Washington DC bubble?

Posted by: Dean Foust on July 05, 2005

In response to my earlier posting questioning whether home prices were outstripping income gains, one reader (IDed as “Audiorich”) writes…

“Not in the Washington D.C. area! House prices here may rise less rapidly in the future (and that would be a good thing), but they won’t stop going up. If you lived here, you’d see that.”

Actually, Audiorich, I lived in Washington for nine years (1989-1998). And a recent visit convinced me that Washington is a huge bubble waiting to pop…

Consider this: My wife and I bought our first home in Alexandria, near the Mount Vernon estate, in 1991 for the princely sum of $216,000. For the next seven years the house did...nothing. When I transferred to become the magazine's Atlanta bureau chief in late 1998, we sold it for..$222,000.

We visit Washington every year during our kid's spring break, and during our latest visit this past April, my jaw dropped. The house next to our old house (identical in structure) is on the market for $520,000. That's roughly 130% appreciation in six years.

Now let me tell readers what you're getting for $520,000: A 2700-square feet, two-story, aluminum-sided, starter house with no basement sitting on a 7000-square-foot plot that floods during heavy rains (the house is near the Potomac river) in a mediocre school district. Now explain to me how young families buy into Washington. They have to put $50,000 down and take out a $470,000 mortgage for a starter house? Or do a $520,000 "interest only" mortgage with a starting payment of $3700 a month that balloons to over $5000 a month when the principal comes due? I'd like to hear the argument of Washingtonians as to how this isn't a bubble?

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Reader Comments

Audiorich

July 7, 2005 05:54 PM

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!

Susan Lopt

July 8, 2005 01:40 PM

I'd have to agree that the DC area is in a major housing bubble. I agree that SOMEONE is buying, but the fact is that many of these "someones" are investors. One in every 4 homes in the DC area is owned by an investor. Investors are in it for the money - and when the returns start to stagnant - you'll have a lot of someones selling. And given the number of people who have purchased homes with intrest only mortagages, and have been given mortages when they have only marginal credit - you'll end up with a lot of defaults and foreclosures once the interest rates go up.
It's a scary time to buy - and I'm not sure I would right now.

Sirocco

July 10, 2005 07:20 PM

Re the house that you think rose 130% in price over the last 6 years, practically all of that was in the last 4! My condo, in Manassas, VA, has risen about 130% in the last 3.5 years.

Kent Beuchert

July 10, 2005 08:24 PM

Having lived in Wash DC area all my life, I
remember the 1990 period, when my condo's value
dropped from #130K to $85K and stayed there for
the next decade. The current demand is from those
who can take advantage of low interest rates and
more than anything, from investors who only will
resell the properties. When investors get nervous (and the question isn't whether, it's when) they
will dump those porperties that they are holding
at sizable costs (and can't rent) and the market will go plop. I wouldn't buy in the DC area now if you put a gun to my head. The prices have no relationship to reality or underlying value. If demand were so great, as some have said, why can't you rent a mouse out anymore, or if you can, only get a fraction of the carrying costs?

NOVA Resident

July 10, 2005 11:02 PM

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.

John Davis

July 11, 2005 08:52 AM

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.

Matt

July 11, 2005 10:22 AM

I believe the DC metro investor rate is 11%, and a little less that that in northern VA where I live. That is a far cry from other places in the country like CA and for condos in FL. I dont buy that investors will be the cause of the "burst". The cause will be for what ever reason, public sediment just says "stop" or perhaps, begins to hype a new fad.

There is no question that all these bubble articles have caused public opinion to think more about (a bubble) this year than more in years past. It seems as though the "uh-oh" effect is starting to pass as I'm seeing less and less bubble articles. The trouble will begin when the pesimists jump into the housing market because they feel they have missed out. When that happens, there will be no more safety balances left (not to mention buyers) and a correction will be imminent.

Currently, there is an awful lot of supply for sale right now in my northern Va burbs. Mostly, people are "moving up" with they're equity and putting it into newer nicer homes. Also, this is the moving season for military and folks with children. Even though homes are on the market here longer, they are still selling and home prices are still going up. The economics of this area are unique that it will be interesting to see what happens if a housing correction hits - if it will effect the bustling market here.

Just like stocks - buy value. Its the best way to always come out on top and protect your assets

Jeff Jones

July 11, 2005 11:56 AM

The other things that people are forgeting about in regrads to the DC area is the very high probability of a WMD attack on the city. Your home won't be worth 5 cents after a dirty bomb attack.

Even if you bury you head in the sand and forget this posibility, the coming storm of interest only/ARM's is coming to a theather near you. ARMs and interest only loans are the last bit of fuel feeding this mania. When the American people see what happens to these people when there ARM adjust up and ballon payments kick in, the party will be officially over.

I saw this all before. Just replace Housing Bubble with NASDAQ.

tooskinneejs

July 11, 2005 12:51 PM

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.

adamc

July 11, 2005 02:09 PM

Audiorich, the three reasons you give to show that ther is *no* bubble are factors that have existed in the DC area for decades. Yet these same factors didn't stop the market from collapsing in the 90's when the bubble was much smaller.

The DC area isn't an island. The fact is that there are plenty of areas for developers to build or rehabilitate. Just look at the District: With no real population increase in the past 5 years and massive construction of new condos, the typical codo price has doubled in that time period. But where have rents gone? The fundamentals of supply and demand are simply not there. The population has stagnated in the district, the supply of housing has increased dramatically. But the *demand* is currently artificially inflated because of speculators and other people like "audiorich" who think that it's impossible for real estate prices to ever go down.


Once there's a hint that prices may stagnate or go down, buyers will stop entering the market (they'll see that audiorich is wrong) and owners with tons of paper wealth will flood the market to cash out.

Wes

July 11, 2005 04:24 PM

Audiorich, denial is a dangerous thing. Who would think that DC has some of the highest crime rates in the country either?

No area of this country is immune from property bubbles. South Florida, CA, etc.

Matt

July 11, 2005 10:39 PM

..."I believe so strongly that D.C. is bubbleland that my wife and I just sold our house that we owned since 2001 and are now renting in our same neighborhood."...

tooskinneejs, thats music to my ears and what I think will keep this (bubble?) going longer. Tell me, what was the event that caused the Nasdaq crash? I honestly dont know. I do know in 1999 that there was the feeling amoung a ton of investors it could never go down. in March 2000, the crash was under way.

Pessimism is an excellent mechanism to protect all of our housing assets. As I said in my earlier post, if everyone jumped into the housing market or had a feeling it could never go down, shortly there after - reason would catch up and the crash would begin. (this happened in 1929 with investments of all kind, 2000 with the Nasdaq). As long as a fear of the crash exists, real estate should maintain good equalibrium of pessimism with the irrationality, and real estate should hold its value. If things become even more so pessimistic this year, then I myself will consider purchasing an investment property or two since shortly there after, another rush upward will occur.

Emotions drive value. Economics drive emotions. (oil prices :) )


Bureaucrat

July 12, 2005 08:27 PM

Here's an anecdotal rebuttal to those who say that DC prices will never fall because of stable gov't employment. I am friends with a couple, both GS-14's (combined income well north of 200K) who have $400K equity in a townhouse they bought in 1999. They want kids, and recently went shopping for a single family home. Even in the $1.2 million range, they could find nothing really desirable anywhere within 10 miles of their Alexandria office... this radius includes Lorton, former home of Marion Barry's prison cell, as well as Hybla Valley, the Compton of N. Va. Criminy, if THESE guys can't find a nice house within their price range, who is? Is there some huge pool of Federal employees who earn more than $200/year that I don't know about? Give me a break.

jillu

July 15, 2005 09:26 PM

I bought a home for $390,000 in last december and recently my neighhbour sold his house for 499,000 less than three days.( same floor plas as mine)
Across from my house the home stayed in the market for less than a week. I do not think the market will collapse. It might loose its high appreciation and becom more healthy grow

John Dixon

July 27, 2005 12:04 AM

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.

Laurel Dugan

July 29, 2005 12:16 PM

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?


John Dixon

July 29, 2005 10:07 PM

To Laurel Dugan:

I am no financial advisor. But I have followed the housing bubble debate. My advice is, if you're planning to stay in town for a long time, go ahead buy. Interest rates are low. Take out a 30 yr fixed with a 20 percent down payment. So what if you're probably paying 20 percent more than the house is really worth. Eventually you'll recoup your losses. But I really wouldn't buy a house now if you think you'll be leaving within five years or so, especially not with any kind of interest-only loan. Because there is a real chance that you could see price declines here. And if you don't have the cushion of a substantial downpayment, you could well find yourself owing more on your mortgage than you can sell the house for. If you couldn't come up with the money, you'd have to default.

Don't believe me about the risk of a price decline. Look at the just published PMI Risk Index available at the PMI Mortgage Insurance Co. Web site, a widely cited authority. They ranked the DC area as 19th in their list of metro regions at greatest risk of a price decline (admittedly this comes to only a 20 per cent or so chance of decline I believe). Besides, median rental costs are now only 59 percent of owning a comparable median-priced home (showing how much rents are out of line with house prices--historically they march more or less in tandem). If your planning to just stay a few years, I'd rent and invest the money you save.

Of course everyone will tell you how people have been predicting a bubble for years and will mention stories of how people sold and rented in 2003, convinced there was a bubble and how since then the house they sold has gone up another 30 or 40 percent. That's true. It's not easy to time the housing market. But that's no proof it's not a bubble. Frankly, I would make my financial plans around the conservative assumption that house prices will very likely soon cool off and increase only at about the rate of inflation. I'd also keep in mind that experts believe there is a 20 percent chance of prices declining in the next five years. There is already some support for the cooling off hypothesis. Check out the Washington Post, July 25 A1: "D.C. Area Housing Market Cools Off: Inventory Up 50%; Region Still Strong."

Of course if you are like me, you WILL try to time the market. I am waiting till this spring to buy, convinced that the market is at the edge right now, and that a few more knotches of Fed tightening will drive all the investors and interest-only people out of the market. With me, it's partly a matter of pride. As much as I would like to buy a house for the same reasons most normal people want one, it just irks me to be enriching sellers, especially if they are speculators, at the top-end of an absurd market; out of stubborn pride I refuse to be one of the last fools entering the market, one of the chumps taken in by all the hucksterism of Realtors, mortgage bankers, and get-rich-quick gurus who will tell you that real estate is a no-lose proposition and you're missing out on the road to easy riches if you don't stretch yourself to your limit and buy now.

John Dixon

August 2, 2005 01:12 AM

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.

Adam Silverberg

August 4, 2005 10:48 AM

Most falling prices of any bubble will result in a slowdown of the market. Howerver, there are 3 places where rapid expanding home prices seem to be fueled more by hype than by other factors such as job growth. They are (in order):

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.

Greg

August 8, 2005 09:21 PM

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.

washington dc suburb resident

August 9, 2005 01:44 PM

I do agree the increase in price will start to slow but they will NOT drop. I also agree that double digit appreciation is NOT good....As far as renting vs buying. I bought a condo a few months ago. The mortgage payment is around $1800 (with no money down). Apartments in the same area run around $1400-$1500 per month to rent. Now if I put money down, my mortgage would be less. Another thing to note: The washington Dc area has one of the highest incomes in the country. Another point to note: people are moving to the washington dc area for the jobs. I know many people at my work that moved here from orland, and dallas. We have more job growth than any other area in the country. Washington dc is changing, people are moving INTO the city. I can personally see the transormation since I live around there. I have seen "bad" neighborhoods transformed into desirable neighborhoods.

Winston

August 10, 2005 04:34 PM

I'm seeing fast growing "For Sale" signs around Fairview Park region along Rt 50. If you live in that area, you'll notice that houses are listed for months without being sold.
People who don't believe there's a bubble, have a drive along Rt. 50 and see.

John Davis

August 12, 2005 02:43 PM

It's true that Washington DC has a strong job market, but remember that more jobs than you can imagine are being created by the bubble itself. Stop and think about how many jobs have been created directly or indirectly in the last 5 years as a result of the mania (RE agents, contruction, mortgage-lending, appraising, home renovation, insurance, household furnishings, etc..) as well as all of the extra spending that has resulted from home equity extraction and a general sense of greater wealth. I believe that when things start to slow it will begin to feed on itself as people become more cautious, psychology operates in reverse, and there is a ripple effect.

It's important to remind ourselves that much of the ever increasing prices have been supported by a parallel increase in the use of extreme mortgage financing where people are basically leveraging themselves to "get in at any cost". I read recently in the Post that over 40 per cent of the mortgages in the DC area in 4Q 2004 were non-traditional or "exotic". I live in one of the most expensive zip codes in NW DC and the typical mortage financing options sheet handed out now at open houses in my neighborhood include the 3 choices, the 30yr fixed standby and two interest only and option arm choices. So it is not just those of meager means who are resorting to this. Rising prices have not been supported by rising incomes. Incomes are high here but have in no way kept pace with RE appreciation. Does anyone know what is the mean percentage of gross income spent on housing (including home equity loans) in the DC area? I'd be interested to see the trend in the last 5 years.

The CEO of the largest secondary mortgage market player ( and a significant DC are employer), who had repeatedly in the past denied the existence of a bubble, said in an internal company memo late last year that he now did believe that in certain pockets a bubble existed and that no doubt leveraged financing was playing a big part. Incidentally, the CEO is no longer with the company (nor am I). Guess what market was at the top of his list as one of the bubble "pockets".
You guessed it! DC!

DC Chak

August 16, 2005 05:37 PM

This weekend, I saw more "for sale" signs along West Ox Road/Reston Parkway than I ever recall seeing before. One modern, newly remodeled Reston TH was cut in listing price from $619k to $599k. Finally, inventories appear to be up, and, unlike this Spring, sellers seem to be forced to accept less than list.

A co-worker has had to drop his price on his tiny place in Glen Echo from $719k to $695k.

DCRealEstateGuy

August 18, 2005 02:26 PM

Here is a good model to use for assessing the attractiveness of renting vs. owning in DC (or anywhere). First things first, make sure you are comparing apples to apples and find the closest rental option you can (in terms of bedrooms/amenities) to the place you are thinking of buying. Next, assume no money down (ignoring a deposit, you don't put money down on a rental). To compare apples to apples with renting, you should assume an interest only mortgage (you don't pay down principle when you rent). Current 5/1 Jumbo ARM for DC area (per yahoo) is 6.09%
Let's use $400,000 as a price for a 1 bedroom condo in Northern Virginia, close to DC.
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.

Michael Klein

August 22, 2005 09:49 PM

I just bought a 2 bedroom, pretty nice condo at World Gate in Herndon. The sales price was $332K, and I have seen the same floorplan sell recently for $355K. However, this is still a 2 bedroom. This bubble talk is bugging me out. Luckily, I got a fixed-rate mortgage, but the monthly payments are still pretty steep including PMI (grrrr). Does anybody out there have any words of encouragment?

cpaoletti

August 28, 2005 02:27 AM

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.

Fred Fry

September 6, 2005 12:07 AM

Click on my name and you can read my thoughts on the DC Housing bubble which I am sure is popping.

I live in NW Washington and the for sale signs are popping up all over the place. I drive about four blocks to get to Rock Creek Parkway and I pass 9 for sale signs. At least two of them (on 16th St) are up for over a $million. One of those has been on the market for over a year. The other houses on that intersection are also now for sale.

We rent and plan to move to VA in the fall and rent there. We earn a good salary but find it not responsible to take these 'exotic' loans. Renting is the way to go for now. I will re-think this once the market prices have halved, because that is where they are headed.

K Michael

September 12, 2005 03:33 PM

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.


Fred

September 13, 2005 09:31 AM

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.....

Cindy

September 13, 2005 12:57 PM

"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.


billy

September 17, 2005 09:12 PM

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

BubbleBath

September 20, 2005 09:48 AM

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?

Tellmetrue

September 23, 2005 01:57 AM

DC express blurb today indicated that the DC housing market hasn't cooled. That more people are projected to move in. Isn't it true that should the bubble fizzle, that the declines will be felt with higher end homes, say $500,000 plus. Won't the market stay strong for first time homebuyers for those home, say $350,000 or less. Say interests rates did go up to 8%, how much would that deter first time home buyers?

tooskinneejs

September 23, 2005 03:22 PM

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."

Bubba

September 23, 2005 11:41 PM

Perhaps a bit philosophical for this thread, but here's what I think is really screwed up about the real estate market in DC (and elsewhere) right now. When I think about what has historically led to financial success in our country, I think of three general factors: skill, hard work, and some measure of luck. Just as in the stock market of the 1990s, the real estate market today has almost completely supplanted the first two factors with the third. "Making a killing" in the real estate market is currently like winning the lottery - there's no skill or hard work involved as complete morons (and you know who I'm talking about if you've seen the real estate agents running around DC these days or have watched the real estate infomercials on TV) are cleaning up with almost no effort for no discernable reason. They don't know what's going on, and they don't really know the potential ramifications of what they're doing, but as long as their number keeps coming up, they'll roll the dice. One could argue that they have a higher tolerance for risk, but I don't think that qualifies as "skill" or "hard work" (not to mention that I doubt they really have a good sense of the risks involved.)

In the long run, this isn't sustainable. Sure, some people will do quite well if they're able to time things correctly (due to no particular vision on their part.) But in the long run, all of the people with more realistic views of the real estate market will be proven right. Of course, how far ahead is the long run? Who knows (I sure don't.) But after you see enough really crummy houses selling for $700K in the DC area, you really start thinking that things have to change soon.

Last point. My impression is that prices have been running up at such a crazy rate largely because people think two things. 1) If I don't get into the market now, I'll be priced out of the market. 2) If I don't get into the market now, I'll miss out on the potential price appreciation. Prices rising simply because people expect prices to keep rising seems to me to almost be the definition of a bubble in asset prices.

David Klein

September 27, 2005 01:22 PM

I believe a very point to consider here is the impact of currently rising short-term interest rates on existing mortgage debt. The media tends to focus on what rising rates will do to housing demand, but equally important is the debt outstanding. As Greenspan himself noted yesterday, a staggering 80 percent of all mortgage debt issued in the past five years (about 4 trillion!) has been second-mortgage refinancing to extract home equity. In fact, in spite of all of the appreciation we've seen during that time, the actual equity Americans have in their homes is at an all time historical low! And worse, all of that debt is issued at variable short term rates. So as rates rise, debt payments will increase simultaneously with 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.

lasky

September 27, 2005 03:49 PM

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.


sampat saraf

September 28, 2005 05:17 PM

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.

ashburnrez

September 29, 2005 07:43 PM

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


sally

October 1, 2005 05:47 PM

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.

Adam Silverberg

October 2, 2005 01:22 AM

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.

Sara

October 3, 2005 08:56 PM

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.

sampat saraf

October 5, 2005 09:48 AM

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.

DF

October 5, 2005 01:11 PM

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..

charlez

October 5, 2005 03:39 PM

" 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.

Lynn

October 10, 2005 12:44 PM

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.

Katharine

October 10, 2005 01:11 PM

"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

saraf sampat

October 11, 2005 02:35 PM

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.


Anonymous

October 11, 2005 11:50 PM

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 :)

Wes

October 12, 2005 11:42 AM

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.

Sally

October 13, 2005 05:38 PM

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.

Katharine

October 13, 2005 07:44 PM

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

Bubba

October 14, 2005 01:52 AM

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.

DF

October 14, 2005 06:09 PM

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?

Bubba

October 14, 2005 11:31 PM

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.)

gerr

October 15, 2005 04:28 AM

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

sampat saraf

October 17, 2005 09:54 AM

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!

Sampat Saraf

October 17, 2005 03:32 PM

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.

Doesitmatter

October 17, 2005 09:15 PM

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?

Bubba

October 17, 2005 11:09 PM

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.

Geoff B.

October 18, 2005 01:21 PM

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.

Drew

October 18, 2005 05:26 PM

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.

Doesitmatter

October 18, 2005 08:39 PM

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

TIM K.

October 19, 2005 12:34 AM

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.

John Davis

October 19, 2005 10:23 AM

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?

