estate section has a subsection called home values and recent sales where you can type in a street address and it will give you recent sales info. Ziprealty.com is a pretty good site that gives you a little bit more info than most of the others.

MG - A good resource to check the listing is
www.ziprealty.com
It just added a new search feature of "properties with reduced prices" (eh, why suddenly add such feature?). According to my search, about 25% of D.C. metro properties have reduced prices. For some properties, the site can tell you their previous listing activities (like how long on the market, when taken off and relisted, ect), for some it can't tell. It's really a wondeful site and help me a lot to monitor the local market.

For sales about 3-4 months ago, if they are closed, you can find out the deed on your state government's record. I don't know about VA, but for MD, the webpage is
www.dat.state.md.us

Regarding Beth's comment, I concur with both Andrew and ThomasL. Even it's a "good deal" from seller's point of view, for many buyers out there, they are way overpriced. I guess potential buyers no longer feel the urge to buy and are waiting on the sidelines to see what's going to happen in the next year or two.

For us, $500K is the upper limit for a 3bd/2bt TH and it has to be in perfect condition. Anything more than that, we won't consider and still better off renting (found a 3bd/2bt TH for rent during the weekend for $1750 in a nice neighborhood and good school district). Moreover, if it really takes sometime for the market to cool down, we wouldn't mind to wait for another couple of years. By that time, we can put the money we save during the waiting years for a big down payment; therefore even the interest rate rises, we wouldn't be burdened by mortgage payments.

I moved into the Washington DC metro area about a year ago, and I have seen tremendous changes in the housing market. When I first moved here, everyone seemed to be in an idiotic buying frenzy. It didn't matter how badly they were getting ripped off or how risky the loans were, they just bought and bought. Now, these same people are gonna get burned really badly because they did not have the common sense to 'think' before acting. Does it ever make sense to pay $400,000 for a one bedroom shoebox condo? Give me a break!
Several things I have noticed since moving here that are having an impact on the housing market:

1. Many people are 'cashing out' because of the huge equity gains their houses made in the past several years. The are cashing out and renting, or they are simply moving out of the area with a nice big bank account.

2. Interest rates are rising, and will continue to rise due to the higher than expected inflation rate. All the people that stupidly took interst only loans, who could only afford the bare minimum payments, are gonna be in for a real treat when their payments increase. Esepecially when they have to start paying the principle.

3. I know many people that are simply not moving to this area because of the housing prices. Several of my friends saw the job opportunities here and were interested in making the move, but after they saw insane real estate prices they decided to stay put. (why move to DC and make $80,000 when you still can't afford a condo, when you can live someplace else, make $40,000 a year, and buy a nice single family home for $140,000.

4. The market here is being utterly saturated with Condo's!!!!

5. A great deal of the 'good' jobs in this area were created as a result of the conflicts in Iraq and Afghanistan during the past 4 years. Defense contractors have a bad habit of laying off people left and right when the work runs out.

6. Several government agencies have plans to actually leave this area to move to more secure parts of the country, such as Colorado.

In short, common sense and logic go a long way sometimes. There will be many foreclosures and bankrupcies in the moving months and years. But, people brought that upon themselves.

Also, to the guy that 'thanked renters for lining investors pockets.' I want to thank the recent buyers for taking on high risk loans, buying houses at ridiculously high prices, and then renting them at rates that wont even cover their interest payments! Thanks!

Just read this great 1984 article from New York Times, seeing such resemblance for nowaday RE brokers when they try to twist the facts.

http://query.nytimes.com/gst/fullpage.html?res=9E05E3D71538F93BA35751C1A962948260

THE DAY LOS ANGELES'S BUBBLE BURST
By BENJAMIN STEIN ; BENJAMIN STEIN'S LATEST BOOK IS ''FINANCIAL PASSAGES.''
Published: December 8, 1984

My pal Jerry P. just bought a condominium in Century City, in Beverly Hills, for 60 percent of what it sold for in 1980. Down the street from me here in the Hollywood hills, four houses have been on the market since 1981. The asking prices now are about one-third less than they were three years ago. Up and down Sunset Boulevard in West Hollywood, apartment houses that were converted to condos lie empty, boarded up, not one unit sold, in bankruptcy, with banks holding title.

The Southern California residential real estate boom began in about 1974. It was not just a boom. It was a superboom, with miserable bungalows in Santa Monica running up from $40,000 in 1974 to $400,000 by 1980. Two-story colonials in Beverly Hills went from $200,000 to $800,000 and then over a million. One-bedroom condos in Hollywood were built and sold for $100,000 - what a house in Beverly Hills had been five years before. Every day, home buyers would look at the prices and say, ''It can't go on.'' But every day, for five years, it did go on. Middle-class families were priced out of the market, and the brokers said, ''But the rich will always be able to buy.'' Ordinary rich people were squeezed out of the market in some areas, but the brokers said, ''Never mind, the music business people will buy anything.'' The music business fell into a depression in 1979, and the brokers said, ''The foreigners are buying. Compared with Paris or Teheran, real estate in Holmby Hills is a bargain.''

Everyone wanted to get in to the game, get the down payment on a house, somehow struggle with the payments for a year, then sell out and get rich quick. Inflation pushed housing prices into the stratosphere. But even when inflation stopped, brokers said, ''The prices have nothing to do with inflation. Everyone on earth wants to live in L.A. The price will go up forever here, no matter what else happens in the rest of the country.''

Then the music stopped, some afternoon in 1980. As if a spell had fallen over the city, suddenly things began to stay on the market for three months, six months, a year, two years. Buyers disappeared. Asking prices stayed high, but nothing sold.

The great Southern California real estate boom was over. Prices had gotten so high that they could no longer be justified by inflationary expectations, or the influx of foreigners, or the climate, or for any other reason.

Now, four years later, those brokers who are still in the game tell sellers to expect that their houses will be on the market for two years. Other brokers have sold their BMW's and are now working as ''financial planners'' or public-relations people, dreaming of the days when they worked for 6 percent of infinity.

ThomasL:

Is there *ever* a situation when a real estate agent would tell you, a buyer, that now is NOT the time to buy? Of course not. Six months ago they were telling buyers to buy now or risk being priced out of the market. Now they tell you to buy because the market is going down. The lesson: Don't rely on real estate agents for an objective opinion about when is a good time to buy -- they only make money when you buy, so they'll always encourage you to buy NOW, regardless of what is happening in the market.

However, I agree with your conclusion that if one can, it's probably worth waiting to see what is the velocity of the current drop: softening, correcting, sinking, or plummeting.

smallbean- Interesting article. Keep in mind though that interest rates were in the teens in 1980.

Some excerpts from an article today about the cooling markets in MA, DC, and CA. Interesting to note that MA is already seeing increased foreclosures, and one CA real estate association is now refusing to disclose housing sales stats for fear of spooking/cursing the downturn any further:

Real Estate Market Turns Chilly
ConsumerAffairs.com

There's more evidence that the once red-hot real estate market is cooling rapidly.
Lenders are getting nervous about defaults as interest rates rise, foreclosures continue to increase in overpriced markets, and some Realtors are getting into disputes over their sales figures.

Luxury home builders Toll Brothers announced that it was lowering its estimated home sales guidance for 2006, due to what it called "softening demand." The company claimed an increased backlog of home units by 22 percent as of Jan. 31st, equaling roughly $6 billion. But actual signed contracts and sales dropped by 21 percent to $1.14 billion, a 21 percent drop from the same time frame in 2005.

Many regional markets are seeing not only slowdowns in home sales, but increases in foreclosures. Two different real estate groups in Massachusetts have reported differing figures for drops in home sales in the state.

The Massachusetts Realtors' Association's year-end report claimed a 3.5 percent drop in home sales for 2005. The Warren Group, a New England-based real estate services firm, claimed that the drop was actually 7.8 percent, according to the Boston Globe.

Further, foreclosures in Massachusetts shot up by 35 percent through the end of 2005, seeing an increase from 7,003 in 2004 to 9,439 in Oct. 2005.
The explosion in foreclosures was attributed to the proliferation of "creative" borrowing options, such as no-document loans or "interest-only" adjustable-rate mortgages.

The Washington, D.C. metro area, another housing-frenzied market, has been seeing slowdowns in home sales and purchases as well. The Northern Virginia Realtors' Association reported a 24 percent decline of existing home sales in its market as compared to 2004.