Matt S.

October 19, 2005 12:21 PM

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!

TC

October 19, 2005 01:29 PM

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.

Doesitmatter

October 19, 2005 07:20 PM

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.

Doesitmatter

October 20, 2005 07:24 PM

"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.

nervous

October 21, 2005 12:33 AM

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.

Matt S.

October 21, 2005 10:40 AM

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.

tc

October 21, 2005 12:21 PM

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.

Saul G.

October 24, 2005 02:58 PM

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.

Bob

October 25, 2005 11:05 AM

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

Winston

October 25, 2005 01:09 PM

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.

tc

October 25, 2005 03:45 PM

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...

Matt S.

October 25, 2005 03:46 PM

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

gracie

October 26, 2005 11:50 AM

"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.

winston

October 26, 2005 12:19 PM

"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.

It's ova in NOVA

October 26, 2005 01:10 PM

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?

Phil

October 26, 2005 06:51 PM

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.

Bubba

October 26, 2005 11:20 PM

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.)

I agree

October 27, 2005 03:00 AM

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%.

Nervous

October 27, 2005 09:47 AM

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..

Al Bedsole

October 27, 2005 12:12 PM

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.

Winston

October 27, 2005 01:41 PM

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....

Nervous

October 28, 2005 09:46 AM

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.

Wes

October 28, 2005 11:37 AM

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.

Winston

October 29, 2005 06:49 AM

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.

sharkmeat

October 30, 2005 11:48 PM

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.

TJ

October 31, 2005 04:28 PM

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.

RSB

November 1, 2005 12:03 AM

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?

winston

November 1, 2005 01:13 PM

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.

John Davis

November 2, 2005 05:23 PM

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.

winston

November 2, 2005 07:56 PM

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.

Al Bedsole

November 2, 2005 09:12 PM

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.

Al Bedsole

November 3, 2005 10:11 AM

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

winston

November 3, 2005 12:44 PM

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.

John Davis

November 3, 2005 04:39 PM

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.

Doesitmatter

November 3, 2005 06:48 PM

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

Jerry Sussman

November 4, 2005 10:09 AM

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.

Saul G.

November 4, 2005 02:55 PM

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.

Al Bedsole

November 4, 2005 03:55 PM

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

Tom

November 4, 2005 08:38 PM

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!

Bubba

November 4, 2005 11:45 PM

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.....)

Dube

November 6, 2005 01:24 AM

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.

Saul G.

November 7, 2005 01:35 PM

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.

winston

November 7, 2005 04:10 PM

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.

CondoGuy

November 9, 2005 03:19 PM

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.

DoesitMatter

November 9, 2005 08:34 PM

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.

Dube

November 10, 2005 12:43 AM

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.)

CondoGuy

November 10, 2005 10:12 AM

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?

Ballard

November 10, 2005 11:09 AM

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?

Drew

November 10, 2005 11:16 AM

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.

Winston

November 10, 2005 12:24 PM

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.

Doesitmatter

November 10, 2005 06:25 PM

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.

Lynn

November 11, 2005 09:14 AM

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

CondoGuy

November 11, 2005 09:19 AM

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.

Wes

November 11, 2005 10:54 AM

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.

winston

November 11, 2005 12:30 PM

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...

winston

November 12, 2005 12:36 AM

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

Doesitmatter

November 12, 2005 08:32 PM

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?

shark tank

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. (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.

Bubba

November 13, 2005 10:02 PM

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.

CondoGuy

November 14, 2005 10:32 AM

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.

chic

November 14, 2005 11:41 AM

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.

Doesitmatter

November 14, 2005 07:26 PM

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.

shark tank

November 15, 2005 01:04 AM

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.

Guy

November 15, 2005 04:01 AM

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.

Wes

November 15, 2005 11:11 AM

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.

winston

November 15, 2005 12:33 PM

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.

Dube

November 15, 2005 11:02 PM

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.

Ms Jones

November 16, 2005 10:42 PM

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.

Terry

November 17, 2005 09:25 AM

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.

winston

November 17, 2005 12:44 PM

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?

Guy

November 17, 2005 05:49 PM

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.

Dube

November 18, 2005 12:36 AM

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.

Saul G.

November 18, 2005 10:41 AM

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.

Drew

November 18, 2005 04:10 PM

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...

Doesitmatter

November 18, 2005 04:47 PM

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.

Fat Guy

November 19, 2005 01:29 AM

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.

Doesitmatter

November 19, 2005 04:01 PM

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.

Lynn

November 19, 2005 11:35 PM

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/

John

November 20, 2005 12:22 AM

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.

Jeff

November 20, 2005 08:57 AM

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?

Tracy

November 20, 2005 06:05 PM

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?

justordinarybuyer

November 20, 2005 11:01 PM

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?!?

Jerry Sussman

November 21, 2005 11:26 AM

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

Sampat Saraf

November 21, 2005 05:48 PM

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.


Dube

November 21, 2005 11:00 PM

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.

Saul G.

November 22, 2005 09:24 AM

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.

Sampat Saraf

November 22, 2005 12:30 PM

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.

Doesitmatter

November 22, 2005 08:28 PM

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.

John Morin

November 23, 2005 10:30 AM

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.

Al Bedsole

November 23, 2005 05:30 PM

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.

Sampat Saraf

November 23, 2005 05:42 PM

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.

winston

November 23, 2005 09:57 PM

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.

Doesitmatter

November 25, 2005 07:33 PM

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.

littletiger

November 27, 2005 07:45 PM

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

Stephanie

November 28, 2005 11:31 AM

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?

Bert

November 28, 2005 11:34 AM

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.

Sampat Saraf

November 28, 2005 06:08 PM

“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.

Doesitmatter

November 29, 2005 07:43 PM

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.

winston

November 29, 2005 11:15 PM

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.

John

November 30, 2005 12:57 AM

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.

drew

November 30, 2005 01:31 PM

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.

Wes

November 30, 2005 02:51 PM

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.

Doesitmatter

November 30, 2005 07:37 PM

"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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Geoff

November 30, 2005 09:58 PM

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?

Wes

November 30, 2005 10:19 PM

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/

Al Bedsole

December 1, 2005 04:52 AM

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

Al Bedsole

December 1, 2005 05:22 AM

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

Saul G

December 4, 2005 04:34 AM

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.

Phil

December 4, 2005 12:27 PM

Geoff: 10%/yr in DC is over.

Saul G.

December 4, 2005 09:25 PM

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

Bubba

December 7, 2005 12:59 AM

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.)

Joe

December 7, 2005 10:16 AM

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

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

winston

December 7, 2005 12:50 PM

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

Dube

December 8, 2005 10:45 PM

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.)

smallbean

December 9, 2005 10:14 AM

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.

John

December 10, 2005 04:48 PM

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?

Doesitmatter

December 10, 2005 05:26 PM

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?

winston

December 12, 2005 12:40 PM

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.

winston

December 12, 2005 12:48 PM

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.

winston

December 12, 2005 12:52 PM

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

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

littletiger

December 12, 2005 09:40 PM

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.

Bob

December 13, 2005 01:23 PM

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?

eddie

December 13, 2005 05:33 PM

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.

winston

December 13, 2005 06:07 PM

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/

Doesitmatter

December 13, 2005 08:16 PM

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.

Dube

December 13, 2005 11:40 PM

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...

Saul G.

December 14, 2005 01:17 PM

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.

winston

December 14, 2005 06:32 PM

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!

Bubba

December 14, 2005 11:47 PM

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.

BB

December 15, 2005 09:58 AM

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.

littletiger

December 17, 2005 07:41 PM

> 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.

littletiger

December 18, 2005 03:42 PM

> 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.

Mike

December 19, 2005 05:24 PM

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.

winston

December 19, 2005 05:26 PM

"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.

Dr. Nick

December 19, 2005 09:16 PM

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!

Dube

December 20, 2005 12:26 AM

> 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?

Dr. Nick

December 20, 2005 10:48 AM

Housing prices projections for 2006...

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

Check out entries 70 and 84 in the table.

Drew

December 20, 2005 05:38 PM

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.

Doesitmatter

December 20, 2005 08:05 PM

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).

winston

December 21, 2005 12:44 PM

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.

littletiger

December 21, 2005 03:37 PM

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.

Dube

December 22, 2005 01:35 AM

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.

Doesitmatter

December 22, 2005 10:54 PM

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.

Saul G

December 23, 2005 09:16 AM

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

Terry

December 23, 2005 11:51 AM

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

littletiger

December 23, 2005 11:55 AM

> 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.

Terry

December 23, 2005 11:58 AM

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.

Lois Griffin

December 23, 2005 12:12 PM

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.

winston

December 28, 2005 02:50 PM

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.

winston

December 28, 2005 04:19 PM

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

Bubba

December 28, 2005 10:16 PM

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....)

jason

December 29, 2005 04:16 PM

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.

Ed

December 29, 2005 04:44 PM

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.

Richard

December 30, 2005 11:28 AM

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."

Henry R.

January 4, 2006 10:27 AM

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."

Bob

January 4, 2006 11:02 AM

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.

Tracey

January 4, 2006 11:17 AM

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?

SGT

January 4, 2006 11:34 AM

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

Sampat Saraf

January 5, 2006 02:07 PM

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.

David

January 5, 2006 02:07 PM

Check out

bubblemeter.blogspot.com
dcbubble.blogspot.com

Wes

January 5, 2006 03:45 PM

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.

winston

January 6, 2006 01:03 PM

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?


billy

January 6, 2006 04:24 PM

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.
...

turkey-a-la-king

January 6, 2006 11:40 PM

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.

littletiger

January 7, 2006 08:12 PM

>>

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.

Joe

January 7, 2006 10:00 PM

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.

Dr. Nick

January 7, 2006 10:26 PM

“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

Dr. Nick

January 7, 2006 10:40 PM

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

What to Do

January 8, 2006 10:33 AM

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?

Dr. Nick

January 9, 2006 02:17 PM

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

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

drew

January 9, 2006 04:33 PM

"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?

Lois Griffin

January 9, 2006 04:44 PM

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?

Michael Klein

January 9, 2006 10:56 PM

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

Scared

January 10, 2006 06:22 AM

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

dug

January 10, 2006 05:03 PM

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

Dr. Nick

January 10, 2006 07:12 PM

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.

Bubba

January 11, 2006 01:23 AM

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.

TomR

January 11, 2006 12:41 PM

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

Stewart

January 11, 2006 06:17 PM

"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.

smallbean

January 12, 2006 03:16 PM

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.

Doug

January 12, 2006 10:33 PM

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)?

bubba

January 12, 2006 11:38 PM

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.

Drew

January 13, 2006 05:15 PM

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.

Dr. Nick

January 13, 2006 10:29 PM

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.

dcgirl

January 16, 2006 11:19 AM

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.

Stewart

January 17, 2006 02:32 PM

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.

Ron

January 18, 2006 07:59 AM

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).

DCDale

January 18, 2006 08:03 AM

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?

TTG

January 18, 2006 08:19 AM

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.

JJ

January 18, 2006 08:30 AM

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?

Wes

January 18, 2006 10:15 AM

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.

smallbean

January 19, 2006 11:28 AM

Check this site:

http://www.anotherfuckedborrower.com

It has good posts regarding those exotic loans.

historian

January 19, 2006 05:33 PM

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.

winston

January 19, 2006 08:16 PM

THIS PICTURE IS BEAUTIFUL! IT SAYS IT ALL!

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

from http://bubblemeter.blogspot.com/

RSB

January 23, 2006 12:31 AM

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.

Drew

January 23, 2006 11:54 AM

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...

bradh

January 23, 2006 04:12 PM

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.

John

January 23, 2006 08:36 PM

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.

Saul G.

January 24, 2006 11:20 AM

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.

Drew

January 24, 2006 11:25 AM

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?

smallbean

January 24, 2006 12:31 PM

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."

John

January 24, 2006 04:22 PM

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.

bradh

January 24, 2006 04:25 PM

-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.

Dr. Nick

January 24, 2006 07:34 PM

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

Wes

January 25, 2006 10:34 AM

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.

Guy

January 25, 2006 12:07 PM

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.

Barb

January 25, 2006 02:15 PM

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

brian

January 25, 2006 02:27 PM

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

smallbean

January 26, 2006 01:40 PM

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.'"

Shane

January 26, 2006 06:26 PM

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

ThomasL

January 28, 2006 03:24 PM

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.

Drew

January 30, 2006 12:16 PM

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!

Chad

January 30, 2006 01:29 PM

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?

hak

January 30, 2006 04:38 PM

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

Bubba

January 30, 2006 11:08 PM

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...

Dr. Nick

January 30, 2006 11:14 PM

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.

bradh

January 31, 2006 10:12 AM

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.

mister bubble

January 31, 2006 01:03 PM

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?

Saul G.

January 31, 2006 04:26 PM

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

Bill

January 31, 2006 05:29 PM

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).

ThomasL

January 31, 2006 08:03 PM

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

Guy

February 1, 2006 12:46 AM

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.

Al Bedsole

February 1, 2006 11:30 AM

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.

Drew

February 1, 2006 01:10 PM

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.

ThomasL

February 1, 2006 01:38 PM

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)

Jamie

February 1, 2006 05:13 PM

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.

Angel

February 1, 2006 06:20 PM

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.

littletiger

February 2, 2006 03:39 AM

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.

Mike

February 2, 2006 04:04 PM

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.

smallbean

February 3, 2006 12:17 PM

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.

Beth

February 3, 2006 03:35 PM

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.

tiggie

February 3, 2006 06:34 PM

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.

Andrew

February 4, 2006 04:05 AM

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.

end of an era

February 4, 2006 01:16 PM

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

ThomasL

February 4, 2006 02:37 PM

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)

Dr. Nick

February 4, 2006 09:33 PM

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.

Justin

February 5, 2006 02:16 AM

Wash DC Bubble is popped. See the data here:

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

MG

February 5, 2006 05:14 PM

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?

bradh

February 6, 2006 10:57 AM

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.

smallbean

February 6, 2006 12:14 PM

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.

John

February 6, 2006 12:48 PM

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!

smallbean

February 6, 2006 01:01 PM

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.

Bill

February 6, 2006 09:00 PM

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.

bradh

February 7, 2006 10:00 AM

smallbean- Interesting article. Keep in mind though that interest rates were in the teens in 1980.

ST

February 8, 2006 09:20 AM

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.

smallbean

February 8, 2006 01:43 PM

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%.

thomasB

February 8, 2006 02:44 PM

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."


Jamie

February 9, 2006 01:15 PM

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!

Leo

February 14, 2006 09:02 AM

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=

Todd Bennett

February 14, 2006 12:03 PM

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.

winston

February 14, 2006 01:25 PM

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.!!!

Wes

February 14, 2006 04:09 PM

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 )

Max

February 14, 2006 11:29 PM

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

Bob

February 15, 2006 09:49 AM

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.

dcgirl

February 15, 2006 10:10 AM

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).

John Davis

February 15, 2006 11:21 AM

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.

smallbean

February 15, 2006 12:20 PM

"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.

K

February 15, 2006 02:35 PM

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.

Saul G.

February 15, 2006 03:43 PM

"Delusional" defined:
http://washingtondc.craigslist.org/rfs/134143929.html

GG

February 15, 2006 07:00 PM

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.

Evan

February 15, 2006 07:11 PM

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...

Jim

February 16, 2006 08:16 AM

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.

smallbean

February 16, 2006 12:29 PM

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.

Max

February 16, 2006 01:04 PM

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.

JustinWang

February 16, 2006 01:05 PM

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.

Evan

February 16, 2006 01:23 PM

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).

winston

February 16, 2006 09:33 PM

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

Times four

February 17, 2006 12:14 AM

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.

smallbean

February 17, 2006 04:43 PM

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.

GregB

February 17, 2006 04:52 PM

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?

Earl

February 17, 2006 05:00 PM

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.

Jon

February 17, 2006 08:49 PM

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.

ThomasL

February 17, 2006 10:35 PM

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.

Times four

February 18, 2006 12:26 AM

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.)

dcgirl

February 20, 2006 08:46 AM

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.

Savingfor1sthome

February 21, 2006 09:45 AM

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.

JimL

February 23, 2006 08:12 AM

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.

Drew

February 23, 2006 02:19 PM

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.

TFraz

February 24, 2006 12:04 AM

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.

winston

February 24, 2006 03:04 PM

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.

Drew

February 24, 2006 05:08 PM

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.

7y

February 24, 2006 05:43 PM

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.

tc

February 25, 2006 03:15 AM

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.

K

February 25, 2006 06:00 PM

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

horse lover

February 25, 2006 09:28 PM

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!!!

EPop

February 25, 2006 09:49 PM

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.

Future

February 26, 2006 02:40 AM

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."

Allison

February 27, 2006 10:54 AM

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

bradh

February 27, 2006 01:26 PM

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.

winston

February 28, 2006 12:29 PM

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???

MarcusGraham

February 28, 2006 01:18 PM

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.

Drew

March 1, 2006 11:40 AM

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.

bradh

March 1, 2006 05:17 PM

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.

Tina

March 1, 2006 05:52 PM

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.

TeddiB

March 1, 2006 06:08 PM

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

TeddiB

March 1, 2006 06:11 PM

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

Dr. Nick

March 1, 2006 10:42 PM

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

Jamie

March 2, 2006 08:03 AM

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!

Winston

March 2, 2006 12:35 PM

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?

MarcusGraham

March 2, 2006 01:01 PM

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!


bradh

March 2, 2006 02:59 PM

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.

Jamie

March 2, 2006 07:49 PM

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).

tc

March 2, 2006 11:01 PM

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.

todd

March 3, 2006 09:26 AM

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.

Jamie

March 3, 2006 11:08 AM

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!

Townhouse

March 5, 2006 09:33 PM

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.

K

March 6, 2006 12:26 PM

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.

Alandra

March 6, 2006 03:53 PM

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.

Alandra

March 6, 2006 04:03 PM

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.

K

March 6, 2006 04:37 PM

Luxury home sales soar : CNN

http://money.cnn.com/2006/03/02/real_estate/luxury_home_sales_soaring/index.htm?cnn=yes

Stewart

March 6, 2006 04:57 PM

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.

Andrew

March 6, 2006 11:25 PM

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.

smallbean

March 7, 2006 01:05 PM

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?

townhouse

March 7, 2006 04:45 PM

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?

Dr. Nick

March 7, 2006 09:09 PM

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).

tc

March 8, 2006 12:42 AM

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.

Drew

March 8, 2006 11:44 AM

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.

brian

March 8, 2006 12:48 PM

http://photos1.blogger.com/blogger/6089/1833/1600/youarehere.jpg

bradh

March 8, 2006 04:35 PM

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.

QuantumFund

March 8, 2006 06:01 PM

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.


DasChaos

March 9, 2006 02:44 AM

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.

smallbean

March 9, 2006 09:19 AM

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?

John

March 9, 2006 10:02 AM

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!

K

March 9, 2006 10:53 AM

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.

Bob

March 9, 2006 11:23 AM

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.

smallbean

March 9, 2006 12:10 PM

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 :).

Burt Hoovis

March 9, 2006 02:10 PM

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.

bradh

March 9, 2006 02:25 PM

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’.

Rory

March 9, 2006 02:41 PM

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!

Bill

March 9, 2006 07:51 PM

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

Rory

March 9, 2006 08:31 PM

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!

scohan

March 10, 2006 12:18 AM

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.

tc

March 10, 2006 12:30 AM

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.

Future

March 10, 2006 12:56 AM

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. Neff said she believes that the assessment is wrong because her house has been on the market for two months -- for $689,000. All Neff said she could think when she read her notice was: "Are they on crack?"Assessments rose briskly in the inner suburbs, too -- 20.6 percent in Fairfax County, 19.5 percent in Alexandria, to name two."

bradh

March 10, 2006 11:05 AM

John,
Well, that proves it. The bubble has indeed burst and prices are going to plummet 80%. People will be jumping out of the windows of their now worthless condos. There will be weeping and wailing and gnashing of teeth. Tell your buddy thanks for clarifying this for everyone.

Note to moderator: Please end this thread. Since John and his buddy have proven beyond any question that the dreaded bubble has burst, there is no further need for discussion. I'd like to take this opportunity to invite everyone to my open house this Sunday....... wait, make that Saturday...

Smallbean,
I think 'gleeful' is a too strong of a word. Irrational exuberance is a better description. (that is a joke, Dr. Nick) I am pleased with the appreciation on paper and I think the chances of the value dropping back to and below what I paid for the place are very very small. It seems that there are a lot of people on this board though, who would love to see that happen. I bought my house first as a place to live, as an investment second. I don't understand the mean-spiritedness and people waiting to say ‘I told you so’. God forbid someone buy a house and realize a gain.

Tc,
I agree with you. The doubting Thomases on this board can spout statistics all day but the fact is that over time Real Estate does ‘always go up’. Cheers.

smallbean

March 10, 2006 11:32 AM

Bradh: thanks for your answer. So basically you wouldn't buy your current property at its current value even you can afford it. Then how can you expect the housing price to keep at present level if wealthy people like you wouldn't buy anymore?

tc: similar questions for you. If you hadn't buy your rental property 17 years ago, would you buy it now with its currrent price? And would you break even by renting it out right now if you purchase it at its present price?

I did some calculation using Eloan myself, with 0% appreciation, a $1800 rental which would sell at fair market value $500,000 and with 20% put down 5-year 5.5% rate), I will definitely lose money. In other words, if the home had 0% appreciation (even with 3% appreciation per year) for the next 5 years, I'm better off renting right now and don't have to rush into buying.

For rental properties, it's a different scenario that can't be mixed with Eloan's calculator. My personal feeling is that as long as it has negative cash flow, it ain't worth investing.

John

March 10, 2006 12:20 PM

Future:
I understand that prices rose sharply last year, I don't think anyone here is disputing that fact. Sales were also at an all time high, in 2005. But right now we are talking about 2006 and the coming years, and what may happen to real estate, in the coming years. My friend actually lives in Leesburg. I am not talking about the tax assessed value of his home, I am talking about the real selling price of the home. Last year he considered selling his townhome, and a realtor thought $430,000 would be a fair price. He decided not to sell because he thought real estate would keep going up. This year he considered selling once more, and they told him $395,000 would be a realistic figure, based on the prices of similar units in his area. Note: The similar units in his area have not been moving, even at the lower price. Sure, he could put his house on the market for $430,000, but nobody will buy it, just like nobody is buying the other townhomes.

TC:
If you have property that was purchased 17 years ago, I'm sure you'll make good money by renting it out. But explain to me how it makes good financal sense to buy a place in the current market as an investment, pay a mortgage of $2000 a month or more, then rent it out for $1300. That is the current situation right now. There are many places around here to rent for $1300 or even less, like it or not. I make very good money, and with the extra money left over every month by renting, I am quite happy with the way my 401k and Roth IRA are growing!

drew

March 10, 2006 12:27 PM

TC - As one our dead president's used to say, "...there you go again!" The historical precedent for residential real estate appreciation is, in fact, about one percent plus inflation. In fact, real estate purchased to live in is a lousy "investment," over time. The value of owning your own home relates to paying for future housing with current dollars. It's really that simple.

This thread was not intended to question the merits of homeownership. Rather, the question is, are we in a real estate bubble in Washington? Duh. You are either a real estate agent, or, given your demonstrated lack of math skills, a member of Congress. Good luck with your real estate empire.

Dr. Nick

March 10, 2006 01:19 PM

BradH,

It's sometimes difficult to decipher humor on a blog. There are certainly a lot of crazy theories out there on the web.

No, I'm not waiting for a 50% drop in prices. In fact, I don't think the decline will be that large. But like all markets, the RE market occassionaly goes through a correction. The rate of home price appreciation over the past five years has been very large compared to historical rates. I still believe in a slow decline over several years of at most 20% as the number IOs and ARMs which convert increase.

I agree McMansions and condos will experience a greater loss in value than a single , detached home in Cleveland Park. But the pyscological effect of watching McMansion and condo price decline may inspire those in the more desirable parts of DC to sell, fearing they could be next, esp. if they bought more home than they can really afford using an IO or ARM. There has been a lot of panic on the way up (i.e., "If I don't buy now I'm AFRAID I'll never be able to buy a home"); how much panic occurs on the way down will certainly affect prices as well.

The current real estate market is scary. When EVERYONE is getting rich from the same investment it's time to be wary. Remember how EVERYONE was getting rich from the NASDAQ in 1999? It's still less than 50% of it's peak after 6 years.

Sure, a 5 minute commute can be priceless. However, if one believes properties property values will decline over the next 12 months then why not purchase your 5 minute communte at a discount next year? Smart investments yield greater returns than simply buying into a bull market and assuming the good times will go on forever.

I agree with Drew, the true long term appreciation of home values is around 1% when you include all costs. For example, my parents bought a house in 1986 for $110,000; my mother sold it recently for $325,000 (roughly a 3X increase in value, most of which occurred in the past 5 years). Some people would argue my mother made $225,000 on the house. However, when one includes interest paid on the loan principal, property taxes, repairs, maintainence, home owners insurance, real estate transaction fees, capital gains (if any), etc. for a period of 20 years the true "profit" is probably quite small.

I would challenge all homeowners to keep a journal of EVERY expense associated with their home over the course of ownership no matter how small the cost and regardless of whether the expense was necessary (i.e., fixing a leaking pipe) or optional (i.e., painting the bedroom a new color). Then when you sell your property you can calculate exactly how much money you made.

The only reason a home is the best "investment" most people make is because it is the only long-term holding they have.

Dr. Nick

March 10, 2006 01:24 PM

Winston,

I'm a bear with respect to the DC real estate market.

However, if home prices do drop by 60% over three years and the economy crashes, but you lose 3 years of salary and deplete your savings over that time period just to buy a property at a discount with respect to today's prices, then what is the REAL cost of your home?

It seems to me the cost of the home equals the pruchase price of the home + 3 years salary + all your savings. That doesn't sound like a good deal to me.

QuantumFund

March 10, 2006 01:43 PM

Brad,

I live in the area so I am well aware of the incomes in it. I have always said DC has a large population of people making 80-250k. I am referring to the very top end. The ones buying those high end San Francisco or NYC homes.

So while the median income or average income in the areas is very similar, the very top heavily favors San Fran or NYC. There is a huge difference between being a partner and Vinson Elkins etc making several hunder k a year and being a top trader, I banker, or hedge fund guy. The top ends are exponents higher than the law guys. That is why San Fran can support higher prices.

April

March 10, 2006 03:49 PM

My husband and I just moved to the Annapolis area from Pittsburgh PA last month. I commute to Alexandria for my new job and my husband is currently looking for employment (law enforcement.) Although I nosed around the MD housing market in the months preceeding our move, I am still shocked to see what those before us have paid for sfh and condos. We are currently renting, as our house is on the market in Pgh (3BR/2BR/Garage-$114,000! *sigh*) but I think we will wait this out for awhile (despite our RE agent's dismay) and keep on rentin' and pay off our debt, save some cash for a downpayment, and buy when we can afford "life", as well as that monthly mortgage payment. Thanks so much to everyone for shedding some light on the issue!! I don't feel so bad to know that there are others out there that simply cannot afford (or are too smart)to make the jump to ownership here.

smallbean

March 10, 2006 05:18 PM

Future: you and John probably had different interpretation of "assessment". My guess is that John was talking about appraisal while he used the word "assess".

I happen to know a collegue who bought her house end of 2004 at about $750K. The tax for 2005 assessed her house at about $850K (she argued with the county too) while two of comps in the neighborhood have been sitting for over 6 months already, their asking prices have dropped from mid-$800K to below $800K. If they both are sold at below $800K, then the appraisal for houses in the neighborhood will probably drop while can't be reflected on the county's tax assessment. Besides, we all know the county would be happy to over-assess one's property value than under-assess it for reason that doesn't need to speak out loud.

fb

March 10, 2006 08:53 PM

I have been reading this blog with interest over the past few months, and have found it to be quite informative. Generally, it seems you find homeowners and renters to be on opposite sides of the fence, which is not surprising. (Disclosure: I moved here in JUL 2005, and lived up here for a few years after graduating college, back in 1998. I came back for a 2 year contract and a promotion, and will be moving back to MIA between JUL and NOV 2007. Currently renting.)

I have lived all over the country, including L.A., Fresno, DC, and MIA/Ft. Laudie. It seems like quite a few of the homeowners AND renters on here have valuable opinions, and interesting perspectives on the DC RE market. One thing puzzles me though...why does it seem that everyone overlooks the most important factors in choosing a place to live? It's not just about jobs, because let's be honest, in this country you can find a job anywhere, provided you are educated and motivated...yes, ANYWHERE. Sure, maybe in DC you'll be unemployed for a far shorter period of time than in, say, Fresno (highest unemployment in the country last I checked). I mean heck, I got a pay INCREASE to move to MIA from here the first time, and it's approx. 27.73% cheaper to live there. And I'm no better nor worse than anyone else.

I used to think I was completely anecdotal in my views on what the definition of a "great" place to live is. But after being up here for 8 months now (and hearing people kvetch incessantly), I am of a different opinion. People are people, no matter where you live. And traffic, weather, culture, crime, and a plethora of things to do still rank at the top of the list for quality of life. So beyond the inordinate number of jobs up here, can anyone sell me on what makes this area so "great"? Please be honest, how many times are you going to visit the Smithsonian before you admit it gets old?

I respect everyone's opinions on here, to be sure. But I just want to hear how anyone can make the argument that this city provides a quality of life similar to that of L.A., SF, or Ft. Laudie? It's like comparing apples to...well heck, not even oranges. It's like comparing apples to cars. And THIS is where I think the argument about overvalued vs. undervalued should begin, IMHO. All comments are welcome.

winston

March 11, 2006 07:34 AM

Hallelujah! NVAR's Feb. numbers are online now. Check this out!

http://www.nvar.com/market/marketstats/feb06/index.html

Oh wait a minute, I just don't understand why DOL's pretty job growth numbers haven't helped to absorb the inventory a bit. BTW, it was 78 on Friday, and we are having a great warm weekend now. So seasonally adjusted??? %@#@%@# Sorry I'm not intelligent enough to explain.

Bush is praising the historic high homeownership rate again, which really makes me puke. I don't see those stupid nutheads with exotic loans as homeowners, they're just a buch a fools or gamblers holding a Macmansion over their head while dancing on the edge of a knife.

I'm repeating what I have said in previous post -
1. With the freaking economy so hot and the deficit so huge, Fed has to raise the rates which I think will hit 5% or above.
2. Housing price in DC region drops at least 20%in 2006.
3. In the next 3 years, we see price drop 50-60%.

The Great Recession is on the way folks. When you feel so high in a party, it's about the time to end.

John

March 11, 2006 08:05 PM

Just the facts:

http://www.fdic.gov/bank/analytical/stateprofile/atlanta/va/va.xml.html

"In the Northern Virginia housing market, monthly sales of existing homes have been declining from year ago levels since May 2005 (see Chart 3). At the same time, monthly inventories of unsold homes have seen dramatic increases, with a rise of over 250 percent in November 20"

Earl

March 12, 2006 02:48 PM

For those of you who are wondering about the mixed-signals of the RE market of late, i.e, increasing inventory AND rising prices, see excerpts from this March 4 article in the NY Times:

Hoping for Best in Home Sales, 2 Sides Sit Tight
By VIKAS BAJAJ and DAVID LEONHARDT

Along much of the East and West Coasts, home buyers and home sellers are engaged in a stare-down. Many buyers, having heard that the real estate market is a bubble in danger of popping, are refusing to offer the asking price on a house, convinced that it will soon drop. But many sellers are not blinking either, thinking that offers will improve when the weather does and biding their time until then.

As a result, the housing market is now in a deeply confusing state, with average prices still rising even though homes are taking much longer to sell and the number on the market has soared. Sometime soon — probably in the spring, the peak sales season — one side or the other will have to capitulate, many economists and industry executives predict.

"In my opinion, the jury on housing is still out," said Antonio B. Mon, the chief executive of Technical Olympic USA, a home builder. "The period from now until May will tell the tale."

Many real estate agents argue that the current slowdown is merely a pause, pointing out that interest rates remain low and that Americans still seem convinced that houses are a great investment. Buyers, on the other hand, are hoping that the rising number of unsold homes is a signal that a slump is coming. It was an early sign of the last housing slump, in the early 1990's.

Nationwide, the number of existing homes for sale jumped 36 percent between January 2005 and January of this year, the National Association of Realtors reported Tuesday. At the same time, average selling prices have continued to rise, even in the markets that had already experienced the biggest leaps in prices and the increases continued even in the final months of last year.

The latest statistics on house prices appear to be dominated by sellers who, for one reason or another, quickly received good offers. That has kept average prices rising. Builders of new homes have also offered bonuses to buyers, like enclosed sunrooms or top-of-the-line appliances. So the builders have been able to continue selling homes without cutting the list prices.

But many houses in the Northeast, Florida and California are, in fact, selling for less than they would have six months ago. In parts of the Northeast, the drop has been about 5 percent. Other sellers have cut their price and still not found a buyer.

Many real estate agents argue that the market will not slump as it did a decade ago. The job market is now improving. The interest rate on a 30-year fixed rate mortgage remains just 5.79 percent, according to Bankrate.com. And the number of homes on the market remains far lower than in the early 1990's, relative to sales volumes, despite the recent increases.

The current slowdown is simply a transition, the agents say, from a scorching hot housing market to a normal, healthy one. But many buyers say they have a sense that the long boom has finally come to an end.

Buyers who showed patience in the early 1990's were rewarded. From the summer of 1989 to the summer of 1990, the number of homes for sale rose about 10 percent, according to the Realtors association.

At first, many sellers refused to accept lower offers, thinking that they would get their asking price or close to it. But they eventually had to unload their houses, and in the Northeast and California that often meant reducing the price. In the Los Angeles area, the median sale price of existing houses fell 22 percent from 1992 to 1996, before taking inflation into account.

TG

March 12, 2006 03:02 PM

With seemingly contradictory RE data coming out lately, one should be careful to compare apples to apples and oranges to oranges. Remember RE is a highly-localized market. While both national and DC/VA/MD data shows a rising stock of housing inventory, NATIONAL data shows an overall increase in housing prices while LOCAL data shows a decrease in prices by 5%, according to January statistics. Further, one should look at what is being sold, e.g., SFR or condos. Locally, the condo market is experiencing both the most rapid increase in inventory and greatest price reductions and is skewing the view of the SFR market (which is also softening, but not like the condo market).

The lesson: if you're in the market to buy/sell in the DC/VA/MD area, you need to look at local data for your kind of property. National data is interesting for economists, but doesn't have much of a bearing on local RE projections now or in the next few months.

Pilar

March 12, 2006 03:10 PM

I'm in the market for a house in the DC area, but don't have to buy immediately. Since the market is clearly in a flux, my plan is to continue to monitor the market over the spring, but not seriously start looking to buy until the spring rush has passed (unless, of course, my dream house pops up at the right price). I understand that the spring selling season unofficially starts the weekend after the Super Bowl, but what is the "rule of thumb" about when it ends? I read an article recently that mentioned that the selling season ends in May, but that seems too early. Thoughts?

John

March 12, 2006 03:15 PM

If prices are not going down, then explain this please:

http://www.zillow.com/Charts.z?chartDuration=1year&zpid=51742999

Trisha

March 12, 2006 03:18 PM

As a potential first-time buyer, I'd be interested to know from more seasoned home-buyers what are the "tricks" that the RE industry uses to get you to buy a house? Some are becoming apparent in the current housing slowdown, e.g., open house parties, freebie giveaways, help with closing costs, and more predatory practices like aggressively pushing irresponsible mortgage products. I've also heard of "staging," i.e., special effects to make a house look bigger or to cover up cosmetic or structural flaws, agents showing the most expensive house last, and making subtly derogatory comments about lesser-priced properties.

Any others I should be aware of?

1stTimeBuyer

March 12, 2006 09:18 PM

http://www.washingtonpost.com/
wp-dyn/content/article/2006/03/10/
AR2006031000865.html

"Condo Sellers Turn to Food And Freebies" -Washington Post-3/11/06

Time for some free booze & appetizers. I'm still not buying in at current prices though.

Kanye-Shlomo

March 12, 2006 10:42 PM

This is good reading...many alarmists in the crowd. My girlfriend and I just decided to move-in together and are toying with the idea of buying rather than renting. We are planning to get married within 2 years and building some equity first is an appealing notion.

However these opinions are scaring me. We are looking at U St. lofts (900 sq. ft) asking $420's, new condos on 5th and Mass Ave for $450's, etc. Most friends we have who are familiar with the market think it's a good idea. We plan on being in DC for another 2-3 years MAXimum...the 3 year I/O ARM is what we're currently toying with.

Are we just totally being deceived? Our life savings is at stake, but rent prices have parity with what our mortgage payments would be. I figure even if we make 6% in 2 or 3 years we'll at least break even. It's hard to foresee not achieving that.

If someone could slip into my shoes for a second and tell me their expert opinion I would be appreciative.

Dave

March 12, 2006 11:00 PM

I have been reading these posts for some time and just wanted to kick in my 2 cents. I have been renting in DC for several years and have seen this real estate market skyrocket. I will admit I got into a few bidding wars for some N. Virginia properties in the last year. But soon, after loosing my second I realized the maddness and got out. I can only liken it a frenzy, where couples were running outside of open houses to their call old "Uncle Charlie" to scrape up 10 grand more while the real estate agents were peering out the window as they admired their fingernail polish and spurt out the famillair words "the metro will never move" and "there is only so much property to build on" to others as they walked through.

I was recently married and between us we make a relatively healthy income, in fact as someone earlier posted, when I saw what we could approved for a mortgage, I ripped it up. We have chosen to rent for a while as we believe it is the most prudent thing to do (plus we are not sure how long we will be in the area). Now we are not foolish enough to beleive that we will pick up a 3 bd rm condo in Arlington for $300k in a bottom feeder cash deal in the next 6 months or even a year. However, prices will do one of 3 things, stagnate and wait for wages to increase, take a slight dip and level off for a while, or three take a dive where values could drop between 10-15% maybe more. Considering the direction of interest rates and the "unique" nature of these many recent mortgages (i.e. interest only and my favorite the negative amortazation) I think number 3 is more likely to come to pass in this area, especially when you throw on the many speculators who have jumped on the train too late. While I don't think is right to wish financial ruin on folks, it has been rather frustrating to see the price of a simple home, a place to live, and sleep become so overly inflated. At some point, if numnber 3 happens, the lesson learned here for all is that a home should be a place to live, not a investment for the novice to flip a quick easy buck. Some folks have and good for them as that is capitolisim. Hopefully they will spend the cash and keep driving the economy. For those late commers who may be caught in the financial turnbuckle, that is capiotlisim as well, as the road to riches can just as easily lead you to the US Bankruptcy Court. As for me you can't beat sound financial practices, that is, consider what the home is worth, not what you can afford in a monthly payment, the two have almost nothing to do with each other. My view is if you can't afford it on a sensible mortagage, then don't buy it. If you can but the value dosen't pass the laughing test stand down. Believe, in my experience, you sleep better, but that's just my call...but I think its better that loosing sleep on whether you can make the margin call. The "spring market" is upon us....we shall see.