The D.C. area is experiencing a "glut" of condo building and inventory, according to a Jan. 31st Washington Post report. The shift from single-family homes to condos as the ownership vehicle of choice may lead to excessive development, and more potential for the condos to go unsold or the developers to default.

All of the worry over the softening market has led at least one realtor association to stop sharing its data altogether. The Santa Barbara Realtors' Association told local reporters that it would stop providing data on new and existing home sales from its records.

This article came out on today's WSJ:

http://online.wsj.com/article_email/SB113932670993367259-lMyQjAxMDE2MzA5ODMwMjg2Wj.html

"......In the Washington, D.C., metro area, new-home inventory climbed by more than 900% to 2, 413 in the fourth quarter over the same period a year earlier, largely because of the completion of several condo projects, according to Hanley Wood."

Current inventory for D.C. metro (including VA and MD suburbs) is 17,561, comapred to 7,047 one year ago overall inventory, increased by 149.2%.

If dropping the price on your house doesn't work, you can ask for divine intervention, as this couple did (from today's article "Home Buyers Now Have the Upper Hand" about the deflating housing bubble in the previously hot market of Phoenix):

"...But the couple got caught in the abrupt market swing that has drastically increased the number of houses for sale in metropolitan Phoenix. They've reduced the price twice - it now stands at $449,000 - yet there were no takers. So they resorted to an old home-selling trick that's supposed to bring luck: burying a statue of St. Joseph upside down by the "For Sale" sign in their yard.

"The four of us, we held hands, and my wife said a prayer to St. Joseph to put us in escrow," Andre Bilyk said. "We were having an open house the next day. You gotta do what you gotta do."

That's a great quote about the St. Joseph statues thomasB!

Note to self...start digging near for sale signs to see which sellers are the most desperate!

The recent WSJ article cited by Smallbean above is very good about outlining factors affecting the US housing market right now and projections over the next few months. Of special interest is that DC ranks #1 in terms of growing inventories of unsold homes. According to the WSJ, DC leads the pile up with inventories increasing by 149.2% compared to last year. In comparison, LA and Manhattan saw increases of 88.0% and 86.9% respectively.

Capuchonomics, a "behavioral finance" weekly provides further analysis of the WSJ article and the real estate boom/bust:

http://capuchinomics.com/news/index.php?option=content&task=view&id=225&Itemid=

The facts speak for themselves. The northern VA association of realtors just released January Stats. Median sales price for January 06 for close in VA was 524k, greater northern va was 481k this compares to 552k and 525k in Dec. 05 respectively.

Additionally sales are down and inventories are up significantly. One can't say how much prices will drop; however, if I were a buyer I would wait as one will have lower prices and more choices over the next couple years.

By the time this is all over realtors are going to be ranked the least liked profession up there with used car salesmen. In my opinion that is where they belong.

Hallelujah! Finally January numbers are coming out from NVAR. You gotta check out this link below. BTW, this winter is the warmerest on record, where the hell did the thirsty buyers go??? Cheer leaders, you said strong demand, solid employment growth, zone limit, %@&$^!@&*$^ will keep the bubble from bursting. WHY THE HELL INVENTORY INCREASED SO MUCH???

http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100395

WELCOME TO THE WORLD OF GREAT RECESSION JR.!!!

It's a telling article when the first line says:

"Although the number of single family homes and condos sold in January was down by almost 30% when compared to 2005, the average sales price did top the 2005 January average sales price by 10.3%."

I fully expect March, April, or May will be the first months that we have negative prices from the previous years. I suspect the first line will then be:

"Although the average price of homes and condos sold in March was down by almost 5% when compared to 2005, the regional economy's underlying strength combined with relocations to this desirable area will propel these numbers to positive territory again. Expect 30% price gains in 2007." ( ha ha ha ha )

Folks

This market is gonna hold not because my gut says so. Here is the reason between 96 and 06 the fed literally doubled the printing of money. What it means is everything made in america has doubled in price or costs that much more. At the same time china has come in and everything made in china is at 1/10th price. There by people can afford these things. I know so many couples in the dc area between the two they make arnd 150k per year. Why is it a big deal for them to afford a 500k house.

Also your viewpoint is so limited to usa... check some of the other countries which have`had a decent economy the property prices are four times the prices over here salary to real estate ratio.

DC economy is good job market is stable... lots of people moving in... fewer moving out...

I dont even see the condo market crashing. Maybe a 10% in the ccondo market. It depends on how many investors are in that market.

For th and single family 06 should be the year of stabilization.
All this holds unless something really terrible happens in this area like a terror attack. Interest are not going to go thru the roof unless the real estate market goes down significantly.

So thats my opinion and let us see what happens.

Cheers

Max, you are a little bit off.
Facts:
Over the last 6 months property values have decrease 6%.
So, if you bought a 700k home last summer its only worth 650k right now. That is a real world loss of 50k if you went to sell your house. This includes single family homes.
Inventory has only gone up over the last few months. It will only get worse.

The major idea that people leave out is family life. Me and my wife to be will be make a combined 180k per year. We could easily afford a 600k house. IF WE BOTH WORKED. I dont want that, which I assume a lot of people dont. Who wants someone else raising there kids. So based on one income ~ 110k, we could afford something around 300k. I will not be raising a family in a condo... So, where does that leave me. You guessed it, I will be leaving the area when that time comes. There are alot of younger people at my work and most share the same sentiment. This is a fun place to live, but not a good place to raise a family unless you are extremely wealthy.
By the way, average income PER FAMILY in montgomery county is 80k/yr. These are the people affording 500k houses. Doomed for sure.

The rules of thumb for house buying.
1. If you cant get your mortgage payment in rent, especially for condos, its a bad investement
2. Never buy a property more then 3 times your income.

Max,

Median price for January 2006 was already down 9% as compared to July 2005 (the peak). $455,000 v. $500,000. (My personal prediction was that prices would go down 5% to 10% in 2006, 10% to 15% in 2007 and then remain stagnant for 2-4 years thereafter). If your prediction is that prices will hold - that means they would need to go up about 10% to get back to $500,000. For prices to go up, you need a spring bounce. With the current inventory levels (4-5 times as compared to this time last year), you need demand to be much higher than last year. Otherwise, the best case scenario is that prices will stay at their current level (which is already a 9% decline from the peak in 2005). We'll know in a few months if spring demand will greatly exceed last year's demand so that prices can stay level with 2005 (i.e. $500,000 median).

Max,

Was your post meant to be sarcastic? Or are you really that economically misinformed?

The fed did not literally double the printing of money in the way that you imply. Rates fluctuated and money supply did as well. Prices have not doubled. Inflation has been low throughout that 10 year period and wages have increased only modestly.

The fact that you know so many couples that make $150k is a meaningless statistic. Those couples can certainly afford a $500k house, but the average household income is well below $150k and therefore the average house price would need to be lower.

Other countries do not have 4x the ratio of the US's house price to income ratio. That would put their ratio in the double digits and that doesn't make any sense.

While the DC job market is relatively stable, the absolute levels of income simply do not support current housing costs, especially if rates continue to rise, as they are expected to. And rates have little to no correlation with whether the housing market tanks for not. In fact if the market tanks, its more likely that rates stop rising or decline to limit the impact on the overall economy.

Let's face it, the rising levels of inventory are a harbinger for things to come. Sellers (especially investors) will get desperate and they will be the ones to give as buyer continue to be priced out by the end of cheap mortgages.

As I think more and more about it, your post must have been sarcastic, because no rational person could believe what you wrote.

"I know so many couples in the dc area between the two they make arnd 150k per year. Why is it a big deal for them to afford a 500k house."

I'm one of those people make >150k per year, in my desirable area, $500k will not give me a house but a shoebox condo not enough to raise a family. I also know couple of people like us who just can't afford a nice house for their family in a desirable area, or who simply can't upsize because of high price. If all of us can't afford, I don't see the reason the price can sustain.

"Your viewpoint is so limited to usa... check some of the other countries which have had a decent economy the property prices are four times the prices over here salary to real estate ratio."

This point has been discuss a lot over the past and on several bubble blogs I read. A HOUSE is not a Global Item that can be shipped and sell in the other country, like a computer component. Each country has its own unique housing valuation and limitation on housing development, therefore comparing the value of a 1 mil house in Paris to D.C. is sort of like comparing apple to oranges.