John

March 13, 2006 10:43 AM

You're absolutely correct, how dare us 'doubting Thomases' use statisitics and facts to draw conclusions!
I provided the experience my friend is facing just as an example of the direction the market may be heading, and to keep people from making the same stupid mistakes alot of others around here made. The simple truth is, if you must take an interest only loan to pay for a home, you CANNOT AFFORD THE HOME!
Personally, I will be renting for the next few years, watch my savings account grow with the money I am saving by renting, and will then transfer out of here into an area where you can actually buy a great home for $350k, which is like 95% of the country right now. If someone wants to live in a $400k overpriced shoebox, thats fine with me. I prefer a nice 3000 sqft single family home with land.
Disclaimer: I work for the federal Government, and like alot of people around here, have a great deal of options as as far as transferring to different areas. So, to everyone that bought into this ridiculous fiasco, have fun and enjoy the great benefits of this city, like the great climate, scenery, and low crime rate. Oh wait a minute, this area doesn't have any of those things! My mistake!

fb

March 13, 2006 12:19 PM

Kanye-Shlomo,

You are in the same boat as us, in that you don't plan on being up here for too long. IMHO, I'd steer far clear of purchasing anything in such a short timeframe. This market is unstable, and you *may* end up taking a loss when all is said and done. Of cuorse it's all a crapshoot, and you'll eventually make the decision that's best for you. But for us, we have a huge fear of being *trapped* up here -- that is, having to choose between a loss on a property, and staying up here. I fear both of those alternatives greatly.

Good luck with whatever decision you make!

bradh

March 13, 2006 03:14 PM

Smallbean
I do ok but I would hardly call myself wealthy. What I am saying is that when I bought my home in 2003, I thought that values would keep increasing enough to justify what I paid for the house (which I thought was reasonable at the time) plus the cost of remodeling and still be a pretty good investment. This takes into account that I can do most of the work myself. Unless prices do drop 50%, like some of the folks on this board are predicting, it looks like I did OK. As I have stated, I believe prices have leveled off and we aren’t going to see anywhere near the huge appreciations we have seen over the past few years. So it would not make sense for me to pay 700k and then spend the money to fix the place up. In a nutshell- in 2003 my house was a good deal for me, all things considered. In 2006 my house would not be a good deal for me, given the way the market has changed. Do I think the house is truly worth 700K? If someone is willing to pay that for it then I guess it is. Is a shoebox apartment in Manhattan worth 1 million? To some folks, apparently it is. I guess the real question is: What would I do if I were a buyer in today’s market? I would probably choose not to live in or close to the city. What I am hearing a lot of people saying is “I only want to pay X dollar amount for a house but also I want to be in a really nice neighborhood and I want a 10 minute commute”. This board is based on “is there a RE bubble in DC?” So to the people saying that they have been priced out of market here- Is there any major metro area in the US that you feel is fairly priced? To me, DC’s prices seem to be in line with the rest of the country. Is there a school of thought that is saying “well DC is such a dump, how can home prices be so high?”?

Future

March 13, 2006 08:48 PM

Smallbean,
An assessment and an appraisal are two different things. John's comment was referring to an assessment. From John's posting: "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." I think John meant buddy's (not buddies) and argument (not arguement). There must be an underlying education issue as well as an issue of not knowing what the heck assessed value means. That seems to be commmon theme here. I've see a lot of lip talk here with no actual fundamental real estate knowledge. It all comes out though in the way people are presenting themselves. Also it might be interesting for you to know that a residential government lending appraisal value is good for 6 months per USPAP and I believe the time frame John was referring to was about 6 months. (from summer to now) Why would anyone need another appraisal a couple of months later?

Wes

March 14, 2006 10:59 AM

Real estate traditionally appreciates at 4.7%. 3% of that is inflation and 1.7% is real appreciation. These are numbers straight from Dr. Robert Shiller's book, Irrational Exuberance, Part 2. Dr. Robert Shiller is a noted Yale economist who has done extensive studies of equity and asset markets. Check out his site here: http://www.econ.yale.edu/~shiller/

Looks like Drew is close to correct. BradH, glad you have made so much on paper but I feel you are overly optimistic. You can talk finance all you want but I doubt you have the knowledge or have conducted the same studies as Dr. Shiller.


John

March 14, 2006 11:52 AM

Future:
Step 1: Read Posts
Step 2: Respond

I have already corrected my mistaken use of the word 'assessed' on a prior post. Again, I was talking about the actual selling price of the home. FYI, in regards to my grammar, I was typing quickly and was just trying to share experiences and facts. Instead of picking apart grammar, why haven't you responded with any facts to support your opinions? Many others on this board have posted messages and links showing factual data, and not a single person has been able to refute any of the indicators that the bubble is bursting. Now, the size of the burst is certainly open to debate, but inventory is WAY up and sales are down. Those are FACTS. The law of supply and demand will most definitely drive prices down further.
FYI: I have a four year degree in Accounting, I graduated Magna Cumm laude, and I've passed 2 sections of the CPA exam. That's not enough education to discuss financial matters?

Also, in regards to comments that the 'market always recovers'. This has historically been a true statement in regards to the stock market. Since 1929, we have seen an average gain of approximately 10.8% per year. Some years are up, some are down. However, the interesting thing to note is that not all stocks recover, only the market as a whole. Also, some industries/sectors slip and do not recover for a very long time. The NASDAQ, which has been weighted toward tech stocks, was at 5046 in 2000, but last time I checked was still only at 2,279. So 6 years later it still has not recovered even half its former value. The irrational exuberance, as Alan Greenspan has called it, of the current housing market is equally as insane as the tech bubble and may end up crashing just as bad. Only time will tell.


bradh

March 14, 2006 01:51 PM

John,
You didn’t use statistics and facts. You used one isolated, anecdotal situation to make a very broad statement and actually confused more people than you enlightened. Do you mean ‘assessed’ or ‘appraised’ or what?
Something I have noticed in this discussion is that many of you consider DC a terrible place to live. I have lived in North Carolina, coastal South Carolina, South Beach Miami and Ft. Lauderdale. When I was single and in my twenties I visited DC and I have to say that I was not impressed with the social scene and activities that a mid-20’s male would pursue compared to where I was at the time. Now that I am in my mid 30’s and have different priorities I guess I don’t see what is so bad about the place. Don’t get me wrong, if I could have the same opportunities work-wise that I have here but live near a beach I probably would. What is it that you think is so bad about DC other than the fact that you think real estate is overpriced? I am talking about the whole DC metro area.
Just a note about interest only loans: Mortgages are ‘front loaded’. Your first payment on a 30 yr fixed is aprox. 83% interest, 17% principal. On your 60th payment or the beginning of yr 5, your payment is 78% interest, 22% principal. If you stay in the mortgage for the full term you do not start paying more principal than interest till about yr 18. So a 30 yr. fixed is a lot closer to ‘interest only’ than some might think. I believe it has been mentioned here that on average most people keep their homes for about 5 yrs. On a 400K mortgage the difference in payment compared to a 30 yr fixed is about $400. Given what a ‘lousy investment’ real estate is, according to some of the posters here, does it make sense to take this $400 per month and put it toward a better investment? Also, if you have an interest only loan, there is nothing keeping you from paying down the principal. ‘Interest Only’ is an option not a rule. I am not defending or attacking Interest Only loans, I am just providing further food for thought for this discussion.
The 1% appreciation figure for homes may be correct if you average in all the Podunk, Iowas and Bugtussle, Arkansas around the country but do you really think that is a realistic figure for this area or for the East and West coasts for that matter?

fb

March 14, 2006 02:32 PM

bradh,

You are asking interesting questions. The first, "Is there any major metro area in the US that you feel is fairly priced?", I would have to answer this carefully. There are, I am sure, some major metro areas that are fairly priced. Seattle is reasonably priced, when compared to other major metro areas like LA, MIA, and DC. So are Denver and Houston, especially Houston.

You go on to state that "To me, DC’s prices seem to be in line with the rest of the country. Is there a school of thought that is saying “well DC is such a dump, how can home prices be so high?”"

IMO, the argument should first be about whether or not DC is overvalued. When you look at all the studies, or if you study some of the basic numbers yourself, it's hard to argue that it's not at least *somewhat* overvalued. Which leads to the second question: 'How overvalued is it?'

I assert that DC is one of the top 5 most overvalued major metro areas in the country, and quite possibly in the top 3. Yes, LA metro and MIA/FLL metro are more overvalued, based on the underlying stats of their respective regions (MHI, cost of homeowner's insurance, etc.)

Sure, maybe an argument can also be made for SF. But both MIA and SF suffer from geographical boundaries that cannot be overcome. For example, recent homebuilders studies have estimated that all available land in Broward Country will be zoned and owned by 2015, due to natural boundaries (Everglades and Atlantic Ocean). Where can anyone go, except N to West Palm, or S to Homestead? The argument that DC is geographically challenged is feeble, if you look at city plans for above-mentioned metro areas. DC is the master of urban sprawl, bar none. But I digress.

Even the weather, excitement, and allure of LA and MIA can't make up for the skewed property listings, although these factors at least help balance it out. DC has only one thing going for it: a plethora of jobs. And, if one is diligent and dedicated enough, jobs can be found anywhere. Heck, do a quick survey on Salary.com, and look at the median salaries for a Software Engineer IV (my field) in both Fort Laudie and Reston. We're talking a 4k difference between MIA/FLL and NOVA...and there's a 28% COL difference!

So in answer to your question, yes, IMO there are more overvalued areas in the country. But very, very few. And personally, I'll have a much less difficult time slapping my money down for an overvalued place in Weston (10-15 miles W of Ft. Laudie), since I have no problems being locked into a property long-term that exists in perennially beautiful weather. Are there downfalls? Yep. But again, I haven't seen any evidence to sway my opinion that DC is highly overvalued.

Here are some local factors to consider:
1. Baby Boomers are retiring en masse. We know that FL has one of the fastest, if not the fastest, growing population in the US, thanks mostly to Baby Boomers. A TON of these boomers are leaving the DC area for better climates.
2. Compared to other major metro areas, you are going to be hard-pressed to find enough young ppl to replace the outgoing workforce. Simply put, there is just not enough to do here to attract them. And you're simply not going to find enough 25-28 year-olds that are willing to split a rent 4 ways. (Number 2 is surmisal on my part, more than anything else. But I'll bet dollars to donuts I'm right on this one, based on some interesting studies I've seen.)
3. We are likely going to see a Democrat in office in 2008. This will likely affect defense and DHS spending, which means DC contractors (the bread and butter of the DC economy) will almost assuredly be affected negatively.

Just some of my thoughts about the housing market up here. :)

Ted

March 14, 2006 04:45 PM

From Inman RE news (14 March):

Real estate foreclosures on the rise
Western states post 'rapid increase'

The number of new foreclosed residential properties available for sale nationwide increased 9 percent from February 2005 to February 2006, according to data released today by Foreclosure.com.

"Foreclosure inventory numbers in February are often low, partially because legal filings in December usually drop off around the holidays and reduce foreclosures in January and February," said Brad Geisen, president and CEO of Foreclosure.com, in a statement.

"The year-to-year comparison, however, tells a different story. If new foreclosures in 2006 continue to track 9 percent higher than in 2005, the country will reach higher inventory levels than it has in recent years."

Ted

March 14, 2006 04:47 PM

From Inman RE news (14 March):

Real estate foreclosures on the rise
Western states post 'rapid increase'

The number of new foreclosed residential properties available for sale nationwide increased 9 percent from February 2005 to February 2006, according to data released today by Foreclosure.com.

"Foreclosure inventory numbers in February are often low, partially because legal filings in December usually drop off around the holidays and reduce foreclosures in January and February," said Brad Geisen, president and CEO of Foreclosure.com, in a statement.

"The year-to-year comparison, however, tells a different story. If new foreclosures in 2006 continue to track 9 percent higher than in 2005, the country will reach higher inventory levels than it has in recent years."

smallbean

March 14, 2006 08:15 PM

Bradh: Whatever you say, YOU WOULDN'T buy your property for its current value. That's enought for me. The rest is just your assumptions again which have been argued a lot previously by many people such as Dr. Nick.

Future: Please refer to John's reply messege on March 10 before you made assumptions. He wrote clearly it was an appraisal by realtors.

Doh

March 14, 2006 08:51 PM

LETS RECAP

This board has gone from:

No way in hell prices appreciation will slow down - to

Price appreciation will slow form 20% to 10% - to

Prices will appreciate in the single digits - to

Prices will go flat - to

Prices will only go down 5% - to

!!!!!!!!!!!!!

Hmmm, what does this tell us (since those predictions are made by optimistic real estate agents who's lively hood is at stake).

littletiger

March 15, 2006 06:19 AM

Thank you for the ZipRealty site to whoever recommended it.

Holy Moly!

Price Reduced: 03/10/06 -- $498,000 to $459,000
Days on Market: 44

Price Reduced: 02/09/06 -- $550,000 to $498,000
Price Reduced: 03/03/06 -- $498,000 to $480,000
Days on Market: 55
(same unit from 550-480, granted, this seller was high when he set the first price, and is still asking way too much for a one-bedroom with no parking, even in the part of town it's in)

Price Reduced: 01/29/06 -- $440,000 to $439,000
Price Reduced: 01/30/06 -- $439,000 to $429,000
Price Reduced: 02/20/06 -- $429,000 to $419,000
Price Reduced: 03/01/06 -- $419,000 to $399,000
Days on Market 56

There are so many!

John

March 15, 2006 08:15 AM

http://patrick.net/housing/crash.html

Here is an interesting site regarding the current housing situation. The author is decisively pro-bubble, but if you scroll down towards the bottom of the page, there are numerous links to factual based articles on the real estate bubble.

Also of interest:
http://www.msnbc.msn.com/id/8514801/

I especially like the line: "Economist magazine this month calls the global rise in housing prices the biggest bubble in history"

Note that this article was written back in mid 2005, before inventory was through the roof and demand was falling.

Sharma

March 15, 2006 08:34 AM

From MSN article, 14 March:

More Americans are Losing Their Homes

Risky borrowing is catching up with a number of homeowners across the U.S. Foreclosures rose 45% in January compared to a year ago, and experts only expect the pace to accelerate...The number of foreclosures is still low on a historical basis, but it has been rising steadily over the past year, RealtyTrac reported. Job losses in some regions were to blame, but so, too, were risky borrowing practices that left homeowners little wiggle room on their mortgage payments. And with the pace of appreciation stalling and interest rates rising, many economists and industry observers expect the pace of foreclosures to accelerate this year.

Silver Lining for Buyers

In the months ahead, analysts expect delinquencies to rise, putting a greater number of these foreclosures on the market for buyers to choose from. That’s bad news for owners who live in these areas, analysts say, because rising foreclosure rates typically mean falling home prices...

But it’s good news for buyers looking for some relief from the high prices of the last several years. In addition to driving neighboring home values down, foreclosures themselves tend to sell at a discount to the market, said Rick Sharga, vice president of marketing for RealtyTrac. Typically, Sharga says, buyers can shave 10% to 30% off the market price with a foreclosed home, depending on demand.

Link to article:

http://realestate.msn.com/buying/Articlenewhome.aspx?cp-documentid=338165>1=7929

John

March 15, 2006 09:39 AM

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B0CF65944%2D4955%2D4F0B%2DACCB%2DD163F5758FAA%7D

Another great article on the housing bubble. Especially funny comments are:

"Economist Gary Shilling recently wrote in Forbes: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... China will suffer a hard landing ... and weakness in the U.S. and China will spread worldwide."

"Unfortunately, bubble warnings are routinely dismissed. Our brains can't handle all the bad news. Besides we've been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls."

Of course, these are just the worthless opinions of silly economists and market analysts. They don't know anything about real estate, at least not when compared to all the real estate moguls that visit this forum.

John

March 15, 2006 11:26 AM

bradh,
Here is the answer to the question regarding what cities are more affordable than Washington. According to this site, Washington is the 12th most expensive city in the country.

http://money.cnn.com/2006/03/14/pf/couple_cities_coli/index.htm?cnn=yes

As you can see, there are PLENTY of other cities that offer a lower cost of living.

fb

March 15, 2006 03:33 PM

bradh,

Yes, I admit that I am less than enthusiastic about this area. But I'm also 32 and my priorities have changed somewhat (just like you), and I still feel the same way now as I did back when I was 22 and graduating. Heck, I'm recently engaged, but it doesn't mean life suddenly ends when you get married and are in your 30s. Your priorities change, to be sure...but again, to me that just means that you go out on the town LESS, and not NEVER.

I certainly respect your opinion, but I have yet to find any evidence (anecdotal or otherwise) that would dissuade me from my opinion. I don't think DC is the worst place to live (Fresno is FAR worse). But you yourself even alluded to the fact that it isn't fair to compare it to LA and MIA. If you truly lived in Ft. Lauderdale, you yourself know that it has so much more to offer than just the nightlife...things that DC will never be able to offer (due to geography, etc.) I mean c'mon, how can you beat an 80-degree New Year's Day on SoBe?

So in all this long-winded BS I'm spewing, what I'm trying to say is that, when comparing DC to other overvalued markets, can anyone really say with a straight face that these prices are worth it? I'm asking an honest question here. IMHO it comes down to whether or not you "live to work", or "work to live". If the former, then DC is not overvalued. If the latter, then DC is a disaster just waiting to happen.

Maybe I am taking a very simplistic view on this. But this is how I determine what is overvalued vs. reasonable vs. undervalued.

tc

March 15, 2006 06:46 PM

smallbean - Apparently you are having a problem with reading what John wrote. He wrote and said his buddies townhouse was assessed (not appraised) and just fyi realtors do not do appraisals as you stated, appraisers do. Here is exactly what John said (again) 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 a reason to worry? Open you're eyes people!(again)Regarding whether I would buy my house that I've owned for 17 years. I bought that house to live in, not merely as an investment. I bought it in my early 20s and was very happy to get a 9.5% interest rate. I benefited from the tax write off each year and the first few years had VERY little in upkeep costs and broke even on what it would cost to rent vs own. After a few years I noticed rents had more than caught up with costs. Yes, as an investor, I would buy that house again at today's prices because the fundamentals are there. It's a great location in some of the best schools and the neighborhood is maintained very well. Those are the things important to me. I am now in a much higher tax bracket so it would actually be a better investment today. After I take depreciation, upkeep and management write-offs, I am doing very well with that house. I wish the market would head south so that I could pick up more properties, but you know what, the Washington metro area's economy is doing too well. Economical Development states 80k new jobs are coming into the area this year and the builders are building 32k new units. We're only seeing temporary stabilization and then the market will go back up in an appreciation mode. Hopefully we will only see a normal 5-7% rate after the spring. My current home, I also purchased to live in. The difference between what the market rate of rental income less maintenance and vacancy and the mortage loan is nominal. After I take into account that my tax rate is higher, I get to write off trips to the folk's house (where the house is) and I take tax and depreciation into account, I would be a small amount ahead each year. If I also take into consideration the avg. 20 year appreciation rate for that particular market, then I'm farther ahead each year. But like I said, I bought this home to live in and that's what I will do. At least for now. ( :

Sandra

March 15, 2006 08:15 PM

Regarding zillow.com, there is only old tax information there. I went there becaue of a recommendation from a poster on this blog. I asked it to pull up a value for my home and it came up with an old tax assessment figure and the number of bedrooms and bathrooms/square footage were off. Then I realized that the city tax record didn't have information about the additional bedroom and bath we added years ago because there wasn't a contractor's permit posted. Then I looked back to see where the value came from and it was a tax assessment figure from 1994. The tax assessment has gone up 6 times since then. Do the users of this website have any current data on their own homes? Even the past neighborhood homes sold didn't come up. I know one neighbor sold their house last June by themselves and another one sold in September by a realtor but neither came up.

Amy

March 15, 2006 08:53 PM

I've been following this blog for awhile now and have to tell you the couple of people posting that have said the appreciation rate of housing in this area is 1% are way off. The Center for Regional Analyis economists have reported that the 27 year average rate of appreciation in the DC regional area is 6.9% annually. That's pretty good considering we're talking about 6.9% not of your own downpayment out of pocket monies but of the actual price of the home purchased. I don't know anywhere else that you can borrow money, live in your investment and get a rate of return on something that's technically owned by the bank!

bradfh

March 15, 2006 09:46 PM

Wes,
So my house is now worth 440K according to your numbers and Drew’s numbers. That is strange because the identical house literally right next door just sold for 700K. Are those values going to hold? No one knows for sure but I like my chances. This is a perfect example of how statistics don’t always hold up to real world situtations. That is why some people teach business and some people run businesses. Again, my question is when you use this 1.7% figure- are we talking about the whole country, the world…..? Real estate is so regional, how can we make such a general assumption?
Since when is refraining from taking an extreme point of view (as in values are going to drop 50%) ‘overly optimistic’? Am I also irrationally exuberant? What I am seeing is that houses are taking longer to sell and they may not sell at full asking price but they are selling. I’m sure there are some areas where this may not be true but that just goes to show how localized real estate is. It can be different from one neighborhood to another. Unless the changes that the city has undergone over the past decade start reversing, there is no reason to think home values are going to drop by half. Planned re-development such as the new baseball stadium, the redevelopment of New York ave. etc. just increase my confidence that values will keep going up although not at the rates we have been seeing. I don’t know where you live but maybe you should take a drive through DC and some of the areas that have been considered ‘bad areas’. I think you might be surprised at how much of the city has changed.
Fb,
One of the main arguments that homes are overvalued is that home prices are quickly outpacing individual and household incomes. From the stats that I have seen, this area is one of the most wealthy areas in the country when looking at household incomes. Are there any stats that would point out the disparity between home prices and household incomes in different cities around the country? If home prices in Seattle are outpacing incomes at similar rates does that not mean that Seattle is as equally overvalued as DC? Also, I have made the argument before that perhaps DC is not a city on the scale of NYC or LA but it is a city of global importance. So if we compare DC to Denver or Seattle are we really comparing apples to apples?
To address the whole issue of ‘value’ and ‘overvalued’: If I remember Econ 101, over time, the consumer ultimately determines the ‘value’ of a given product or service. In DC’s real estate market we are starting to see houses staying on the market longer and prices being reduced. Even with an official real estate appraisal the value is based on what people were willing to pay for similar homes. So perhaps the homes have reached their true value and anything more will result in the homes not being sold. If you graph real estate over time it would look like a succession of waves and troughs. It looks to me like we are at the top of a wave, about to go into a trough.
“Where can anyone go, except N to West Palm, or S to Homestead?”
You could also say, ‘where can anyone go? W to Manassas, N to Gaithersburg, S to Fredericksburg? It looks like your point is that in Miami, there are alternatives to being close in to the metro area but they are undesirable because of commute etc. This lends credence to my argument that people are saying “I want to pay X dollars but I want a 10 minute commute and a nice neighborhood”
“Here are some local factors to consider:”
1.From the stats I have seen, the DC area is second only to Florida in growth of population.
2. See answer to #1
3. This is a huge assumption and a whole ‘nother discussion.
Smallbean and John
In attempt to end the whole assessment, appraisal debate-because of the lag time on this board sometimes answers, questions or challenges to other posters points or opinions are posted after the person has answered said question or challenge. We are far from ‘real time’ on this board. To John, I am sorry if I have sounded harsh or a bit on the smartass side regarding your post about your buddies townhouse but the tone of your post did leave you open for criticism. As for appraisals etc., for the record- an appraisal can only be done by a state certified real estate appraiser or his/her apprentice under supervision of the certified appraiser. This is what lenders use when verifying the value of a property for a mortgage. An ‘assessment’ is usually the county tax assessment of the properties’ value for the purpose of figuring the amount of property tax. In the past few years in this area the tax assessment has usually been a lot less than actual appraised value. A realtor will usually do a ‘comp-check’. The realtor checks MLS for similar properties in the same neighborhood or at least within a mile of the subject property that have sold recently. There are a lot of internet sites where a consumer can do this themselves. The Wall Street Journal website’s real estate section has one that I have found pretty accurate.
Sharma,
It would be interesting to know what percentage of those foreclosures were from job losses and how many were from ‘risky loans’. These ‘risky loans’ have really only been aggressively marketed for at most the past 3 yrs. Most interest only loans remain fixed and interest only for 5, 7 or 10 yrs. In reality, we probably won’t see the affects of these loans for another few years

paw

March 16, 2006 03:58 AM

I am not sure why D.C. being a worth while place to live has even entered in the topic. The fact of the matter is that people do live here and apparently find it a worth while place to live. It is about personal preference and everyone has their own. There are pros and cons to every place.

I personally have been to L.A. and wasn't impressed. It has a lot of traffic, crime, smog ghetto areas, etc just as any other major city so why is it supposedly any better. So what that it has nice weather all year round. I personally really enjoy the change of seasons here in the D.C. area. I love the leaves and crisp air in the fall and the snow in the winter etc.

Every place is going to have its tourist areas like the Smithsonian that yes do get old after you have been several times. But that is the same with any tourist place. I am sure Venice Beach gets old too. I have been to Venice Beach and seen it and don't feel the need to go back everyday. What it comes down to is every place is basically the same. Every city is going to have the same basic everyday things to do as well as have things to do that are unique to that place.

SOOOO with all that said what it comes down to is personal preference which is irrelevant. You can't say that L.A. is a better place to live than D.C. because that is personal preference and everyone will have their own opinion. What it boils down to is that D.C. is overvalued just as L.A. and other major cities are overvalued. You can't say that it is more acceptable for these other cities to be overvalued just because you think they are better places to live...that is just your personal opinion. D.C. is a major city in the U.S. (and in the world) and should have comparable prices to other major cities in the U.S. However, most of these cities are overvalued at the moment and should not be including DC. At some point all of these cities will need to level out otherwise people won't be able to buy anything anywhere.

smallbean

March 16, 2006 10:59 AM

tc: here is what John wrote on March 10 (correct me if I'm wrong)

"My friend actually lives in Leesburg. I am not talking about the tax assessed value of his home, I am talking about the real selling price of the home. Last year he considered selling his townhome, and a realtor thought $430,000 would be a fair price. He decided not to sell because he thought real estate would keep going up. This year he considered selling once more, and they told him $395,000 would be a realistic figure, based on the prices of similar units in his area."

So the "assessment" is done by realtors (I think estimate is probably a better word to use) but not the county.

Thanks for your answer. But I have to say acoording to my experience (I've been to lots of different rentals and open houses recently), generally a $700K SFH in a top school district will at most rent for $2500; a $600K TH in the same top school district will at most rent for $1800. The monthly morgtage payment is much higher than the rental. Given that, I don't understand why one would want to invest on rentals with negative cash flow (lose $800 every month) unless for speculative reasons.

John

March 16, 2006 12:00 PM

Badh: You hit the nail right on the head when you said "A realtor will usually do a ‘comp-check’. This is what I was talking about, but I did not know the real estate lingo. I admit I was wide open to sarcasm with my post. At the time I was just so shocked at the info my friend provided to me. I do expect prices to slide, but I didn't expect them to slide that much so quickly!
For the record, I do not think prices are going to slide 50% like others may think. However, I do believe the Washington DC and other metro areas that were superheated are in for a correction to get more in line with incomes. The average household income in Washington DC is good to be sure, but its still around 70k to 80k in most areas here. That’s not really enough to 'safely afford' the average single family home. Between myself and my wife, we actually bring home more than the average here, and we certainly are not in a position to afford a single family home here, and we have practically no debt! I can't imagine how a single person could make it. Another interesting to thing to note, is that upper management in my agency is deeply concerned over our retention rate lately. Not only are people not taking jobs in my agency because of the cost of living factor, but they are also leaving at a rate we have never seen before. A colleague of mine just left the agency and moved to Pittsburgh, where he is receiving nearly the same pay with a drastic cut in his cost of living. Needless to say, he is doing quite well now! Also, you make an interesting point regarding the interest only loans vs. 30 year loans. I guess my primary concern here would be toward the people that take interest only loans and only pay the interest each month. The majority of people I know that have these type of loans only pay the interest, so it will be interesting to see what happens when the principle comes due. I guess alot of people thought homes would continue to appreciate at 20% forever, which is pretty much a mathematical impossibility, cause a home worth $400,000 would be worth $2,476,694 in just 10 years and $15,335,039 in 20 years!

tc: I did correct myself in a subsequent post.
I still have doubts about the financial sense in investing in this market and then renting. The disparity between rent and buy, or the P-E ratio here is quite large. To calculate a P-E ratio on a home, divide the purchase price of the home by the yearly income from renting it out. Judging by what I have read, most economists tend to advise renting over buying when the P/E ratio gets too high.
If you take a mortgage payment of $2,528 (based on a $400,000 mortgage at 6.5% for 30 years), add taxes and possibly a condo fee or HOA every month, then with repairs and homeowners insurance, it seems that you most certainly come out with a negative cash flow, since you can rent similar places around here for less than half the price. Taxes saved by deducting mortgage interest would be as high as $700 a month. (Calculated using the 6.5% interst rate and a tax bracket of 35%, which is currently the highest bracket for indiviual taxpayers. Note: your taxable income would have to be at least $336,550 to be in this bracket) And you would still have a negative cash flow. It seems you would have to count on continued appreciation to make this a worthwhile investment. I'm not doubting that you're making out well. Rather, I wonder how many people around here became 'real estate investors' because they saw the sucess of others, without looking into their own personal situations first.

I guess most of us with just have to agree to disagree on what direction the market is heading.
Is there anyone out there that does believe the market will continue to grow at 20%+ per year? Just curious.

John

March 16, 2006 12:16 PM

In regards to another posting, I have to agree 100% that everyone has a different preference as to where their ideal home would be. While I am personally not at all a fan of Washington DC, as you can tell from my previous posts, I would certainly rather live here than L.A. or New York City!

Jerry Sussman

March 16, 2006 12:19 PM

I posted a couple of comments months ago, and have been reluctant to get back into the fray due to what appears to be an increasingly polarized tone. However, I would like to make an additional comment regarding the notion of "valuation" that has been tossed about.

Some folks have suggested that DC area properties had been "undervalued," and that the recent run-up has brought these properties in line with their "true" or "fair" value. Others have suggested that the value merely is whatever the buyer is willing to pay, separate and apart from any intrinsic value. Then the distinction is drawn between appraised value, assessed value, etc., etc. And some have touched on the effect of inflation on the perceived "investment" value of real estate.

Many of these comments appear to overlook the fundamental distinction between appreciation in "value" that results from too much demand chasing too little supply and the illusory appreciation that reflects nothing more than the printing of money.

Money can be "printed" many ways. The Fed is one example. But the "creative" financing associated with the mortgage markets is another. Suggesting that real estate values increased slightly or significantly more than the rate of inflation is saying little, as the increase in real estate values itself was the major contributor to the inflation measured by some of the very indexes against which real estate valuation increases are compared.

To state it simply: A house that went for $75K in Lake Ridge, cica 1975, may have been reasonably valued at $250K in 2000, considering the effects of 1970's "stagflation," the 1980's recession, the real estate debacle of the early 1990's, and the tech boom of the late 1990's. That the very same house is "valued" five years later at about $600K (actual numbers, by the way), is, in my humble estimation, attributable to the creative printing of money. Valued in constant dollars (i.e., absent the smoke and mirrors financing of the past several few years), I suspect that today's "value" of the house would be closer to $300K than to $600K. Those that coulnd't have afforded the $300K house shouldn't have been part of the demand, but creative financing made it appear to be so. It'll all come out in the wash.

By the way, I rent. I've lived in this area for over thirty years. Houses always were expensive in some areas. House prices always went up. Except when they went down, that is.

fb

March 16, 2006 05:32 PM

bradh,

Thanks for the response. I'll put your posts in quotes, and my responses will follow.

"One of the main arguments that homes are overvalued is that home prices are quickly outpacing individual and household incomes. From the stats that I have seen, this area is one of the most wealthy areas in the country when looking at household incomes."

Yes, this is one of the arguments. But as you and I both know, the MHI in DC is VERY misleading. We are talking about 2-income households up here, due to the very high education level and earning potential of both individuals in a relationship. And with that come many questions. How many of them are nearing retirement age (see previous post)? How many are about to have children, and find out that daycare at $1200-$1500/month is too costly, or that a nanny raising a child is sub-optimal?

But let's just assume that the MHI is stable in DC, because then we'll truly digress. Given the MHI up here of around 88k, what do you think that should buy? Let's say 3x the MHI, which is very fair. That puts us at 264k. What does 264k get you around DC? Not much...the median home price here is over 400k.

"If home prices in Seattle are outpacing incomes at similar rates does that not mean that Seattle is as equally overvalued as DC? Also, I have made the argument before that perhaps DC is not a city on the scale of NYC or LA but it is a city of global importance. So if we compare DC to Denver or Seattle are we really comparing apples to apples?"

You are right, it is very difficult to do an apples-to-apples comparison between cities, which is why I began my discussion where I did: aesthetics, allure, etc...the intangibles of a city. Other than the tangible "job" factor, these factors are what attract people to a city, and should certainly be factored into its "value".

"To address the whole issue of ‘value’ and ‘overvalued’: If I remember Econ 101, over time, the consumer ultimately determines the ‘value’ of a given product or service. In DC’s real estate market we are starting to see houses staying on the market longer and prices being reduced. Even with an official real estate appraisal the value is based on what people were willing to pay for similar homes. So perhaps the homes have reached their true value and anything more will result in the homes not being sold. If you graph real estate over time it would look like a succession of waves and troughs. It looks to me like we are at the top of a wave, about to go into a trough."

I think you and I are in agreement here, in that supply and demand determine valuation...but does Econ tell the entire picture? And how bad is the rubber band going to snap this time? (Who really knows?) I think you and I would probably disagree on how big the fallout is gonna be. In fact, I don't even wanna wager a guess.

"You could also say, ‘where can anyone go? W to Manassas, N to Gaithersburg, S to Fredericksburg? It looks like your point is that in Miami, there are alternatives to being close in to the metro area but they are undesirable because of commute etc. This lends credence to my argument that people are saying “I want to pay X dollars but I want a 10 minute commute and a nice neighborhood”"

No, no, no. There are NO alternatives in the MIA area, that's the whole point. All the land is gone as of 2015 in Broward. Apartments have been swallowed whole by these conversion numbskulls, leaving a lot of lower income people high and dry. I'm not talking DC-style, 500k pop. city style of conversion...I'm talking an urban area with millions that will have an interesting time over the next decade if they don't move somewhere else. Which makes me think MIA is still more volatile than DC, like I said before. My argument was that at least there are alluring qualities to MIA that make it worth the long-term risk.

In DC, there are no geographical obstacles whatsoever. (No, that creek called the Potomac don't count.) :) People can move 60 miles away and are able to commute...and the prices in places like Culpeper are still VERY unreasonable. Think about it: who in their right mind thinks a SFH in Culpeper is "worth" $450k? My bet is that the market will soon answer that question for me.

"1.From the stats I have seen, the DC area is second only to Florida in growth of population.
2. See answer to #1
3. This is a huge assumption and a whole ‘nother discussion."

This area is NOT growing as you think. Check out this link:

http://money.cnn.com/2005/12/22/real_estate/fastest_growing_states/

Summary: DC has a NEGATIVE growth (-.7%); it's 51st on the list, and in fact lost 3700 people last year. WV is at the bottom as well, tied for 44th. Maryland is average and tied with several states for 24th. VA is tied for 15th on the list in growth.

Florida, Nevada, and Arizona are still the top 3 on the list, unless you include Idaho as a state (just kidding!) I *believe* Nevada has been #1 for 18 years in a row now. Guess what they all have in common? Yep, job growth, beautiful climates, beautiful people, and laidback atmospheres. Which kinda proves my whole point all along, if only I had found the link sooner.

Oh, and one other thing: here's a link to some more info on job growth in FL.

http://moneycentral.msn.com/content/Banking/Homebuyingguide/P129581.asp

paw,

The reason things other than numbers have been brought up is very simple: Do most people choose to live somewhere because of the factors I have mentioned, or because of numbers? I think the "numbers" I presented above kinda reference what I'm saying. Which leads into the debate about overvaluation in DC.

fb

March 16, 2006 05:56 PM

paw,

Yes, every area has pros and cons. But some areas have more pros than others. Understand where I'm going with my whole discussion here, which is that you cannot rule out intangibles when you assess the value of an area, ergo the value of home prices. Sure, you may like the DC area a lot, but do the majority? Check out the pop growth link I posted above, and tell me they do.

As for your comments about LA...you had me on the smog, crime, and traffic. These are 3 things I loathe about DC, so we see eye to eye. (Of course, I'm also discounting the Texas Transportation Institute's assertion that LA's traffic congestion is decreasing, while DC and Atlanta are increasing faster than any other cities. But whatever.) But to say "so what about the weather", well I can't help but laugh. Again, look at the fastest growing areas in the country. Now tell me again that noone cares about weather. :)

I don't want to get into a peeing contest here, but you're right, what it does come down to is personal preference. And if MOST people prefer things that DC doesn't have, don't you think that has an effect on its over-valuation?

Drew

March 16, 2006 06:51 PM

Amy - People on this thread, including me, have said houses have historically appreciated 1% PLUS INFLATION. That's probably why the Center for Whatever is coming up with the 6.9% number. You should also consider that 27 years is not enough time to frame an historical perspective. Try going back 100 years and look at the dominant trend. 27 years also strikes me as an oddly arbitrary number, don't you think?

And here I go repeating myself - this thread was started to address whether or not DC is presently experiencing a housing bubble. The pros and cons of homeownership, and the long term financial impact it has are subjects for a different thread. My two cents...

John

March 17, 2006 07:44 AM

tc: Those are some intersting stats regarding new job creation vs. the number of housing units being built here. Do you have a link to these stats?
I found almost identical numbers being proposed on the following site:
http://realtytimes.com/rtcpages/20060224_pricestats.htm

The problem I see is that this is a realtor's site, so that is hardly an unbiased source. The author of the article also did not include a reference to the job numbers or housing units either.

Badh

March 17, 2006 01:38 PM

John,
I am hoping that calling me ‘Badh’ is merely a typo. Come to think of it though maybe I will start using that…
Fb
My point or question with the MHI compared to home prices was ‘are there any stats that compare MHI relative to Median home price in cities such as Seattle etc.’…. and if home prices are outpacing income in these cities at similar rates, aren’t these cities equally overvalued?
‘NO alternatives in the MIA area’
There are alternatives to anywhere if you don’t mind having a long commute. What I have been saying with this is that folks who are claiming that homes are so overpriced are saying ‘I want a nice neighborhood, a big house and a 10 minute commute’ In other words, ‘I want to live in McLean but the prices dictate that I have to live in Manassas.” I would like to have a 10 acre estate in Great Falls but I cannot afford it. However, just because I can’t afford it does not mean it is overpriced.
‘that creek called the Potomac don't count’
Perhaps not in terms of available land but the Potomac and to some extent Anacostia rivers limit access into the city. This affects traffic and commute times. If you have ever tried to get into the city via 66, GW parkway, or 395 during morning rush hour you will see what I mean. This affects the beltway etc. I believe DC has the 2nd worse traffic in the nation, at least top 5. In a nutshell it puts homes that are closer in to the city at that much more of a premium. I can’t imagine how different this area would be if it did not have a river running through the middle of it.
“This area is NOT growing as you think. Check out this link:
http://money.cnn.com/2005/12/22/real_estate/fastest_growing_states/”
Your CNN link shows DC proper as having a decline in population, but if you look at the area as a whole it is a different story:
http://www.washingtonpost.com/wp-dyn/articles/A52779-2005Apr14.html
In DC proper you have a lot of lower income people who have owned houses for years and have been steadily cashing in and moving out to the suburbs over the past few years.
I tend to agree with paw in that you cannot say that one particular area is overvalued compared to another based on weather, activities, nightlife etc. We have a winter here but it’s not North Dakota. Some folks do like seasons. I’ve said before if I won the lottery I would probably be somewhere else but that isn’t the case for everyone. You have beaches not far away, mountains fairly close and 3 airports for anywhere else you want to go.

JimL

March 17, 2006 02:08 PM

Here is some food for thought. I think this person's analysis is a little flawed, but should add to some interesting discussion if it hasn't been posted already.

http://www.daileyint.com/hmdpc/2005/06/dc-housing-bubble-110-years-of.html

Ed M.