"DC economy is good job market is stable... lots of people moving in... fewer moving out..."

My observation on the other side: I know at least two people turned down their job offer in D.C. last year simply because of the high living cost here. I also learned several government agencies are going to diversify their locations to several other states because of security concerns.

As far as stabalized price in the single family house market, I doubt it. A 5% redunction in price is quite possible for 2006. Let's wait and see.

Just an aside question. How many folks posting negative comments have a condo/townhouse/house here in the DC area ?

I think the area market will slow down a little and stay low .. My take..

Full disclosure: I own a home in the DC area.

"Delusional" defined:
http://washingtondc.craigslist.org/rfs/134143929.html

Toddi Gutner’s recent blog also on this site (“Summer Meltdown”), cites Ian Shepherdson’s ( High Frequency Economics in Valhalla, NY) projections based on current data on the decreasing volume of mortgages (i.e., fewer home purchases) from the Mortgage Bankers Association. Current mortgage volume is down 10%, with expectations that volume will continue falling at an accelerating pace. This is troubling for the DC real estate market: If potential buyers are already not buying, even at “historically low mortgage rates,” already high inventory rates in DC will continue to grow. And of course, comments today by new Fed Chairman Ben Bernanke that interest rates will continue to rise will also severely dampen “irrational exuberance” about housing. While the national real estate boom may experience a soft landing, because of the high risk exposure of the DC real estate market, we may expect a more abrupt landing here.

Thanks for the discussion above about the merits of buying a higher-price house at a lower interest rate (like now) vs. buying a lower-priced house at higher interest rates (what I expect the scenario will be very soon). After I crunched some numbers for various scenarios, I find myself cheering for Bernanke's comment today that rates will continue to rise -- it's not such a bad thing for me as long as prices come down, which they seem to be doing in the areas I'm looking. I'm glad I'm in a position to wait and see what happens for a couple of months. However, I imagine it's going to be a sleepless night for those who have ARMs...

As a condo owner and current shopper in downtown DC, I’d just like to throw in my own anecdotal info. I’ve see some one bedrooms surprisingly not move that appear to be priced well. In one instance the sellers agent was telling my agent that they expecting multiple offers (the classic accepting all bids by Tuesday). The following week, the property was still listed (and as I said before, it was one of those properties that seems priced pretty accurately for the market). Overall, it will be interesting to see if more people decide to hold and not sell since they see others aren’t getting the ask, which might keep the inventory down from explosive levels.

As Evan said himself, I too am playing the very patient waiting game. My circumstance is a little unique, as I may be leaving the area in 3-4 years (though I plan on keeping the property for a long time, so I'm only look at 30-year fixed rates). This is my personal guess, but I think as long as prices are stagnant to dropping a little, for me I think I’ll be able to rent a one bedroom condo in Dupont for about a break even cash flow in 3 years. And 20 years from now, it will help fund my retirement.

There are discrepancies in the Northern Virginia Association of Realtors data for January 06. Please check http://bubblemeter.blogspot.com/ for details.

It seems the YOY average price increase for Great Northern Virginia Area from 05 to 06 may just 9.1% instead of 15.2%, and 27% decrease in units sold instead of 10% decrease. Makes me wonder the credibility of data provided by Realtors to the public.

Folks

I am not being sarcastic nor are my facts wrong....

Each of us are brought up in different ways so we all believe in different things. Much of it is cultural some our past experiences. I have no intention of making this a flame war but want to have a decent discussion on a topic which affects us all.

Response to Bob
I understand where you are coming from. there are lot of people in the new york/bay area where kids are raised in condos. IMHO nothing wrong with it. It is your choice if you want to raise them in a single family house and if you want one of the parent raising them. You have to make those tough choices and compromises. Mind you any big city where all the jobs are the prices are more or less the same. You can move to a place like atlanta where real estate is dirt cheap as compared to here but the job scene is pathetic and salaries a lot lower.

I completely agree with your statements on investment. On the house I believe you can go atleast four times.

To dcgirl
Can you tell me where you are getting your numbers from?
Much of the prices you are referring to is 9% from some speculative prices some one had in their mind.
Inventory has gone up and it has gone down too. That is the reason I am saying it is stabilizing.

To smallbean
I never said you could ship houses arnd if you cld your house would have been dirt cheap. We all could have afforded a mansion.
You look at the big picture countries with good economics and decent job creation the prices are a lot higher than here. What is the difference between paris and dc? DC has more jobs and paris is pitiful when it comes to the economy. Yet paris the real estate is higher. Again this may not be a good example but just trying to make a point.

To Jason
I am not a economist but can you explain what this means then
http://www.dallasfed.org/data/data/m2m.tab.htm

I agree the price needs to match the average salary and it does. 400k is the average for this area. given avg salaries in the 80's we are not in disaster mode yet.
I didnt say other countries I said countries which has decent economy going right now. I didnt compare to say argentina where you can buy properties dirt cheap. So do not misquote me.

The market can go either direction and there is no sure thing. However, I think that a decrease in home prices in this area is highly unlikely.

DC area has a lot of wealth, old money and new money. The big companies and the federal government are all expanding and hiring. Also keep in mind that the income level here is extremely high - Fairfax county ranks No.2 in average household income in the nation. Yet homes here are still much more affordable as compared to Orange county CA and Fairfield county CT. So the potential for further price increase is huge. In other words, DC area homes are by no means "too expensive"..

It's just a matter of the rate of increase, not if it will increase.

Re: Jim's comment about potential sellers holding on to property because they might not be able to get their asking price -- all data indicates that this is the beginning of the normal cyclic downturn of the real estate market. The only questions are: 1) how quickly will the market drop; 2) to what level; and 3) when will we start to see the upswing? Generally, real estate ebbs and wanes in 6-8 year cycles, although some wonder if this waning period will last longer because the previous run-up was so high, fueled by risky loans, and whether it might drag the national economy down with it. Hence, those who thought they might want to sell their home in the next 2-4 years might consider an earlier sell to get out in a "softening" market, rather than try to sell in either a stagnant or completely collapsed market.

The spring season is already upon us, so we'll soon see if there are enough brave buyers to pick up the slack from inventory that has been accumulating since October, as well as buy the properties that usually come on the market in the spring (including the properties that were taken off the market because there were no buyers -- those houses aren't even included in the unsold housing inventory).

Hallelujah!!! I love these numbers, and they're a slap on the face of those cheerleaders! I've said in previous post that the rate will rise to 5% or above, and it seems very likely now. With record high double deficit, Fed has to keep raising the interest rate, otherwise China and Japan will no longer be willing to pay for those McMansions.
I cannot afford a shit box now with household income well above official median, but I will be much happier enjoying a nice house watching those ARM bidders eating cat food.

http://www.nvar.com/market/marketstats/jan06/index.html

I AM THE CANARY IN THE COALMINE!! My wife and I just moved to DC in July and make well above 250K per year (and believe me, DC income taxes really, really suck!) Before moving here, we got approved for a completely obscene mortgage. I told the lender to erase the number that he proposed and never show it to anyone else ever again. Then we looked at houses in Capitol Hill, Georgetown, and Mount Pleasant among other places. Get outbid by over 10% on a decent house that happens to cost over $850K, and you start to think that things are a bit screwed up. Happens more than once, and you start thinking that things are really screwed up. Happens when the house that you're bidding on is marginal at best, and you're convinced that something is really, really wrong. You then rent for the time being and start planning your exit strategy from the DC area.

Please don't tell me that anything about the real estate market here makes sense. I can ostensibly "afford" a heckuva lot of the houses here, but I can't imagine paying a godawful amount for a moderately nice house in a marginal location or a disgusting McMansion in Sterling with an appalling three car garage attached to its front. DC is not that nice of a place, so I'm willing to move out since I can live quite comfortably elsewhere for a fraction of the price. Manhattan prices in DC for a 1BR condo near U St? Give me a freakin' break.

Will it crash? Frankly, my dear, I don't give a damn. In the long run, everything will work itself out so that this insanity will end. In the meantime, I'll be long gone. Good night, and good luck.

Looks like we went a full circle and are back to where we started 6 months ago in July.

Six months ago:
The Washington DC housing market is not a bubble for 3 reasons: steady job supply, short supply of desirable locations, and lots of money running around. Conclusion: There is no bubble in D.C.

Now:
The Washington DC housing market will be stable for the 3 reasons: steady job supply, comparing with XXX (can be replace by NYC, SF, or LA) the RE price here is quite reasonable, and lots of money running around.
Conclusion: The RE price is not going to decrease in this area.

Since we are likely to go around another full circle, I would like to quote two comments from two previous posts.

1. "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."

2. "I am not among those who are able to speculate whether there will or will not be a sharp decline in the price of D.C. area real estate. However, having lived in this area for the past thirty years, I would like to offer my personal opinion regarding the supposed "uniqueness" of the D.C. Metro area. That supposed uniqueness purports to exempt the D.C. Metro area from all laws of economics that apply elsewhere throughout the world, including the 50 states of the United States. My opinion: no such uniqueness exists."

It would be really interesting to see what reason and conclusion will be after another 6 months.

Summary of January 2006 home sales statistics from the N. VA Association of Realtors (NVAR):

"Although the number of single family homes and condos sold in January was down by almost 30% when compared to 2005, the average sales price did top the 2005 January average sales price by 10.3%.

Active listings increased dramatically when comparing homes on the market in January 2005 versus January 2006, with a 392.5% increase.

Sales prices for the first month of 2006 in Greater Northern Virginia (including Prince William, Loudoun and Fauquier Counties) also followed an upward trend as did closer-in Northern Virginia region. The average sales price was up 15.22% from the January 2005 average of $417,395 to the January 2006 sales price average of $480,931.

Units sold were 27.9% below January 2005 levels with 3,188 units sold in January 2006. Active listings were up 330% when compared to the number of listings in January 2005."

Comment: We've all seen the evidence of the increased inventory -- but nearly 400% (no, that's not a typo, four HUNDRED percent) increase over last January??? That's astounding! What I don't understand is why home prices also increased 10% over the same time period. Did these homebuyers NOT read the news? Did they not get the memo? Do they have so much money to burn that they put in higher-than-asking price bids because that was what everyone was doing six months ago? Or is this another case of NVAR getting its numbers wrong?

Kirstin Downey of the Wash. Post did an interesting (but too short) live chat on the changing state of DC real estate today:

http://www.washingtonpost.com/wp-dyn/content/discussion/2006/02/09/DI2006020901821.html

Downey's comments are more realistic and knowledgeable than the previous chats done by the Post's Real Estate Editor Maureen Haggerty, who is clearly under instructions not to say anything negative about any aspect of DC area real estate. Downey has also written some good, short investigative pieces on the risk ARMs pose to the region's near-term future, and others. Highly recommended.

Times four,

I completely agree with you. I'm one of those young lawyers that many people on this board seem to write about -- single, making in the mid-100s. But there's no way I'm buying in this market. And most of the young lawyers I work with are not buying either -- we're too smart for it, and frankly we work too hard for our money to see over half of it go to a mortgage payment after taxes (we do corporate defense work, as do most DC lawyers -- we make good money, but we work very very long hours).

And frankly if prices don't moderate, many of us will simply go elsewhere (I gre up here, which is why I chose to come back at all). Many other legal markets pay only about 30-40% less, you work fewer hours, and you can afford a house. DC really doesn't have enough to offer to warrant this high cost of living. Really, this is not NY or SF or LA, all of which are much more desirable places.

To quote JustinWang "It's just a matter of the rate of increase, not if it will increase"

Are you a real estate agent? You sound just like the last three I've met. Good luck selling homes this spring

To K : I have been posting negative comments and I own property here (condo). I think this market is due to correct 10-20% in the next two years and languish for another 6-7. However, I bought way below what I could afford, so I don't care if I take a 20% hit on the condo and pick up a house for 15% off.

To Max : This idea of purchasing a house for 4 x your income.... When the dot.com stocks took off, remember how people started rationalizing higher P/E ratios? I think it's dangerous to modify accepted rules to justify the higher prices

Maybe this is too simplistic of an analogy, but... if I buy $500,000 of a S&P 500 index fund, but with 80% financing from a loan at 7%, with 1% maintenance fee, and tax of 1% (like real estate) per year, is that a good investment idea? Would any of you do it?

Sure you can't live in the index fund, but it will also beat the crap out of real estate returns if you look at historical averages over the past 100 years.

Therefore, I think buying a house as your primary "investment" is misguided. Unfortunately, people have somehow felt that real estate is the safest, best and only investment out there and started buying on margin, causing the "bull market"

I think the housing market in DC will correct. It is not so much because people cannot afford them (Forbes indeed shows Fairfax county has some of the highest incomes in the country), but because wealthy and smart people (which you bull marketers tout that DC has a ton of) DIVERSIFY their investments. They will not forever continue to pour all of their money into their homes.

Hey, Justin. Your post begs the question of whether homes in Orange County are priced correctly. If most commentators think that CA is completely ridiculous, does that mean that DC is only moderately ridiculous?

Think about buying a $750K house. With a 30 yr mortgage at current rates, you're looking at a payment that equals approx $70K of net, post-tax income. So given conventional wisdom about house expenses (which may be wrong, but it's interesting how often conventional wisdom happens to be right - that's how it becomes conventional wisdom), you should be making around 300K pretax. Netting out your mortgage deduction will move that pretax income to something between 200 and 300K. I can't imagine that Fairfax County is really affluent enough that a sufficient number of people make that kind of money to make a $750K house the TYPICAL house. Instead, people are either paying way too much of their income for housing, or they've chosen exotic loans which are fine when conditions are pleasant, but can become much less nice when things turn south. (And just to make everyone in DC feel better, consider housing prices in CA. People there are completely, absolutely screwed.)

Max, my numbers are from the MRIS (see www.mris.com). The 9% decline is the change in the median home price in Northern Virginia (not counting the outlying areas like Loudoun County) from July 2005 to January 2006. The median home price for January 2006 was still higher than January 2005 but if prices stay where they are currently, we will start getting YOY declines in a few months.

I am hoping that prices drop back to what they were in 2000. If this happens, some folks will lose back their paper gains. No sympathy from me - at least they own a place to live. I've been saving for several years to qualify for a traditional mortgage. I assume I could have easily gotten a mortage in the past few years, but I was not comfortable taking on so much leverage. My feelings pretty much fall in line with the 2 points that Bob made at the end of his 2/15 statement. I'll keep renting and saving as I have been. If prices don't decrease enough, I'll just take my savings and move away from the DC area.

I'll be very interested to see what happens to all those brand new condos popping up in less desirable areas in DC, compared to maybe a nicer area but poorly maintained condo (or condo building). Are investors going to hold tight (especially if they can rent and break even on costs)? I think a real challenge could be the rental market in DC in the next 3 or 4 years. With so many high-end condos on the market, investors may take hits on rents if they don't really upgrade their current residence.

JimL - No one who bought a condo in the District of Columbia over the past few years can rent it out and "break even," unless he put down a monstrously large downpayment. In that case, the "opportunity cost" of tying up the downpayment funds will be significant, but the investor could hold. We also know that over half of the mortgage originations in DC over the past year were for "interest only" loans. So, at some point in the future, all things being equal, half of the investors who are writing checks every month to "hold" their property, will be faced with even larger mortgage payments. That rents in DC have been essentially flat for the past three years, while sale prices continued to rise, suggests the supply of housing is adequate to meet demand. In other words, there is no housing shortage. Just a great big bubble that is already deflating.

I have been following this blog for about a month because my wife and I are moving back to the DC area from the Seattle area. Our time in DC is limited to only 3 years. We have a great place in the NW that has doubled in value over the last 6 years. Do we sell our home and take the capital gains expemption and invest it while we RENT in DC- or do we attempt to buy a place in DC proper or Alexandria? We are also considering keeping our house to rent and renting in DC, but we dont plan on returning to the Seattle area. Any comments are appreciated.