March 17, 2006 04:22 PM

Excerpt from March 17 article in RISMedia about the very real impact of consumer perception on the housing market:

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.., is more pessimistic than other real estate analysts, predicting a “big fall in housing prices in many areas, with the raising of interest rates and the rate of home sales falling back to what it was in the ’80s and ’90s.”

It is perception—rather than reality—that worries others. Slower sales are a given, Baker says. “Gradually, over the next several months, we are seeing a major shift in consumer psychology from the idea that real estate is a can’t-lose investment, the best thing since sliced bread, to a perception that you can, in fact, lose money in real estate, particularly over the short term, if you have to sell. If that perception takes hold, then the real estate industry is in for some difficult times.”

As someone who watches the DC/VA/MD housing market (although neither as a buyer, seller, or agent), I see this perception starting to play out with even reasonably-priced houses staying on the market longer. It seems that potential buyers (including investors) are getting spooked by the current softening market and no one wants to catch a falling knife. I suspect that buyers who can wait are waiting to see what happens during this spring market before they make a decision whether to buy this year or not. With increased inventory and decreasing asking prices, even a back-of-the-envelope calculation shows that you're better off waiting for a $10K price reduction after a month than worrying about a 0.05% increase in the interest rate over the same period of time.

Martin

March 17, 2006 04:45 PM

To the person who asked about "tricks" agents use to sell houses, the primary "trick" is to tell potential buyers that NOW IS THE TIME TO BUY. Always. If housing prices are going up, an agent will tell you NOW IS THE TIME TO BUY or you might not be able to afford a house in the future. If prices are going down, NOW IS THE TIME TO BUY because prices can't possibly go any lower.

You might find this dishonest, but agents get paid for selling houses, not on giving sound advice based on market realities or your financial situation. This trick carries over to RE market "analysis" as well. Does local "analysis" from NVAR or realtors qualify as objective information? Hardly. When comparing wildly different "analysis" of the local or national housing markets, look carefully at who the "analyst" is, i.e., a real estate rep or not. By weeding out opinions of RE reps, you'll see a very consistent picture of the current market. Where there is variation, it's mostly about whether the dropping housing market will take the entire economy down with it or not.

Sharma

March 17, 2006 04:49 PM

Article about housing cost-to-income:

Bankrate noted that the housing-cost-to-income ratio in Philadelphia stands at 31 percent, which is deemed as "quite favorable" when compared to other large Northeastern and Middle Atlantic cities, such as 53 percent in both Washington, D.C., and Newark, N.J., and 72 percent in New York.

tc

March 17, 2006 06:13 PM

John - I found stats both from Economic Development (a friend brought me the stats hardcopy, he works there) but the same stats were on the website from the Center for Regional Analysis that Amy mentioned. It is a localized regional economic analysis for both general economy (jobs, etc) as well as housing. Google it. It is also not run by the real estate industry but by the economists at George Mason University. Predictions are posted for the next two years as well. I looked at the January, 2006 report. The real estate market information is towards the back of that report.
FYI, as far as negative cash flow on rental properties, you also have other end of year business expenses that you also have to take into account to truly reflect your "net gain" or "net loss". Ask a tax accountant about it or I can refer you to one if you're truly interested. Licensed appraisers do the best job of valuation on a property, not real estate agents or tax assessors. The tools real estate agents use are to just try to predict what a similiar house should sell for, where the appraiser actually tells you what a lender will allow you to borrow. I'd say the lender's appraiser is more "on the money". Tax assessments usually take a few years to determine, by that time the tax value is old news.

tc

March 17, 2006 06:20 PM

I thought I'd go back and find the link for you guys. The Washington Area Housing Market starts around page 33 or so but the entire report is very interesting.

http://www.cra-gmu.org/forecastreports/WashingtonAreaEconomy1-30-2006.pdf

Jo

March 18, 2006 01:03 PM

See link below for MSN Money article about increased use of incentives to sell houses. Cites some pretty pricey upgrades sellers are throwing in to get their houses to move, but I'd still rather get a lower price or lower interest rate than help with closing costs or even trendy granite countertops or stainless steel appliances that only depreciate in value.

Link to the article:

http://realestate.msn.com/loans/Articlenewhome.aspx?cp-documentid=374936

tl

March 18, 2006 01:38 PM

DC area is going down in flames, fast.

- Note the track history of inventory levels/prices of DC in the last six months:

http://www.benengebreth.org/housingtracker/

11/21/05 peak of 8,011 and median price of 475k
03/14/06 exceeded the peak at 8,025 and median price of 469k.

The first peak caused a 5.3% decrease in the median price of homes. We are not even into the "selling season" for the area and inventory has risen 25% since January 1st (from 6000 to 8000 units).

I believe the inventory is going to rise another 15-20% over April and May as investors try to dump before its too late and will have an effective decrease in the median price of homes of 10-15% this selling season.

For anyone who believes this is a "buyers" market, I say beware! Let these prices settle over the next year before even thinking about getting into this mess.

Todd

March 18, 2006 04:28 PM

It doesn't matter if DC is a better or worse place to live than NY, Boston, LA, SF, or Peoria. You're here for a reason - you live here, you work here, or you want to/have to live or work here. Housing prices are not determined by DC's art/music/sport/midget wrestling scene (or lack of), but by the people living/working here and those who want to live/work here.

Experts agree that DC housing is overvalued. This is based on the gap between avg housing prices and avg income. Whether you want to live in an undervalued housing market like Houston or an overvalued market like DC (or Ft. Lauderdale, NYC, etc) doesn't matter to 99.99% of people on this list. Most people who read these posts do so because they live here or want to live here. Keep the discussion relevant.

Ingrid

March 18, 2006 04:53 PM

Re: the post about tricks agents use to sell houses, I'm looking to buy my first house this year and have found it very useful to read articles and websites geared toward home sellers. I've learned a lot of fascinating stuff about tricks for selling in a slowing market this way. For example:

Stage 1: offer upgrades first;
Stage 2: offer help with closing costs;
Stage 3: drop the price;
Stage 4: either do something more to the house (e.g., new coat of paint), offer even more incentives, or continue to drop the price;
Stage 5: change agents;
Stage 6: repeat Stages 1-4;
Stage 7: take it off the market.

I've noticed that the more upgrades sellers offer up-front, the faster they move to Stages 1-4, especially now with more houses coming on the market (and especially in the oversaturated condo market). My strategy: use the incentives as a measure of how desperate sellers are, then wait. Yes, wait. If sellers are nervous/desperate during this spring selling season, it will only get worse (for them) in the coming months.

John

March 19, 2006 07:24 AM

Looks like the Federal Reserve has no intention of bailing out the housing market, as some have suggested:


Fed won't act to preserve high home prices: Kohn
'Greenspan put' theory doesn't stand scrutiny

WASHINGTON (MarketWatch) -- The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday.
"If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,' Kohn said in a speech prepared for delivery to a European Central Bank forum in Frankfurt, Germany.
In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise.
"This argument strikes me as a misreading of history," Kohn said.
"Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk," he said.
"Whatever might have once been thought about the existence of a 'Greenspan put,' stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy," Kohn said.
"The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions," Kohn said.
But Kohn said he doubted that central banks should "lean against the wind" of an incipient stock market bubble by adopting a somewhat tighter policy stance than otherwise would be the case.
He said there were three tough conditions that would have to be met before the costs of the extra tightening would be worthwhile.
First, the central bank would have to be able to identify the bubble in a timely faction. Secondly, there would have to be a fairly high chance that the tighter policy would check the speculative activity and finally, the expected improvement in the economy would have to be sizable.
"For my part, I am dubious that any central banker knows enough about the economy to overcome these hurdles," Kohn said.
Greg Robb is a senior reporter for MarketWatch in Washington.

http://www.marketwatch.com/News/Story/3CvZTHKdTqD04vPDQ7xtKwB

paw

March 20, 2006 02:16 AM

fb,

I appreciate your comments and I do agree that DC is overvalued. I wasn't trying to say otherwise.

I still stand by what I said before though. I realize that value is going to be based on the intangibles as well as the home, but I don't feel that the the intangibles are that drastically different when comparing city to city. I don't feel that there are any major cities that are that much better or that much worse by far than any other. Some may have more pros or cons but not so much so that they are that much different. Therefore people shouldn't be making it seem as though other major cities are justified in being overvalued just because they are supposedly a more likable place. No city should be overvalued...not even DC. They could all stand to level off and be more affordable.

Also I wasn't saying that no one cares about the warm weather. I simply said that I didn't care about it and that other people may not either. Just one of my points of personal preference. And if weather is the major issue I don't think it is enough to warrant that cities with good weather all year round are justifiably overvalued. I don't think that it is justifiable for any city to be overvalued.

And, maybe warm places are the fastest growing places but that doesn't mean that other places shouldn't be well valued because weather isn't the only factor. I mean look at New York. PLENTY of people want to live there but they don't have warm weather all year. So it doesn't seem that weather should be that big of a factor in value since there are many cities that are well valued that are not warm all year round.

I don't feel that DC is so severly lacking as a city that it doesn't compare to other cities. Especially just because it doesn't have warm weather all year round. As I said before, DC is an important city in this country as well as in the world and should be well valued. I don't think DC is severely lacking in intangible value compared to other places. I really don't see that DC is THAT much different or worse off than any other city. Especially to the degree that it shouldn't be valued well compared to other major cities.

I believe that there are many great cities in this country and they should be comparably priced but NOT overvalued. None of these cities has more of a right to be overvalued than another. That is the point that I was trying to make before...that NO CITY has more of a right to be overvalued than another since no city should be overvalued. People were just making it seem as though it is ok for other cities but not for DC.

Sorry if I wasn't clear before and for repeating what I already said. I wasn't trying to get into city comparisons...in fact that is what I was trying to speak out against since I don't think that DC is SOOO much worse off or different than any other major city. I was only responding to the questioning of whether DC is a "worth while" place to live.

I was just trying to make two points:

1. That D.C. is an important city and shouldn't be undervalued compared to other major cities since it isn't that much different than other cities. It has just as much of a right to be well valued as any other major US city.

2. That no city has a right to be overvalued just because a lot of people think it is a nice place to live because NO CITY should be overvalued.

Thank you for letting me state my opinion. I have found that this message board has a lot of good information. Keep posting!

OH and my disclosure...I do think there is a bubble in the DC area. I currently rent but would like to buy in the area some day. Also, I too am seeing A LOT of homes for sale in the area that have been on the market for a long time. I am also seeing a lot of reduced prices.

paw

March 20, 2006 02:26 AM

OH and one more thing...

I am 30 years old and I don't find that there is a shortage of young people in the area or a shortage of things for us to do. There was some discussion of that above.

I am the oldest of all of my friends. They range from 22-28 years old. They all share houses with other people their age and don't seem to have a problem with that at all. I don't go out as much as they do, but there doesn't seem to be a lack of night life for young people here. My friends all go out EVERY weekend and never seem to have trouble finding places to go and things to do.

Just thought I would share that since there was a question about it being an area that young people would be interested in.

StG

March 20, 2006 09:38 AM

There's been a lot written about the impact of the slowing housing market on the national economy. Here's an excerpt from a USA Today article (March 20) about the impact of the slowing market on jobs in the real estate industry. What's incredible about this article are the stats that almost 10% of the US workforce works in the real estate industry! That's HUGE! So the current real estate softening has the potential to impact a huge number of people directly.

Quote from the article:

"As the housing market slows, there will likely be a lot of stories of people who are bailing out of their real estate jobs and other professions related to housing — appraisers, mortgage brokers and home construction workers — and many not by choice. This could send shock waves through the job market and the economy.

That's because housing helped drive the economy out of the last recession. Almost four out of every 10 jobs created in the past four years were in housing-related fields. At the end of last year, a record 9.8% of U.S. workers were employed in the real estate industry, up from 8.2% a decade ago, according to Moody's Economy.com. Only the health care industry added more jobs."

Full article can be found at:
http://www.usatoday.com/money/economy/housing/2006-03-19-housing-econ-usat_x.htm

fb

March 20, 2006 10:39 AM

bradh,

"My point or question with the MHI compared to home prices was ‘are there any stats that compare MHI relative to Median home price in cities such as Seattle etc.’…. and if home prices are outpacing income in these cities at similar rates, aren’t these cities equally overvalued?"

I'm sure there are some stats out there, but I don't have them. (Or should I say, I'm too lazy to go hunting for them.) :) Good question, sorry I don't have the answer for you.

"There are alternatives to anywhere if you don’t mind having a long commute."

That's the problem with MIA, is that it is a lot poorer area than DC, so no, there really aren't any alternatives. SoFLA is a very volatile region right now. I'm watching with eyes open.

"Perhaps not in terms of available land but the Potomac and to some extent Anacostia rivers limit access into the city. This affects traffic and commute times."

Yep, I agree with you. Two of my points were that A) There is no problem with "available" land in this area. You have lived down in SoFLA, so you are clearly knowledgable on what a land shortage really is. B) Traffic and commute times are most assuredly affected, which is a con for DC, not a pro. Who wants traffic, especially when there's no hope of it getting better? IMO there is no such thing as a 10 minute commute in DC. You could live right next to the Pentagon, only to find out your lovable employer BRACed and moved you to Ft. Belvoir. Which, therefore, would lead one to believe it's a factor in RE valuation.

You are also correct in asserting that DC has awful traffic. Check out all the data at the TTI's website:

http://mobility.tamu.edu/ums/

IIRC, DC is tied with Chicago for the third-worst traffic in the nation, and Atlanta and DC are significantly deteriorating. LA is the #1 offender is actually improving YOY. DC is getting close to being second.

"Your CNN link shows DC proper as having a decline in population, but if you look at the area as a whole it is a different story:
http://www.washingtonpost.com/wp-dyn/articles/A52779-2005Apr14.html"

Two comments about your WP link: A) It's a year old. To give you an example how much times have changed, keep in mind that Loudoun has gone from the fastest growing county in the nation to #8. See link http://money.cnn.com/2006/03/15/real_estate/fastest_growing_US_counties/index.htm

Loudoun is the ONLY reason NOVA is being propped up in the growth rate, and it's dropping. (As an aside, look at the fastest growing county on the list.) B) Look at the very first sentence in that article. "The Washington region is growing faster than any metropolitan area outside the Sunbelt, drawing thousands of immigrants and holding on to current residents despite worsening commutes and skyrocketing home prices."

Yes, OUTSIDE the Sun Belt. Why would they even make reference to the "Sun Belt" if it wasn't important?

"I tend to agree with paw in that you cannot say that one particular area is overvalued compared to another based on weather, activities, nightlife etc. We have a winter here but it’s not North Dakota. Some folks do like seasons."

Some, but not most. Again, I think the articles I've posted on here are evidence of that. I mean if more ppl liked the weather, activities, etc. up here than in the "Sun Belt", then why are we bombarded on TV with ads for FL vacations, retirement communities, etc.? Why aren't ppl flocking to DC to retire, or to work? Why is the Sun Belt experiencing the fastest growing economies (see previous post and my link to article from MSN)?

I think you and I will have to agree to disagree. I am of the opinion that you are going to see a an even bigger disparity in # of jobs vs. jobs being filled in this area, and it's going to be because you'll have a hard time convincing a lot of young ppl to stay up here for more than 3 or so years.

In any case, I wish you luck in whatever you choose, and in your current and future RE investments. Hopefully when I move, you'll wish the same for me. :)

fb

March 20, 2006 10:49 AM

"I believe that there are many great cities in this country and they should be comparably priced but NOT overvalued. None of these cities has more of a right to be overvalued than another. That is the point that I was trying to make before...that NO CITY has more of a right to be overvalued than another since no city should be overvalued. People were just making it seem as though it is ok for other cities but not for DC"

You and I are in agreement on this, and I appreciate your response. Isn't it funny, the misconceptions we all can have? I was under the impression that everyone was saying DC was so great that it had a "right" to be overvalued, and I was trying to debunk it.

I'm just going to stand by the sidelines now, as that was pretty much my whole point all along. :)

smallbean

March 20, 2006 10:58 AM

Here is the dynamic graph regarding the RE-related jobs in each state on USA today

http://www.usatoday.com/money/graphics/housing_jobs/flash.htm

MD 12.2%
VA 11.5%
D.C. 6.0%

Badh

March 20, 2006 10:59 AM

Interesting chart showing median home prices for DC,VA,MD. Median prices Jan 06 vs. June 05 and Jan 06 vs. Jan 05.

http://www.print2webcorp.com/news/washingtontimes/HomeGuide/20060310/p31.asp

There's midget wrestling here?

doh

March 20, 2006 08:11 PM

Why are we even debating the bubble anymore?

December 2005 avg house price: $552k
February 2006 avg house price: $514k

See NVAR website under market stats (fairfax county).

A 7% drop in two months. BTW, a realtor friend of mine told me the March numbers look absolutely horrible. So much for "prices will only go flat, they never drop in DC area"

Look out beloooooooooooooooooooooooooooow!

LA Guy

March 20, 2006 09:22 PM


I'm someone who has lived in CA my entire life
(LA and SF Bay Area) so I feel I know a thing or
two about when real estate is overpriced or not.
My mother-in-law also owned a house in Alexandria
from about 1995 to 2005, so I have an idea what
DC is all about. I think maybe I can contribute
some insight as an outsider that perhaps people
in the midst of the market might miss:

1. Real estate has been running up in many places
across the country, mostly as a result of
a) the stock market crash, b) low interest
rates, and c) relaxed lending practices.
There isn't more demand in SF, NYC, or DC
because they are/are not good places to live,
because of an influx of high-paying jobs in
the past 5 years, or because of a shortage
of land. It's mostly effects of the above 3
factors.

2. As the above factors change then so will
prices. Prices could remain flat, but more
than likely they will fall. It has happened
before even in areas of desirable real estate
like Southern California. Prices will
eventually recover if you can wait them out,
although this run-up is much larger than
typical and so the wait may be longer than the
typical 7-10 year cycle.

3. Don't buy more house than you can afford to
buy with a FIXED-RATE mortgage. Period. To
do otherwise is to speculate. Speculation
is fine if you're a real estate investor, but
bad if you're buying a house as a primary
residence, because it could leave you homeless.

4. Someone mentioned that land was undervalued
in the mid-1990s. Yes, it was. That doesn't
mean it is fairly-valued now. It has passed
that point. It is now overvalued relative to
incomes and rents.

5. The DC area seems to have more buildable
land than somewhere like NYC. Elsewhere, it
was mentioned how many new homes are being
built. Supply in DC is not as tight as in
some other expensive areas. In a metro area of
California, you might find houses on 5000
square foot lots. That doesn't happen as often
in DC. Also, price of houses per square foot
in many parts of DC is not that high
(relatively). Optimists might say that just
means that there's easily room for higher
prices, but it's mostly a function of how cheap
land still is there - and the land is cheap
because it is plentiful. You can still buy
property cheaply in places like Franconia.
You cannot gauge the entire market by looking
only at the top end of the market. In fact,
I think there's sometimes more to be learned
by looking at the bottom. A big house is going
to cost $2+ million whether it is in Dallas,
Honolulu, St. Louis, Seattle, San Francisco,
Miami, or Denver because the price of materials
is going to dominate. The price of a, say,
1000 square foot house is going to vary wildly
and that will tell you a lot more about the
local market. From what I see, the small houses
in the DC area are cheap relative to the
top end. That either means the low end is
underpriced or the top end is overpriced.
Given the recent run-ups, I think you can
guess which I think is more likely.

StG

March 21, 2006 10:57 AM

According to HousingTracker, the median price for a house in the DC area decreased by 6.2% in the last 6 months, while inventory increased 43.6% in the same amount of time.

Housing prices are always "sticky," i.e., sellers are reluctant to sell their house now for less than their neighbor sold his house for six months ago, even though the market is clearly sliding. It takes time, i.e., increasing DOM and seeing more "For Sale" signs in one's own neighborhood for sellers to realize that housing markets AND prices do, indeed, drop.