I was really wondering what the economy would look like without this kind of gov. spending and RE bubble, or more precisely mortgage bubble. Once lenders feel nervous about the economic prospect and tighten the rules to end the easy money, millions of american dreamers paying well over their heads to own a shit box will found them in deep trouble. Did Elaine Chao and her DOL ever tell the public how many jobs created are a result of Gov. spending on war and RE market? Once the RE bubble pops, spending will shrink, so does the job market and overall economy. This is why this RE bubble will cause far worse damage to the economy than dot com bubble.
I still remember how Greenspan talked in public about a year ago to encourage homeowners and home buyers to use ARMs, and just don't understand why the world is praising him like God. He's a clown trying to please every president he serves.
US gov. is borrowing from China and Japan like those crazy home buyers, and this nation will eventually have to pay for all its debts.

TFraz - That is a question for you and your accountant/financial planner. However, since you asked, my advice, regardless of what you do with your Seattle place, is NOT TO BUY in DC. Besides, even under normal circumstances, the "experts" recommend you rent if you know you will only stay 2 or 3 years. And circumstances are not normal, trust me. Take a look around, you'll figure it out.

TFraz: I wouldn't recommend leaving a house to rent in an area you don't live in, you'll have to pay someone to manage the rental and then it's hard to verify the true situation whenever a problem comes up. It's easy to end up with renters that won't take care of the place.

TFraz - you will want to be careful of the IRS regulations with capital gains. From the IRS website: If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. I own two homes, one here in NOVA and one in Southern VA. I will sell the one home this year because I know that I will want to sell the other one in 2-3 years and you can only take the break once every 2 years. Goodluck in whichever you decide. My opinion, it's always nice to be in your own home.

TFraz : I'd suggest whether the DC market crashes, stabilizes or goes up, I'd take the cash out and then rent. Renting the place out might be a good option if you are willing to take the headache..

ThomasL : Thanks for your disclosure ! :-)

For all others: can we have more folks letting us know if they own a place here ? I feel that ownership/non-ownership seems to have a big effect on peoples opinions..

K

What do all you experts think about land values in PG, Charles, Anne Arundel and Calvert? I've been looking for about 20 acres for a small horse farm and can't afford anything desirable. Will they drop anytime soon? Advice appreciated!!!

TFraz,

If I was moving to DC, and knew I would only be in the area for 3 years, I wouldn't even consider buying a place. Real estate prices can fluctuate greatly in the short term. I wouldn't risk a short-term 10-20% fall in price when I could rent "risk-free" over the same period.

Looks like those "doomsday, gonna watch those evil ARM home buyers bite the dust" guys are going to be left with only rental equity. Oh wait a minute, all the analysts on this blog figured out renting doesn't give one any equity. Read on:
Goldman economist Jan Hatzius argues that softness in housing will be such a drag on the economy that the Federal Reserve, which has been steadily cranking short-term interest rates higher, is going to have to turn around and start cutting them to keep the economy from tanking. He's looking for a full percentage-point cut in 2007.

Here are Hatzius' bullet points:

**Houses are about 15% overvalued nationwide, ranging from 50% overvalued in Los Angeles to not overvalued at all in Houston.

**Housing construction, which is the highest share of GDP in half a century, will slow. And people will pull less cash out of their homes (through cash-out refinancings, etc.).

**Together, these drags will subtract 1.5 percentage points from the economy's underlying growth rate. For the past two years, housing's strength has lifted economic growth about 1 percentage point above its underlying rate. All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.

**Ben Bernanke probably isn't going to react right away. He'll wait until there's concrete evidence that a housing downturn is hurting the economy. "If and when that slowdown arrives, however, the response is likely to be fairly aggressive."

From CNNmoney.com:

Home sales: Is the market glutted?

January report shows 5% drop from revised December level, as supply of new homes suggest backlog could be building. Rest of article can be found at:

http://money.cnn.com/2006/02/27/news/economy/newhomes/index.htm?cnn=yes

K,
That is a good point. It would be interesting to see if there is a correlation between ownership in the area and one’s opinion of the current housing market. As for me, I own a 3 bedroom townhouse in the heart of the U street corridor. My wife and I bought it as a ‘fixer-upper’ in late 2003 for $425K. I am more than pleased with the appreciation and improvement of the neighborhood we have seen and hope that it continues. I am one of the few on this board who does not buy into the ‘bubble’. I think what we are seeing now and what we will continue to see is housing prices returning to a more normal rate of appreciation. If we do see a drop in prices, I think it is more likely to occur in the outer-lying areas such as Loudon, Prince William and some of Fairfax County. In DC proper, I think the only drop in prices will be in the condo market.

Good post Allison. I heard of this news from NPR this morning. "Higher than analysts had expected". I really don't believe most analysts carry a brain on their shaky shoulder. They have the education, knowledge, skills, money, etc. but what they don't have are a little bit of common sense and the real understanding of the life real american middle class.
Good luck bradh on you appreciation dream...
The real end of this american dream is when FED has to raise rates again and again to avoid US debt being dumped as shit by China and Japan.

WHERE'S THE DAMN DEMAND???
WHERE'S THE DAMN DEMAND???
WHERE'S THE DAMN DEMAND???

I agree with BradH.

Prices for HOUSES in DC Proper will not fall dramatically in the near future. Relative to condos, houses in DC offer consumers more square footage and ultimately more value for their dollar. Based on the inventory of condos increasing in the area, I can see the bubble bursting for the condo market before I see it happening for true houses because the supply of condos will outpace the demand for them.

Folks, trying to separate the condo market from the SFH market is wishful thinking. Granted, houses have historically been easier to sell than condos in downturns, but it is relative. You won't see houses going up while condos are going down. If anything, the overbuilding of condos can put pressure on house prices because they provide alternative, low cost shelter from the elements. Remember that? When houses were just a place to live?

Since we're disclosing our circumstances now, I am a renter. I owned for many years, in DC, but was so alarmed by what was going on I bailed out. I was living in a small condo, though, and not a house that I'd be happy with for years to come. No one should sell his house just because of price action, but if you're thinking it's time to move, better now than later. And if you're an "investor," look out.

And BTW, am I the only one here, who works for a large organization, in no way connected with the housing industry, who keeps hearing from coworkers, at lunch and at the water cooler, about their "real estate investments?" Since when do normal Americans all think they're Donald Trump? It is remarkably similar to the office chatter on stock investments, six years ago. 'Nuf said.

Winston,
Since you seem to have a crystal ball... How much do you see prices falling in this area? Judging from your posts, you seem to be one of the chicken littles who have bought into this media driven real estate bubble frenzy. There has been a housing boom and now the boom is ending. (By the way this boom had been going on in DC for a few years before the Fed started cutting interest rates.) This does not mean however that there will be a crash. You and many others on this board seem almost gleeful at the prospect that the RE market will crash and a lot of people will be adversely affected. I am starting to think that a lot of the gloom-and-doom predictors are people who got burned during the tech bubble and want to see others suffer a similar fate with real estate. How about some numbers to go along with your gloom and doom predictions and snappy rhetoric.

Short article in today's Washington Post:

New-Home Sales Fell 5% in January
Incentives Fail to Attract More Buyers; Inventory at 9-Year High

"Home builders across the country have been advertising thousands of dollars in incentives to would-be buyers this winter, but it looks like shoppers have not been swayed. Sales of new homes nationally fell 5 percent last month to the lowest level in a year, as the number of unsold units reached a nine-year high, according to government data released yesterday."

Many posts on this site have mentioned increasingly large incentives of late, noting huge differences in incentives from month-to-month, which may only give would-be-buyers the incentive to keep waiting as sellers pile on the upgrades, freebies, help with closing costs, rebates, and other "sweeteners" to coax people to buy NOW.

Anecdotally, I'm finding that the huge incentives offered on properties that have been on the market for 60+ days are starting to be matched by new properties as well. As a potential buyer, this only makes me want to wait to see what else is going happen as the inventory piles up.

Here's a curious contradiction: According to the Washington Post's March 1 article (link below) about the drop in home sales in January, new home sales dropped by 5% in January, and yet new home starts rose 14.5% in the same month. Analysts have already warned about the current and growing housing glut, so I'm wondering why homebuilders would compound the problem by building more houses?

http://www.washingtonpost.com/wp-dyn/content/article/2006/02/27/AR2006022700463.html

Another Washington Post article today on the state of DC area real estate:

Washington Area Housing Prices Witness Small Dip

"Washington area housing prices dipped in the fourth quarter, according to new data from the National Association of Realtors, though it's too soon to tell for sure whether prices are truly on the way down in a softening housing market."

http://www.washingtonpost.com/wp-dyn/content/article/2006/02/26/AR2006022601175.html

Hello everybody...

FYI,

"Sales of EXISTING, SINGLE-FAMILY DETACHED HOMES (i.e., not condos) in California totaled 500,470 at a seasonally adjusted annualized rate in January, down 24.1 percent from a year earlier and 5.9 percent from December, according to the report from the association" (i.e., the California Association of Realtors).

Source:
http://money.cnn.com/2006/02/28/news/economy/california_home_sales.reut/index.htm

BradH and MarcusGraham,

If it can happen it California, then why not DC?

Dr. Nick

I'd tend to agree with bradh's and MarcusGraham's predictions. My guess is that house prices will flatline for a bit or maybe fall slightly (or raise slightly) but that condos are due for a bit of a drop. It just seems totally unreasonable that the cost of a 2-bedroom condo is almost exactly the same as a 2-bedroom townhouse!

This is from the perspective of somebody who doesn't own anything and is looking to purchase a home at some point...so I'd be pretty happy if I was wrong and house prices took a plunge!

Re Bradh,

Of course I'll be H_A_P_P_Y to see the RE market, maybe the overall economy crashes in the near future. I just don't believe a "soft landing" can teach "wealthy" americans a lesson on common sense.
Single houses won't drop as condos? Give me a break. These newly built single houses actully look more like a shit box than condos.
I'm still looking forward to seeing price drop 20-30% in 2006 and 50-60% in the next 3 years.
Sorry I have enough savings that allows me to live for 3 years without a job if the economy crashes. What about those "home owners" paying over their heads? Need some imagination?

Theoretically, DC can accomodate a billion condominiums since all builders have to do is continue to stack condos on top of each other until they reach the building height limit allowable by law in the District. Single family housing construction, on the other hand, are limited by the availability of land. Builders are now fighting for the use of the World War II Soldiers Home in DC. See http://www.washingtonpost.com/wp-dyn/content/article/2006/02/20/AR2006022001365.html

I predict that soon, there will NOT be enough land to accomodate the building of houses in DC proper which will, in turn, affect supply and demand to the point that prices will continue to appreciate. Will there be a slight deceleration in housing prices? Maybe. A bubble bursting? Very improbable......unless, of course, there is a mass exodus of homeowners out of the District in response to a terrorist attack or the loss of an unprecendented number of jobs. If you own a house in the District, it's a safe investment to hold on to it. If you own a condo on the other hand, cross your fingers and hope that the dealer busts!

Dr. Nick
You are right. The housing boom in California has ended and it has also ended here in D.C. The difference is (and excuse me for repeating myself)that DC had been undervalued for years and has now caught up with other major metropolitan areas.
In 1985 you had a city that was known as the worst city to live in the country. The outer-lying areas were full of middle-income government workers who won’t even venture into the city at night for dinner, much less live there. The 90’s come along and the tech-boom starts happening. Many of these government workers take their tech experience to the private sector and suddenly they are raking in the cash. The area also starts attracting young techies. At the same time, people in the US have started taking an interest in historic properties and restoration. Where could you find a huge old Victorian townhouse for not a lot of money? Why DC proper of course. So it happens just like it happened in San Francisco years earlier. People start moving back into the city. First the Gays. Next the yuppies. Before you know it, Georgetown isn’t the only acceptable place to live in DC. This revitalization started in the NW part of the city and around Capitol Hill and it continues to the present. So of course prices were bound to catch up with the rest of the country. So who can we blame for the high RE prices in the area? Condo flippers? No. We can blame Bill Gates and Bob Vila.

I've put together a poll to get an idea of what DC area people think will happen over the next year in terms of real estate prices. Take a look at www.my-first-home.info if you are interested in seeing the results or voting (its filed under March 2nd).

Jamie - Regarding your comment about it being unreasonable that the cost of a 2-bedroom condo could be the same price as a 2-bedroom townhouse - Some people prefer to live in a condo because it affords some things a townhome may not. 1) Upkeep on common areas 2) No yard work, especially helpful if someone is older or travels a lot. Leisure time has become more important than yard-work time 3) Security may be important for the same reasons as #2 4) More ammenities - recreation, etc. than most townhomes unless they have an extensive POA 5) No concerns about roof, deck, window replacement depending on the bi-laws. Actually in the DC metro area, most townhomes are in a POA which has a monthly fee to cover some of same things that condos cover except perhaps the master insurance policy, seeing how condo owners do not pay homeowners insurance like townhome owners, it's covered in the master policy. One example in this area is in Lowes Island, an upscale neighborhood in Loudoun County. There the townhomes and condos look almost identical from the street with one exception, the condo association keeps the neighborhood up better. The trees, shrubbery and flowers always look nice. All the roofs and decks are in great condition where the POA for the townhomes next street over weren't managing the maintenance quite as well. So what do you know the value of the condos (which is really just a type of shared ownership/responsibility) jumps up to and just passed the townhomes. Both the condos and townhomes are two-story homes with garages. I have a friend that has owned in Lowes Island for a few years and we've watched this happen. As we start to see more and more empty nesters with more discretionary income that want to live within walking distance to shops and entertainment, we are going to be seeing more and more condo ownership in all areas of the country, especially in progressive higher income neighborhoods. Disclosure: I own 2 homes and am a consultant.

March 2, 2006
Loudoun Average Home Price Drops 6.6% in February
We collected the "unofficial" February 2006 market data for Loudoun County, Virginia and the average home price dropped 6.6% from the January 2006 average. Based on number of homes sold and new "under contract" for the month at current inventory levels (homes on the market) there is almost a 4 month backlog. Average number of days on the market increased by 16 days from 63 days in January to 79 days in February.

The calculated Marketpulse™ Index of -0.72 indicates continued good news for buyers. New Construction builders are only reporting 42 homes sold reflecting the reported sluggishness in the new home market. New home buyers should be looking for even more incentives in March! And, builders should be much more willing to negotiate.

Buyers are looking for value. Sellers getting contracts are those that have the best showing homes at a value price.

Good points TC, I suppose my viewpoint is somewhat skewed by living in smallish apartments for the last 10 years or so. After so many years of dreaming about a small backyard and a private entrance to your house you start to forget what a pain it is to mow the lawn, re-shingle the roof, and paint every couple years!

As spring kicks into high gear...with a glut of townhouses in Fairfax and other burbs...won't prices have to moderate, unless they've been totally updated and are at least close to fair market prices...and those that need work probably won't even sell or see drastic price reductions? I grew up in NOVA for 18 years, left for FL for the past three and am now returning hoping to buy when prices come back down to earth.

I have always felt that people who do not have a property or are hoping to buy one feel that the housing market is overvalued and is gonna fall dramatically. Folks who own something feel a slight correction is all that can happen.

Interesting ..

Drew: I do feel that there are too many newbie RE investors .. I am one of those as well.. Let us see where this goes.

Excerpt from an AP article today ("Housing Cooling Off"):

David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area “have the largest potential for a price slowdown.”

The rising prices in those markets were fed by speculators who bought homes intending to “flip” or sell them for a quick profit, Seiders said. “The biggest fear I have is investor-owned units coming back on the market in large numbers,” he said.

An article in the Associated Press today comments on the effect "real" investors (i.e., NOT real estate investors) have been having on the stocks of home builders. Apparently, investors have been bidding down the stocks of home builders since July, prompting the home builders to complain that their companies are undervalued despite record earnings, especially Toll Brothers and Hovnanian.

One analyst said builder stocks have been trading at relatively low multiples of their earnings since the late 1990s because investors always believed the strong housing market was too good to last. “Investors kept saying, 'Next year housing will go down,'” the analyst said. “I guess they're finally right.”

My comment: If real investors (again, not real estate investors) are taking their money out of the housing industry, that may be a leading indicator of troubles ahead.