For more info, see link:
http://www.benengebreth.org/housingtracker/location/DC/Washington/

StG

March 21, 2006 11:03 AM

To those who have been arguing that high housing prices in DC are justified by the number of people coming into the area, according to the latest report from the Census Bureau, DC was one only 4 states in the US to lose population last year (joined by Mass, NY, and RI -- not coincidentally, also over-heated housing markets).

See chart at:
http://money.cnn.com/2005/12/22/real_estate/fastest_growing_states/

Johnny

March 21, 2006 11:21 AM

It is ridiculous to talk about the DC-area market??? Some places are have a much tighter supply than others -- Georgetown, Capitol Hill, and other neighborhoods in DC have a very tight supply. That combined with an every growing population and job market should insulate those pocket markets from substantial falls. It is places like Alexandria, Arlington and Maryland that have much more to be worried about. Supply is not skinny in those areas and new high rises and neighborhoods are being built all the time. Prices will stagnate in some places and fall in others, but it is to talk of the DC-Area bubble is to be very imprecise.

Stewart

March 21, 2006 12:07 PM

Doh,
I don't know that a 7% drop can be rationally characterized as a bubble bursting. And you're talking about Fairfax County. Fewer and fewer people are willing to pay high dollars for small homes far away from the city. The money that used to get you a detached home with some yard in the suburbs will now only get you a townhome, if that. It's not surprising that people are increasingly balking at paying a premium for a small home and an hour long commute in bumper to bumper traffic. The single family home market in the city is still strong. No you don't have 12 bidders waiving every contingency imaginable chasing each property. But reasonably priced homes are selling. They may take longer to sell but they are selling.

Doh

March 21, 2006 09:59 PM

Stewart,

Correct, I am talking about Fairfax county. The 7% drop in itself is not a bubble (never said it was), its the 20% drop that we will have by this summer.

If you look at the historical chart of avg home prices you see that the avg home price should be in the $300k range - some 40% below where it is at. To those who say "DC deserves a premium" $300k is a 50% premium over the national average.

The smart money left Real Estate last fall - who is left holding the bag?

Real Estate agents on this board can be seen posting above that Real Estate prices NEVER fall in the DC area - oh well, they are already wrong. We have proven that this market fall is not "typical" history. Real Estate fed upon itself and now it is going on a crash diet. Dont' believe me? Just check the realty section in 6 months after the desparation sets in. March will report a year over year decline in prices (the last bastion of false hope of the real estate mafia) and when they have no more good news and face reality the bottom will come crashing out. The US is a mass mentality market place (hence the bidding wars of the past) and when they smell a loss they all jump in to inflate the panic.

I have real estate friends who are engaged in illegal price fixing - "encouraging" other real estate brokers to maintain their high prices because they know as soon as one of them drops the comp on their investment property they all have to drop their prices. These scams don't work for ever.

Paul

March 22, 2006 10:04 AM

According to ACCRA's latest cost-of-living survey, the DC/NOVA area is the 12th most expensive metropolitan area in the US.

Interestingly, in Money Magazine's latest survey of "Best Places to Live in the US," DC didn't even make it into the top 100.

Makes one wonder what you're paying for in DC -- police???

Both links below:

http://money.cnn.com/2006/03/14/pf/couple_cities_coli/index.htm

http://money.cnn.com/best/bplive/index.html

Tony

March 22, 2006 01:19 PM

This just in from Inman Real Estate News (see link below):

Real Estate Purchases Slide Despite Falling Interest Rates

"Despite a drop in interest rates last week, overall mortgage applications fell 1.6 percent on a seasonally adjusted basis from the week before, the Mortgage Bankers Association reported today.

The seasonally adjusted purchase index decreased by 2.3 percent to 393.6 from 403 the previous week, whereas the refinance index decreased by 0.6 percent to 1,574.5 from 1,583.6 one week earlier."

Link: http://www.inman.com/inmannews.aspx?ID=50645

This is evidence of the herd mentality that dominates many other investment phenomena: everyone rushes in to buy when it seems that everyone else is buying (regardless of the resulting higher prices) and conversely, no one wants to buy when it appears that no one else is buying (although prices might be dropping, or in this case, interest rates are dropping). Clearly, people don't see real estate as a great investment like they did only 6 months ago.

Housing prices will eventually drop due to the growing glut, but timing is key here. Analysts, agents, and potential home sellers and buyers are watching the spring market closely to see where this is all heading. If sales don't pick up this spring, it's fair to say the decline will only accelerate until possibly next spring.

Just as there are economic problems associated with too many people chasing too few goods, there are also economic consequences of too many goods with too few buyers, especially when those goods account for a significant part of the local and national economic engine.

We'll wait and see...

Badh

March 22, 2006 01:44 PM

Doh,
Could not find the Fairfax County data you mentioned- could you post a link?

StG,
Please realize that DC proper or the District of Columbia does not make up the whole “area”. The discussion is about the DC metro area which is made up of DC, parts of MD and northern VA.

todd

March 23, 2006 12:36 PM

NVAR Stats for Feb Home Sales:

Although the volume of single family homes and condos sold in February 2006 in Northern Virginia was 20 percent below the units sold totals for February 2005, average sales prices have increased 6 percent, to $514,116.

More than four times as many active listings were on the Northern Virginia market in February 2006 than February 2005, up 316 percent from 1,584 to 6,588.

February 2006 sales volume in the Greater Northern Virginia region was also more than 20 percent below volume in February 2005. Sales prices, however, have increased 9 percent, to $483,872.

Active listings in the Greater Northern Virginia area were significantly higher in February this year than in 2005. February's total of 14,662 active listings were more than 250 percent greater than the number last year, which was 4,173.

With slowing sales and increasing inventory, who's paying the higher prices???

Todd

March 23, 2006 06:42 PM

From MSNMoney re: today's news that home sales shot up in Feb:

"The Realtors‘ group called February‘s sales figures an aberration due to both warm weather and lower mortgage rates in January that boosted buying activity.

The group‘s chief economist said the pace of home resales should start to slow again next month."

I'm inherently suspicious about anything realtors' have to say about the RE market (i.e., it's always a good market), but I find it especially curious that the chief economist for the National Association of Realtors' is downplaying the unexpected rise in home sales in Feb. I'd expect NAR to gush, "See, we told you that the market is still strong," NOT "it's just a seasonal aberration."

Anyone else find this strange???

http://moneycentral.msn.com/content/invest/extra/P148492.asp?GT1=7919

doh

March 23, 2006 07:02 PM

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

Average sales prices continued to rise through December in Northern Virginia, despite a decrease in sales and sizeable increase in inventory. The average sales price rose to $552,621
http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100393

Although the volume of single family homes and condos sold in February 2006 in Northern Virginia was 20 percent below the units sold totals for February 2005, average sales prices have increased 6 percent, to $514,116.
http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100398

littletiger

March 24, 2006 07:55 AM

February 2005 prices were significantly lower than May 2005 prices--by May the full 20% price jump attributed to the 2005 spring market had hit (as far as I could see).

So even if prices are higher than they were in February 2005, from what I'm seeing from the listings, prices are down from the peak which was sometime in May-August 2005.

When I bid on places in April 2005 (lost all bids, thank God), places routinely sold for 20%+ over the February/March 2005 comps.

littletiger

March 24, 2006 07:59 AM

I just backed out of a deal for an expensive condo--the developer did not make it to spec, tried to play hardball, I backed out and got back my deposit.

While it is not an ideal situation, I actually feel lucky. I think I will be able to get more for the same money--right now, I could get the same (1 BR w/parking) for a little less money, but in following the trends, I think a 2BR or house may come into my range, which I feel is a better long-term investment.

But I also decided when I backed out, that I would rather rent than overpay for a 1BR that I would quickly outgrow, and may not be able to sell/rent at cost if the market softens.

Stg

March 24, 2006 09:18 AM

I'd be interested to know if anyone has used HomeValueZone.com (see info from their website below) and what they thought of it, especially compared to over-hyped Zillow.com:

HomeValueZone.com is a pricing system based on trends in the marketplace. A traditional Comparative Market Analysis (CMA) looks only at completed sales in the past. HomeValueZone does this too; but also examines the current trend of sold but not settled sales, homes listed for sale now, and homes withdrawn as unsold.

HomeValueZone.com offers free automated and proprietary Value Trend software that quickly performs (4) CMA’s for an entire year. These CMA’s are then averaged to create a monthly percentage increase or decrease for a specific home in a neighborhood.

HomeValueZone.com is free for home sellers and buyers in Virginia, Maryland, and Washington, DC. Sellers’ use it to get an accurate sales price that can be justified to buyers, real estate agents, and appraisers. Buyers’ use it to determine if they’re offering the right amount on a house that is for sale. HomeValueZone contains links to help consumers find top real estate agents and lenders, and a free contact database, free automated Value Trend software, and more to help real estate professionals in their work.

littletiger

March 24, 2006 10:54 AM

OK, I was supposed to go and see a house--a little out of range, but doable with the rental unit--it just went under contract.

Clearly the sky is not falling, good property does move.

I still hope to get a better deal than I would have last year, and I do not regret forgoing the half-million dollar 1 br condo.

littletiger

March 24, 2006 10:55 AM

I am still watching the market for 1-2 weeks before bidding.

Anyone else out there looking, have observations on the market?

StG

March 24, 2006 07:44 PM

I've been confused by the contradictory info that came out this week about house sales in Feb and found the following explanation:

"The Commerce Department reported that sales of new single-family homes dropped by 10.5 percent last month -- the largest amount in nearly nine years and the second straight monthly drop.

The latest government data seemed to contradict a report Thursday that sales of existing homes rose by a stronger-than-expected 5.2 percent last month after falling for five straight months. The National Association of Realtors, which issued the report, said the February numbers got a one-time shot in the arm from warm weather and lower mortgage rates in January. But the longer-term trend is still downward, according to the realtors group's chief economist. "The increase we experienced in this report is an aberration because of warm weather," said NAR chief economist David Lereah.

Economists said the discrepancy in the two reports may also be the result of statistical variations in the way the two reports are assembled. Sales of existing homes are reported when those sales close, while new home sales record the initial contract of sale. As a result, the report on existing homes tends to lag current market conditions, analysts said, and may not reflect the impact of the slowdown. Seasonal adjustments to the data often overstate month-to-month changes in winter months, when the number of homes sales and pace of construction is usually slowest, analysts said."

For full article, go to: http://www.msnbc.msn.com/id/11993043/

Gerry

March 24, 2006 08:07 PM

Littletiger:

I think I remember you were worrying about your newly-purchased condo much earlier on this blog. It's great that you found a way to get out of it with all your money in hand! Some haven't been so lucky.

I almost bought a place in Alexandria in Nov, but I realize now that was a blessing in disguise because now I'm seeing similar or better places for $20-30K less than the asking price in Nov.

Conversely, I have friends who bought last summer and rather than enjoying their new house, they're obsessed about dropping prices and rising interest rates. I try to console them that they bought when they had to buy, but unfortunately, they're the ones left holding the bag.

I'm eager to have my own nest soon, but after seeing firsthand the grief of friends who bought at the peak of the market, I'm content to sit on the sidelines and watch what happens for a little while.

Terrence

March 24, 2006 08:18 PM

From the excerpt above:

"Economists said the discrepancy in the two reports may also be the result of statistical variations in the way the two reports are assembled."

Hmmm, government data shows a large decline in home sales in Feb, but the Realtors Assoc shows an "unexpected increase" in home sales in the same time period -- Why doesn't it surprise me that the methodology that the Realtors Assoc uses seems to have a bias toward more sales??? Why does any newspaper quote data from real estate associations as if RE associations are a credible, unbiased source?

Jen

March 24, 2006 08:20 PM

Home Sales Slowdown a Boon to Buyers:
Latest housing data provide fresh evidence market is cooling (March 24, 2006)

http://www.msnbc.msn.com/id/11993043/

TJ

March 24, 2006 08:49 PM

I find it interesting that Commerce Dept data released today showing a big drop in home sales in Feb has made analysts revert to talking about a bursting bubble again.

In Oct when the first signs of a slowing market were detected, commentators all began to talk about the bubble possibly bursting. In Nov/Dec, you could definitely hear the air hissing out, but some just attributed it to the holiday slowdown. In Jan and Feb, the slowdown was referred to as "softening," "correction," "a more balanced market," or possibly "a slowly deflating bubble."

Doing a quick survey of today's news, the infamous "bursting bubble" is clearly on the minds of RE analysts and back in the news again. See example below from CNN:

At Long Last: New Home Sales Slump
Sales in February drop more than expected, as median price falls and supply grows. Is the real estate bubble bursting?

By Chris Isidore, CNNMoney.com senior writer
March 24, 2006: 12:04 PM EST

NEW YORK (CNNMoney.com) - New home sales fell more sharply than expected in February -- and along with them, the price of a new house -- in the latest signs of a slowdown in what had been a white-hot housing market.

Sales sank 10.5 percent to an annual rate of 1.08 million homes in February, from the revised rate of 1.21 million in January, the Census Bureau reported.

Robert Brusca of FAO Economics said it's not too soon to wonder if there has been a bursting of the so-called "housing bubble" of recent years, when prices and sales kept rising.

"How can you look at these data and ignore the question?" he asked rhetorically. "We had such a dramatic fall in the West," he added, where sales fell almost 30 percent.

"If there's a bubblicious market, that's the one, the one that had the highest prices. And while you can say all housing markets are local, but it's clear there have been factors that helped all the different markets, so it would be folly to say that couldn't reverse."

See full article at:

http://money.cnn.com/2006/03/24/news/economy/newhome_sales/index.htm

doh

March 25, 2006 08:28 PM

Congratulations little tiger. A smart move.

Sandra

March 26, 2006 08:28 PM

Terrence,
You may need to read (and actually comprehend) the entire article before jumping on the NAR statistics. New home sales were down in February. Existing home sales were up. Ask your mommy to explain to you the difference and please... keep out of the market. You're too illiterate to understand a sales contract.

tc

March 26, 2006 08:39 PM

A realtor friend told me he was out this week-end with a ready to buy qualified physician and her husband. They found two homes they wanted to see that were advertised as holding open houses this week-end. When they arrived at each home, they were both under contract already. The couple had submitted an offer earlier this week on a different home and had lost the bidding because of multiple higher offers. All the homes they were looking at were in the 900k - 1 million price range in western Fairfax county. I guess that market isn't collapsing.

Ana

March 27, 2006 04:30 AM

Hello, I was impressed by all your comments... and I'm sooo glad prices are coming down in the DC area. First and to those of you who compare the northern Virginia area to places like San Francisco o any other really, what does have DC? Let me tell you after living in there for 8 years: Horrible traffic, horrible humidity, rude people, no quality of life and the possibility of adding to this list snipers and terrorist attacks. If you tell me that there are people still wanting to go there be my guest but I would suggest to find a job anywhere but DC area. This is from a person who needed to do zig-zaging to get milk. How can people be so stupid to buy in such a place? get your money and buy a property in Spain or Italy by the beach and see the difference.

JimL

March 27, 2006 07:35 AM

In downtown DC, I think you'll see the real hurt on condos in "up-and-coming" areas. Logan Circle is up and comming, it still isn't DuPont Circle, or Georgetown, etc. It seems to me that condos in those prime areas are still selling when priced well -- i.e. sellers are not getting peak 2005 prices but still making out like a bandit, and sellers have more choices in those already established neighborhoods. I think people who are speculating in areas like Shaw, Columbia Heights, etc., are going to really hurt themselves if they try to speculate there. I'd guess it's not a bad time to buy in the prime areas should you plan on staying for a while, but I imagine in a year you'll find some great deals in those other areas.

smallbean

March 27, 2006 12:46 PM

tc:

From Sunday's Washington Post

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/25/AR2006032500992.html?referrer=emailarticle

"...In June, Alice Jacobson and her husband, Jim, put their spacious colonial-style house in Loudoun County up for sale for $949,000. It sold nine months later, for $150,000 less.

Alice Jacobson, a marketing specialist with AT&T, said they learned the hard way that reaching for the high end of the market was a mistake. Pricing the house at $949,000 "killed us," she said. Because the house remained unsold for so long, it almost felt as if it "had a curse on it."..."

It's also in NoVa, the price is 900K -- 1 Mil range. Guess we're looking at different sides of the story, only time will tell.

Sue

March 27, 2006 03:06 PM

Ah, memories are short. I purchased a new California home in 1992, just as prices were peaking. New out of college, had no idea about market cycles. We were given incentives to upgrade the house and given closing costs in order to keep the purchase price artificially high... same as is happening now. Three/four years later, entire cul-de-sacs in our neighborhood were in foreclosure, as all mortgages were new and upside down. I recall talking with some poor kids on trikes in one cul-de-sac where they were the only inhabited house, about all their friends being gone. We were under water in our home for years - but the % underwater was still only about 20% of our annual income - prices then were not as inflated as they are now. It still felt like a lot, though. Can we imagine how families will cope if a recession hits, and/or they are upside down to the tune of their entire annual income or more? Families that could otherwise have continued their payments will walk away. The psylogical downer of being upside down year after year is greater than the upper of doubling one's income on paper in these good times.

Len

March 27, 2006 03:29 PM

In case you missed it, the Washington Post had special sections on the real estate outlook for the DC/NOVA area in both Saturday and Sunday editions this past weekend. Almost every article trotted out the latest data: slowing sales, growing inventory, and softening prices. Some articles discussed the impact the slowing market will have on the DC area economy. Articles can be found at:

http://www.washingtonpost.com/wp-srv/realestate/features/2006/housingoutlook/index.html

Stewart

March 27, 2006 04:45 PM

JimL,
I don't know which Logan Circle you are referring to but the one I know in Washington, DC most certainly cannot be characterized as "up and coming." The time for someone to "speculate" in that area has long since "come and gone." You're not going to find any bargains there. I would also say that it is too late to find many bargains in Shaw and much of Columbia Heights. I think that as a general rule, it's a bad idea for buyers to be speculating anywhere, if by "speculate" you mean buy a property with the assumption that it will double in value in 3 years.

ASB

March 28, 2006 01:48 PM

TC, a single story a "realtor" friend told you doesn't mean the market is going either way. "Realtors" make their money from selling "property" or "Real estate". If no property is sold, they make no money. With that in mind, which of the below do you think most realtors will try to convince people:

A. The market is still strong, and people should feel confident to buy at whatever screwball price a seller will attach to a property.
or
B. The market is over-inflated, don't buy any property, even though I will not make money now.

Now, because of your story, I will go buy a 900k home, because a realtor told you it's a good idea, and you shared it with us. Thanks.

ted

March 28, 2006 02:04 PM

As a prospective buyer who has been watching the market closely since Aug, I'm now starting to see many "newly listed" properties that I looked at a couple of months ago. In most cases, they were houses that didn't sell, were taken off the market or even failed in the rental market, and are now re-appearing with no mention of their previous DOM (60+ days). What I find interesting is that some of these "re-appearing acts" haven't done anything significant to change why they didn't sell last year -- same ridiculous price, no "spruce-up" paint, etc. Clearly, some sellers and their agents didn't get the memo that the market has changed.

Good properties at reasonable prices will always sell quickly, but there are still a lot of people hoping for a return of last spring's market when they didn't have to wash the dirty dishes in the sink, much less "stage" and market the house to sell it, but according to the latest NVAR stats, they have twice the competition for the same number or even fewer buyers.

Rob

March 28, 2006 03:15 PM

The Fed's move to raise interest rates today and economists' expectations that they will continue to raise rates will probably have a further dampening effect on this spring's housing market.

From MarketWatch:

The Fed Raises Rates, Leaves Door Open for More: No Clues for When Central Bank Might Stop
MarketWatch, Mar 28, 2006

WASHINGTON (MarketWatch) -- The Federal Reserve opened the Ben Bernanke era on Tuesday the way it closed Alan Greenspan's: With a quarter-point rate hike.

The Federal Open Market Committee raised its overnight lending rate by a quarter percentage point to 4.75% as expected and left the door open for further rate hikes.

Some economists had been looking for the Fed's statement to provide clues about when the Fed would stop tightening. But no clues were forthcoming.

With the unanimous vote, the FOMC has now raised interest rates at 15 straight meetings.