Luxury home sales soar : CNN

http://money.cnn.com/2006/03/02/real_estate/luxury_home_sales_soaring/index.htm?cnn=yes

T-Fraz: The general rule for buying a home is that you should not buy unless you plan to stay in the home for at least 3-5 years or more. This allows enough time for your appreciation to exceed whatever it will cost you to sell the home. One of the reasons why the DC market was so hot was because a lot of people who would normally not have been homebuyers under the general rule became homebuyers due to the incredible appreciation rates that the market was offering. People who had no intention of living in a home for 3-5 years decided to buy anyway because the incredible appreciation rates allowed buyers to realize excellent gains in a short period of time. In some cases, the gains were enough to make it quite profitable to sell a home even before the 2 year holding period to avoid capital gains was up.
Howeve, one thing to keep in mind about the current DC market is that while there is a large disagreement on the exact course the market will take for the next 5 years, NO ONE is predicting that real estate appreciation rates will even approach what they were during the height of the DC market 1,3, 5 years ago. So the odds are not high that you will be able to buy a home in DC now and realize an extraordinary gain in a 2-3 year period. Sure, you may be albe to find an area where there is major redevelopment scheduled for the near term that will be complete in a couple of years (the Georgia Avenue-Petworth metro station comes to mind), and be able to buy low and sell high, but the odds are not good. You need to talk with your financial planner/accountant. Maybe there are some tax benefits that may or may not be realized or lost by one course or the other.

As a new resident of the area, I've enjoyed reading the various views expressed here. One tool that I've come across that I've found quite useful.

E-Loan's Rent Versus Own calculator
http://www.eloan.com/s/rentvsown

What I like about this tool is that it allows you to sets the values for such things as savings or investment rate and yearly appreciation on the home in addition to such standard things as loan rate, rent cost, and down payment. I'd recommend anyone considering a home purchase to run some numbers through this tool. I know that it's been instructive for me.

For all the property owners on this blog who are lucky enough to purchase your properties years earlier (good for you), just want to ask you 2 simple questions:

1. Can you afford to purchase your house, at its current value?
2. Would you repurchase your house, at its current value?

If "no" for either, how can you expect the housing price to keep at present level?

I'm so tired of the cliche name of "bitter (mean) renter", or the same-old assumption of being chicken 3 years ago not buying when price was low. Were the property price at the same level as three years ago with moderate appreciation (about 5% per year), I would buy in a heart beat.

Homeowners, assume yourself just finish your college study and find a decent job, or just get married, or want to upsize because of growth in family size now, and suddenly face with such out of basic property prices, would you buy? So simply because some people were born 3 years later, or got married 3 years later, or had child 3 years later than you, they got punished for unreasonbale property prices? Isn't that what you are indicating? Speaking of mean spirit, isn't homeowners' wish of sustaining current property price sort of mean spirit also?

So what's the consensus - if you're looking for a suburban townhouse in the 3-4 range buy now, buy soon, wait a year?

BradH,

It seems your rational for the increase in residential property values over the past 6 years is as follows: “properties were undervalued, therefore current prices are reasonable”.

Questions for you:
* By what percent were DC area homes undervalued this week in 2000?

* Are DC area homes currently (a) undervalued, (b) fairly values, or (c) overvalued? Again, please state a percent.

* How are Bill Gates and Bob Vila responsible for the current valuation of DC area housing? Seriously. I’ve never heard this argument.

It is my opinion there are three entities responsible for the current housing prices in DC and elsewhere: (1) The Federal Reserve which created artificially low interests tempting marginal buyers into the RE market; (2) lending institutions which have tempted even more marginal buyers into the RE market with exotic loans (i.e., IOs, ARMs, etc.), and (3) naïve and greedy home buyers who believe that property values can only go up.

Btw, if demand for high value housing is so high then why haven’t developers bought up all the land in Anacostia, chased out all the poor people and started building luxury condos and palatial homes for all the high-paid consultants in town?

Many home buyers may be able to ride out the oncoming wave of mortgage conversations, some will not. And it will only take a small percentage of those individuals to default to drive down prices. Furthermore, even those who can ride out the storm may choose to sell. After all, who wants to live in an efficiency/studio condo for the next 5-10 years waiting for prices to rebound?

I’ve said it before on this blog. I won’t be happy to see others get burned in a housing bubble but I won’t shed a tear for them either. A housing crash will harm all of us including those who don’t own property.

P.S. This Friday will mark the sixth anniversary of the NASDAQ peak (i.e., above 5000).

Andrew - Great Post about the www.eloan.com/s/rentvsown calculator for renting vs owning. Previous posts were trying to find something like this! I tried it out and would realize a $30,000 gain over only 3 years with my tax bracket, figuring only a 5% home appreciation rate. That was with a $430,000 home vs renting for $1500 per month.

TC - That is a very handsome gain. "Only" a 5% appreciation rate is quite an assumption, though, don't you think? Did you run the calculator assuming, say, a 5% reduction, every year, for three year? You should try it - it will be quite an eye opener.

Historical precedent is such that you can assume a 1% return, after inflation, over a period of several decades. If that is the mean return, how far down do prices have to go, over the next several years, to compensate for the extraordinary increase of the past five years? See if the calculator can help you answer that before you make a decision based upon the assumptions of your friends at "eloan," or run the risk of consulting "bankrupt.com" down the road. Cheers.

http://photos1.blogger.com/blogger/6089/1833/1600/youarehere.jpg

Dr. Nick,
The Bob Vila, Bill Gates comment was a joke- playing off the fact that this area has become the Silicon Valley of the east over the past 15 years and the fact that people are restoring old houses here. I’m a bit surprised that this needs an explanation.
“properties were undervalued, therefore current prices are reasonable”
What I have said is “DC properties were under-valued, now property values in DC have caught up to property values in other major cities. I don’t know whether the values are ‘reasonable’ or not. That depends on what is important to the person buying the property. How much is having a 5 minute drive into the city worth to you? If you are waiting though for prices to drop 50% I would not hold my breath. The properties that I think are probably overvalued are the million dollar McMansions in Leesburg and Manassas on a quarter of an acre of land with an identical McMansion right next door.
“if demand for high value housing is so high then why haven’t developers bought up all the land in Anacostia…..”
This in fact has already started and if and when this new baseball stadium is built you will see that area undergo a metamorphosis (albeit a slow one). If you read my posts you will see that I have stated that the revitalization of DC started in the NW part of the city and is moving towards the SE. Anacostia will be the last part of the city to change.

* By what percent were DC area homes undervalued this week in 2000?
I don’t know where you would find these statistics, but if you can- find what a 3 bedroom townhouse was selling for in DC versus what a similar property was selling for in let’s say San Francisco. I’m sure you will find that the SF property was much more. Go back to 1995 and do the same comparison and you will find a huge difference. Why should a 3 bedroom townhouse in SF be worth more than the same property in DC? Granted, SF is probably a more aesthetically pleasing place to live. Other than that, is there anything that makes SF a more important city? On an international scale, DC is a much more important city than SF. That is why I say properties here have been undervalued and have now caught up.

Brian,

Population density is far greater in San Fran, that is one reason. It is bound by mountains and water, so that constrains it. There is also a lot less violent crime. Far fewer murders.

DC is a more important city, but San Fran has higher paying top end jobs. Not counting tech, they have a lot of very high paying finanical jobs, hedge funds, some very good mutual fund shops, and I Bankers that specialize in Asian markets are there. A good trader makes a lot more than a law firm partner.

There are many more billionaires in the Bay area than in DC/NOVA, it will keep those Presidio and Pacific Heights homes far more expensive than those in Georgetown and Potomac.

BradH-
You are an idiot to compare DC to SF. San Francisco is a 7 X 7 mile peninsula. DC is a sprawling mess built on a swamp. You can live in two different states and still be in the metro Area.

SF has natural geographical boundaries, like Manhattan, which contain the growth of the city.

Aside from these attributes, SF also has the best climate in the country: a 60 degree average temp, and 65% sunny days. Compare that to DC. How much snow did you get last month?

Just because the president lives there doesn't make it a great place to live. And that's what really affects home prices.

Bradh (and probably many property owners on this blog):

Please answer my questions before you make further arguments and assumptions.

1. Can you afford to purchase your property, at its current value?
2. Would you repurchase your property, at its current value?

LOL! Its really obvious who bought homes at the top of the bubble and are now trying to convince everyone, including themselves, that the bubble is not bursting!
Its not even an arguement any more around here, inventory is up and prices have been sliding! My buddies Townhome was assessed at $430,000 last summer, and was just recently assessed at $395,000. A $35,000 drop in price in half a year is not reason to worry? Open you're eyes people!

smallbean: No. I would not buy the property at the price I bought it at "today". The interest rate I got was 5% then. $500K home @ 5% = $400K @ 7.5% .. So now I'd have to buy my home at only $400K roughly to keep the monthly payment the same. That monthly payment is the below the max what I can afford but the max of what I am willing to pay.

Kat has hit the root of the problem. People are buying homes based on monthly payments instead of value. Just because you can pay the montly payment doesn't make it a good value. The bottom line is you shouldnt buy a house more than 3 times your income.

To those who think DC is a good place to live, you are on drugs. Its not the worst place I have lived, but it is close.
Montgomery county is the perfect example of how messed up this place is. You have million dollar homes next to low income apartments. How you would you like to buy a million dollar home and have your kids playing next to ghetto apartments. Not me. The reality is financial segregation is a good thing. I am a middle class person and shouldn't be living in a rich neighborhood because the values of rich people and my values are not the same. The same can be said about the poor and the middle class.
The best thing about this area is the bike trails, but towns like Madison, Wisconsin make the bike trails here look like crap.

John: Bradh and his wife bought it a ‘fixer-upper’ TH in late 2003 for $425K. And he is gleeful at the appreciation on paper.

K: Thank you for your honesty. I have the feeling that the price has increased to a level that most serious and well-qualified buyers can't afford, even with exotic loans. Persnally, I'm not waiting the price to hit the bottom to buy, but waiting for a point that decent properties come down to prices with monthly payment below the max what I can afford but at the max of what I am willing to pay (just like you :).

When I was considering taking a job in Germantown I began looking for an apartment for me, my wife, my ex wife, our 8 kids, and my three 17-year old Puerto Rican foster daughters to live in, and I was amazed at the outrageous housing prices in the DC area. I decided that I didn't need to leave West Virgina that bad after all.

QuantumFund:

It seems that you and Das Chaos either did not read my post very carefully or you totally missed my point. I am using SF as an example because the prices of real estate are comparable. You could exchange 'Boston' for 'San Francisco' in my post and the point would be the same. You may want to pull up some statistics on where Fairfax, Loudon, Montgomery counties rank as far as wealth goes. I’m sure these places aren’t as wealthy as Marin county but they are not far from the top of the list depending on what criteria is used. Wikipedia is a good source and ranks the places by several different criteria.

DasChaos:

I won’t stoop as low as to resort to name calling, but I guess you have never heard of the Potomac or Anacostia rivers. Go purchase a map. These might be considered natural geographical boundaries. These contribute to traffic problems and provide more reasons why people would want to live in the city rather than have to commute. Part of Manhattan is built on a swamp also, so what is your point? Last time I checked, parts of NJ and Connecticut are in the NY metro area but what does that have to do with anything?
I am not trying to say that DC is a better place to live than SF. If I won the lottery I could see myself living there over DC. If you would read my post you would see that. My circumstances brought me here, not San Francisco or Hawaii for that matter. Again, I was using SF as an example of a city with Real Estate Prices comparable to DC’s at this point in time.
“Just because the president lives there doesn't make it a great place to live. And that's what really affects home prices”.
20 years ago that would be a good point. However, if you know anything about the area (and apparently you don’t) you would know that people are moving back into the city and the city is being revitalized.
Before you go calling other folks idiots, make sure you understand what you are reading and get your facts straight. Otherwise, risk looking like an idiot yourself.

Smallbean,

First of all, thank you for being civil. It seems some of us are lacking in that quality. To answer your question:
1. I could afford to purchase my property at its current value.
2. I would not purchase my property at its current value for the following reasons: I bought my home as a ‘fixer-upper’ in a marginal neighborhood in late 2003 for just over 420K. Similar homes that had been newly remodeled were being sold for around $550K at the time. The house next door to me which is identical in size and floor-plan just sold as a ‘fixer-upper’ for 700K and the neighborhood has improved quite a bit. Prices have leveled off and are not skyrocketing like they have been over the past few years. So if I paid 700k for my house today and then remodeled it, it would take me a quite a while to ‘break even’. A big reason why I bought my house was that I did think values were going to go up and that I could live in it while fixing it up. It looks like I did pretty well and I am pleased with the situation but…… I wish I had bought in 2000 when the exact same house sold for around 100K. As it has been said ‘hindsight is 20-20’.

Folks

I am British, and have lived through the bust of the mega property market bubble in the 80s in the UK. My wife is taking a job in DC for 2 years and we live now in Charlotte (no bubble in Charlotte really).

Last weekend we came up to DC to look for a 1 bedroom condo for my wife to live in the week.

Why am I telling you this because until I read this blog I had no idea of how bad the bubble really was in DC.

BEWARE OF THE REALTORS!!! We worked with a realtor on the weekend and she played every trick under the sun to get us to make an offer. Never even mentioned the bubble even when asked about market she said "DC and surrounding areas are still an incredible investment - you will make 5-10% a year because all the jobs coming to town.....etc etc"

We will be renting!

This is sucn an interesting exchange of ideas. I have no doubt that the DC area is headed towards a blood bath. 1/3 of properties are bought by speculators. 1/3 are bought by wanna be speculators. Last 1/3 are for people who really need a place to live. So supply is plenty and when the 2/3 want to cash in, you will see a price drop of 60% or more. The most hardly hit will be the condos -- decline could reach 80%...ouch

Folks

I am British, and have lived through the bust of the mega property market bubble in the 80s in the UK. My wife is taking a job in DC for 2 years and we live now in Charlotte (no bubble in Charlotte really).

Last weekend we came up to DC to look for a 1 bedroom condo for my wife to live in the week.

Why am I telling you this because until I read this blog I had no idea of how bad the bubble really was in DC.

BEWARE OF THE REALTORS!!! We worked with a realtor on the weekend and she played every trick under the sun to get us to make an offer. Never even mentioned the bubble even when asked about market she said "DC and surrounding areas are still an incredible investment - you will make 5-10% a year because all the jobs coming to town.....etc etc"

We will be renting!

Great blog! As a prospective 1st time home buyer in the DC area (specifically North Arlington, VA), I am going by the following premise. If the current monthly mortgage payments are roughly double the rents being charged in a comparable unit, there is no way in hell that I will buy in this market. I would rather rent, live in a comfy place near metro, and sock away the money that I am saving by not paying rediculous mortgage payments into interest paying mutual funds. Just my 2 cents.

Drew,
Yes, I tried it with zero appreciation and I still came up way ahead. Sorry to burst your bubble. It sounds like you may be one of those underemployeed techies out there with no financial sense. There has not been a historical precendent of an inflation adjusted 1% appreciation rate on the housing industry. I've noticed on several of your posts, you're off on facts you state and you don't have anything to back up your statements. Also you do not need to compensate for past earnings on future return on investments. Drew, real estate is cyclical and the returns on real estate in this country have been excellent over time and there is nothing to make us in the financial industry believe anything is going to change. Get an education. Sorry you don't have enough money, credit or gumption to invest in real estate. There will always be types like you. I guess that's why I still own rental properties, so you will have a place to live and you can pay someone else's leveraged mortgage for them. And by the way, I'm even farther ahead on the other property since I've owned that one for 17 years.

John - Below is text taken from a Washington Post March 6, 2006 article. You can find the entire article if you google it. These returns are for the DC area but I know my property assessment in S. Virginia went from $133,000 to $186,000 in 2006. Where does your "friend" own a home that received a reduced 2006 property assessment? I find that very hard to believe. Also, Ms. Neff (referred to in this article) needs to understand under normal market condition two months is not very long to be on the market. Homes need to be in good and clean condition to sell in today's market. Seller's cannot expect to get multiple offers on a home that needs repairs or is outdated. "With an average home value increase of 28 percent, Loudoun County led the region this year. Prince William County, at 25.5 percent, was not far behind. And Loudoun appears on track to handle a record number of complaints and requests for review. It is too soon to say the same for Prince William, where notices have not hit the streets, officials there said. "We've had a couple thousand calls," said Loudoun County Assessor Todd Kaufman. Most callers don't dispute that their new assessment represents market value, as required by Virginia law, he said. They're just shocked that the value has gone up so much."For the most part, people aren't upset about their assessments once we explain it to them, show them comparable sales and so on," he said.There are exceptions. Laurie F. Neff, 34, owns a home in the Sumner Lake neighborhood of Manassas. Her 3,500 square-foot home's value rose from $535,500 to $749,600 -- a 40 percent increase. Nef