Martin

March 28, 2006 03:25 PM

the latest interest rate hike isn't going to help home sales which are already lagging. it doesn't help buyers who will have to pay more for a loan, it doesn't help sellers who will find it harder to sell their homes, and it doesn't help the local and national economy since so many jobs are directly or indirectly dependent on construction and real estate.

Alley Cat

March 28, 2006 03:45 PM

I’ve read this blog on and off for a while and found the shifting views fascinating.

For the record, I strongly believe that there is a bubble in this area and that there will be some radical re-pricing in the next year or two.

This weekend, I went with some friends who were looking at houses in more marginal areas. Some of these properties had undergone serious facelifts (and more). My personal favorite: a house with a jacuzzi in every bathroom (3), granite countertops etc. (I say that with some wryness—that kind of excess is not my taste). Said house was in a dicey area, far from a metro. Price was about $500,000—a cool half million (I think people keep forgetting that $500,000 is a half million so I prefer to say a half million!).

There were several houses for sale which were similar in not just that area but within that very same block. These houses were actually quite lovely (built in the 1920s and 1930s so the quality of workmanship and materials was higher than what is found in most suburban tract homes today). The appliances were new; the floors were beautifully waxed etc. All in all, these were really wonderful places...but they are in areas where it may not be safe to walk at night.

I agree with most people here who say that the price dips will be seen first in the more marginal areas (although for the record, I believe that they will be seen everywhere, including in Georgetown etc. as I believe that prices will readjust across the board).

What I wonder about is what will happen in marginal areas where lawyers, doctors and so on have bought $500,000 homes to live in (buying the house from a speculator, of course)? These people will undoubtedly be trapped in these homes, unable to move, when the market readjusts. In both the short and long time they may find themselves living next door to a doctor on one side and next door not to a crack house but to some shady characters on the other side.

So, here’s my question: Will these neighborhoods slide completely or will there be some a lot more neighborhoods which are economically mixed in DC or the surrounding area? Personally, I am hoping for areas to become more economically mixed as I think that could be very interesting and possibly a good thing for DC proper and the surrounding area. But that said, I really don’t know what will happen.

Any thoughts on this and how such a situation could transform DC?

doh

March 28, 2006 08:52 PM

TC,

Nice try, but it won't work. Pumping the market won't change reality. Unlike your "I was told by a friend who knows someone...." story here is the reality of the market in western Fairfax County: 249 days on the market and price reduced to $1,099,000 (smack dab in the middle of your "red hot" market range).

Bedrooms: 4
Full Baths: 3
Partial Baths: 1
Square Feet: 5,028
Lot Size: 14,810 Sq. Ft.
Year Built: 1999
Listing Date: 07/22/05
On Market: 249 days
Type: SFR
Status: ACTIVE
MLS #: FX5319885

fuj

March 29, 2006 10:34 AM

I have been watching the market now for 2+ years and I am NOT seeing a slowdown in NW DC, Bethesda, and Arlington YET. Clearly, properties outside the Beltway are sitting longer and are pricing less than last year's ask.

I wonder how long until this will trickle down to the immediate metro area, or if at all. Can anyone offer evidence that the statistics are actually relevant in 20016, 20007, 20818, 22207 etc.

Thanks.

winston

March 29, 2006 12:57 PM

--------------------------------------------------
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!

Posted by: winston at December 14, 2005 06:32 PM
------------------------------------------------

I AM SMARTER THAN GREENSPAN AND BERNANKE!!! CHECK OUT THE ABOVE COMMENTS I MADE LAST DEC. WHEN WSJ AND FED WERE TALKING BS, I KNEW ALREADY THAT THE RATES HAD TO GO UP.
BE PREPARED FOR THE RECESSION! CHEERS!

Austin

March 29, 2006 05:45 PM

I've also been wondering about how the softening market will affect gentrification in DC. To me, the only good thing about the housing boom of the last years is that more middle-income households bought in low-income neighborhoods because that's all they could afford, resulting in greater economic diversity in those neighborhoods. However, because of the wide use of exotic loans like ARMs (especially in the DC area), I think the more common scenario was households at all levels over-extended themselves financially to buy into severely over-valued houses, some in marginal neighborhoods. Those households won't have much money left to do home improvements that bring their own properties up in value, much less improve their communities. If/when those households default on their precarious loans, it may drive those neighborhoods down further than where they were pre-boom. It will certainly have an economically-depressing effect on all neighborhoods (good, marginal, and low-income) where these risky ARM households reside.

doh

March 29, 2006 08:23 PM

I would like to update my post. Price has been reduced again to $949,000.

Sugar Ray Leonard

March 29, 2006 11:31 PM

NW DC, Bethesda, and Arlington (Reston - Ballston) - will never go down. Or not by much in comparison with outer suburbs.

JimL

March 30, 2006 08:44 AM

Stewart,

I agree with you. Why would someone spend $400K on new construction in an "up and coming" neighborhood when they can get something similar for $350K or less in a better location (i.e Dupont instead of Logan). To me, all the new construction or conversions are where the prices are really out of whack even in already established neighborhoods -- but more so in the "up and coming" areas. Just my personal observations, but condos that are well priced (especially compared to the new construction/conversions) are moving pretty well. It's those who are in last year's mindset that are still sitting on the market.

Drew

March 30, 2006 02:37 PM

Austin - that is a refreshingly thoughtful post. I haven't been here in a while but notice the tone of discussion is becoming rather high pitched.

It is very difficult to predict how a falling housing market may impact neighborhoods. I happen to live in a "marginal" part of DC. I am absolutely astounded that people have been paying near-Georgetown prices in a neighborhood where we still push our money beneath bullet-proof glass to get milk or a loaf of bread.

I think the momentum towards gentrification will slow considerably, at the very least, or just stop completely, if (when) the housing market tanks. I do not think, however, that neighborhoods will be worse off than before, barring a severe economic recession. Crack cocain contributed to the mess DC was in a decade ago, and that seems to have subsided considerably. There was news, recently, that methamphetemine use was on the rise in the DC area - that could have a very destabilizing effect. We shall see.

It is amusing to read through the pro-real estate-goes-up-forever boosterism on this thread, when I think back to the "good old days," and the fear that struck middle class white people at the mere mention of "Washington, DC." Like I said, we shall see.

tc

March 30, 2006 08:36 PM

ASB
"Now, because of your story, I will go buy a 900k home, because a realtor told you it's a good idea, and you shared it with us. Thanks." I never said a realtor told me it's a good idea. Please reread the post. I went out to lunch with his client today (life insurance issue) and she retold me the same story. They have been shopping for a few weeks and everything nice under $1 million is gone before they can make a decision. If there was a house in June in Loudoun county that didn't sell right away it was only greed on the seller's part that kept it on the market. Nothing was taking months to sell in decent condition at a reasonable price back at the height of the market.
DOH No, that house in Reston is not smack dab in the middle of the market range. I said they were looking from 900K to 1 Million and that house is over 1 Million. Where are you getting the middle of the range I gave? And again, if a house was priced out of reason in the summer, which the house in Reston was, this is again greed on the part of the seller. Obviously the agent would have liked to have sold it. If a house didn't sell in the first month back in the summer, it was overpriced or in bad condition. I'm still looking at the economic reports from the Center for Regional Analysis. This area has the highest job growth of any MSA in the country right now. If a house is priced correctly and is in good condition, it will sell.

tc

March 30, 2006 08:43 PM

doh - No that home did not have a reduction to $949,000. It is priced at $1,099,000. FX5319885. I've had my realtor email me the current listing. Good try!

EDN

March 31, 2006 12:51 PM

Good book recommendation from financial advisor Michelle Singletary on surviving the RE market:

"So is the housing market busting its bubble?"

This is a question being asked by folks looking to sell and those in the market to buy. It's certainly on the minds of those who dream of homeownership but don't have the funds to do anything but dream. If you're not sure what to do in this real estate market, I suggest you pick up House Poor: Pumped-Up Prices, Rising Rates, and Mortgages on Steroids by June Fletcher.

Fletcher, a reporter for The Wall Street Journal, has been writing about real estate and home-related issues for more than 20 years.

I've been looking for a real estate book to recommend. But too many are written by folks who are so tied to the industry they can't be objective.

House Poor is different. In fact, on the cover Fletcher promises tips to "survive the coming housing crisis."

K Ho

March 31, 2006 01:33 PM

...give it a few weeks...;-)

Drew

March 31, 2006 02:02 PM

TC - rather than rely on hearsay, posted anonymously on an internet bulletin board, why not just look at the Virgnian Realtors most recent data? Inventory is up, what, 400 percent in N. Virginia? Sales, in Loudon are down, about 45% year over year?

Where the heck are these properties that are "gone" before a decision can be made? Oh, are you saying houses "priced correctly" are those steeply discounted for quick sale? I thought real estate only went up? WTF?

Badh

March 31, 2006 02:09 PM

Real Estate market “crashes” are the exception not the rule. It seems like all of the doom and gloomers are the ones who are saying “it’s different this time”. I hate to repeat myself but over time real estate does ‘always go up’ and when the market “tanks” it usually does not take long to recover. This isn't "boosterism" it is simple fact. It is called a “cycle”. Again, real estate is cyclical. If a person bought the home to live in, they can usually wait it out. If the person bought the home on speculation then that is the risk they took. It is like any other investment that any person on this board has made. There is a risk and a reward. If you buy a condo and flip it and make a profit- more power to you. I, for one, am not going to begrudge you and I am not going to complain that you are making life harder for me.
Drew,
I would not bet on the city going back to the DC of the 70’s and 80's even with your predicted Meth epidemic. You are really grasping at straws now.
Doh,
Tc is correct. The house is still listed at $1,099,000. Keep spinning though.

I am seeing a lot more 'under contract' signs throughout the city. Just as tc stated, it seems that the homes that are priced right and in good condition are selling.

tc

March 31, 2006 09:21 PM

Housing Outlook for 2006 and 2007
Market will continue to cool –
returning to “more Normal’:
• 2006 Prices will increase in the
range of 6% – 12% compared with
20+% in 2005
• Sales volume will drop back to
2002-2003 levels (98-100,000
transactions)
• Days on Market rising to 45-55
average.

Taken from the 2006 January - Metropolitan DC Area Housing Report, George Mason University Center for Regional Analysis.
Drew- What's with the WTF comment? You're certainly giving away your socioeconomic background with that kind of lack of professionalism. Meth, huh Drew?

doh

March 31, 2006 09:38 PM

Sorry, I meant this house:
Bedrooms: 5
Full Baths: 4
Partial Baths: 0
Square Feet: N/A
Lot Size: 20,909 Sq. Ft.
Year Built: 1981
Listing Date: 11/07/05
On Market: 144 days
Type: SFR
Status: ACTIVE
MLS #: FX5447512

Price Reduced: 11/21/05 -- $1,050,000 to $1,029,000
Price Reduced: 12/22/05 -- $1,029,000 to $989,000
Price Reduced: 03/09/06 -- $989,000 to $975,000
Price Reduced: 03/20/06 -- $975,000 to $949,900

And this one:
Bedrooms: 3
Full Baths: 3
Partial Baths: 1
Square Feet: 2,483
Lot Size: N/A
Year Built: 2006
Listing Date: 08/16/05
On Market: 227 days
Type: CONDO/TH
Status: ACTIVE
MLS #: FX5353266

Price Reduced: 11/29/05 -- $999,990 to $969,990
Price Reduced: 01/13/06 -- $969,990 to $899,990
Price Reduced: 01/17/06 -- $899,990 to $849,990

And this one:
Bedrooms: 4
Full Baths: 4
Partial Baths: 1
Square Feet: N/A
Lot Size: 2.0 Acres
Year Built: 1978
Listing Date: 08/04/05
On Market: 239 days
Type: SFR
Status: ACTIVE
MLS #: FX5339166


Price Reduced: 02/17/06 -- $1,190,000 to $999,999

And this one:
Bedrooms: 3
Full Baths: 3
Partial Baths: 1
Square Feet: 2,483
Lot Size: N/A
Year Built: 2006
Listing Date: 08/16/05
On Market: 227 days
Type: CONDO/TH
Status: ACTIVE
MLS #: FX5353266


Price Reduced: 11/29/05 -- $999,990 to $969,990
Price Reduced: 01/13/06 -- $969,990 to $899,990
Price Reduced: 01/17/06 -- $899,990 to $849,990

And lets take a look at this one also, over 700 days on the market - look at them fly off the shelf:
Bedrooms: 6
Full Baths: 6
Partial Baths: 2
Square Feet: N/A
Lot Size: 1.2 Acres
Year Built: 2005
Listing Date: 04/10/04
On Market: 720 days
Type: SFR
Status: ACTIVE
MLS #: FX480364

Everyone is correct - prices never come down, except when they are falling. We have already lost all of 2005 gains and still no one is buying. I can't wait for the March numbers when real estate agents will be forced to admit a year-over-year decline in prices (oh wait, prices never fall in DC area). I am laughing all the way to the bank as my down payment has grown in the stock market and soon I will be paying CASH for all of these foreclosed properties.

dumbcompany

March 31, 2006 10:56 PM

Wow, I’ve been out of this string for a while, and it’s tough to catch up on everything that everyone’s saying. This is a really fun thread though (perhaps the most successful that businessweek.com has ever put out.)

Here’s something that caught my attention.....

So Badh, you want to talk historical data? Well, historically real estate has generally gone up, as you rightly point out, but not, as you happen to ignore, by much more than inflation. This is true nationally and regionally. Historically, you would have done about as well by putting your $ in a money market account. My basic point is that the run-up has been unprecedented. Unprecedented crashes can follow.

And regarding that last statement, if you look at real estate markets that have experienced unprecedented run-ups, they are almost always followed by drastic falls. As you correctly state, real estate is cyclical. But there are moderate cycles and severe cycles associated with stable and volatile markets respectively. Markets that experience moderate price increases tend to also experience moderate declines when the market softens barring a clear external shock (such as steel mills closing in Pittsburgh.) Other markets are more volatile. They experience large increases which are then followed by large decreases. Look back at your Econ/Finance 101 – on average, large returns are compensation for large risks. Large risk is associated with high price variance. Which, if your appeal to basic economic principles is correct, implies that people who dive into the current real estate market are at risk of experiencing large price declines. When that will happen is tough to call. In fact, that’s the million dollar question (literally.) But the law of large numbers will kick in eventually so that you will end up doing about as well as real estate has historically averaged – slightly better than the rate of inflation. You’re right, people took on new risks when they jumped into real estate, whether as a serious buyer or as a speculator. But high returns are accompanied by high risk. Risk involves the possibility of a drop in the market. You cannot discount that possibility (and, in fact, should expect it to occur at some point.)

We’re in a new world here, folks. Innovative lending products, unusually high payments as a fraction of income, real estate speculators, low but rising interest rates – who knows where it will end up. But when your 3 year ARM that you took out in 2003, when prices were just starting to spike, starts to adjust in the summer of 2006, let me know what happens to your payment.

Doh

April 1, 2006 09:02 PM

K Ho,

We won't have to wait a few weeks, only till the horrendously horrible March home price decline reports come out.

I really get a kick out of the people on this board who spend their time trying to justify insanity (but then they are the same people running the Government so I guess it all makes sense).

Japan is raising its interest rates and we will see all of the Asian money that has kept Bond yields and mortgages rates low start to leave. In order to remain competative the Fed will need to continue to raise interest rates or risk a collapse of the US Dollar - and a mass exodus of foreign investment dollars that have propped up the US economy.

Also, with corporate profits at a 20year high the pressure will be to raise wages which is the key spark for inflation which means the fed will keep raising interest rates and cause (indirectly) mortgage rates to rise.

People are no longer willing to spend 60-80% of their gross income on housing.

With the dissapearance of the value of ARMs (tied to short term rates and are in most cases the same APR as 30 year fixed right now) the same monthly housing expenditure buys you less house because defacto interest rates have risen.

Housing costs are up - household housing expenditures are down.

Would someone please provide a logic based reason for house prices not to come down.

No emotional stories of "people love it here", "we are all rich (cause were not)", or my favorite "The mayor of DC has passed a law exempting DC from the the laws of economics so therefore housing prices never fall in DC".

I challenge anyone to provide just one solid argument based on economics and logic. I bet no one can do it.

Rearden

April 3, 2006 03:30 AM

Just finished reading the entire blog since July, so now I can feel free to comment.

First, full disclosure: will be closing on a SFH walkable to Rockville metro, in a desirable homeowner's association community that is quite protective of changes being made to the look and feel of the community (wooded, with pool/tennis/bball/community center/walking paths)
(i.e. good for real estate value). Bought a 3bed, 2.5 bath house that will need virtually no money put into it, .28 acres of land, one car garage, location between the still being built Rockville Town Center, and Rt270 at the Falls RD/MD ave exit.

My wife and I were able to put 20% down on a 30 year fixed mortgage at 6% (we have top credit), and after the tax write off, will have a monthly payment (even with taxes, homeowner's insurance, and HOE fees) roughly $500 higher than our 2 bedroom rental that was a 5 minute walk to White Flint metro, where we've resided the last 2 years waiting for the bubble to pop. During that time, all we've seen is rates go up slowly, but frustratingly, housing prices did as well.

We actually plan to LIVE in our house, not as an investment, but because we want a house. Given that we have 450k in liquid assets for unforseen calamities (which I hope to not need, but have nontheless), and we plan to stay in the house for at least 5-10 years easy, trying to gauge if we have anything to worry about, or if our choice of location/community will protect us from the surely coming bubble pop somewhat. I admit there's a bubble (how can one not?), but that merely means admitting there will be a change from the ridiculous appreciation of the last 5 years. That could mean appreciation slows down, stagnates, or goes down. What I'm trying to figure out is which applies for my specific situation. BTW, the house I bought appears to be about $25k lower than the comps sold in the last 6 months in the same community, so it was priced a little more reasonably than the rest (which makes me wonder if it won't get hit as badly in the bubble pop, since some of the hit was already reflected in the the selling price vs the comps).

Any thoughts?
(the community is New Mark Commons, if anyone knows it)

Thanks!

littletiger

April 3, 2006 09:21 AM

OK, still watching the market. I'm now looking for a two-bdrm property or more. It's true that nice, well-priced properties are moving--I'm only looking in Dupont, Adams Morgan, Woodley Park, and a little bit around there--the "established" neighborhoods.

One-bedroom apartment prices are down. One that I lost to a higher bid last year is 10% less at LIST PRICE this year, and still not selling--that's $40K less than last year. So glad I lost that bid.

I don't see as much movement in two-bdrms, but I am hoping for it, as I would rather rent than buy a one bedroom.

Outside the District, if I was willing to leave, I am sure I could find something discounted in Arlington--the inventory is ridiculously high. But I don't want to leave the city.

And, for the record, I LOVE living in DC, in the close in, established neighborhoods I mentioned. I couldn't live in the suburbs--that's where you incur the traffic, lack of cultural amenities, etc.

I walk most places, and just got rid of my car. Anything I can need is within a few blocks--groceries, hardware, shopping, cafes, etc. When I need to get away, I rent a car and drive 20 minutes to lovely national parks, I drive 1 1/2 to 2 hours if I'm feeling ambitious and want a hike.

For me, this beats NY, it's just easier to live here, yet I get the urban scene.

Fashion sucks, but what can you do, no place is perfect.

But there ARE those of us who do love it here. Not to mention have our work here. Those prices did not rise on the demand of people who find DC to be insignificant or unpleasant.

Irwin

April 3, 2006 10:30 AM

From MSNMoney.com:

Brokerages pushing owners to lower prices
By Robert Sandler
April 2, 2006

"Looking to head off a sustained dip in the real estate market, some of Pittsburgh's largest real estate agencies are asking home sellers to do something that will mean less money for them and their agents: reduce their asking prices.

Ninety-nine percent of the Realtors are doing that right now," said Ron Croushore, CEO of Prudential Preferred Realty and president of the West Penn Multi-List and the Realtors Association of Metropolitan Pittsburgh. "Inventory's beginning to build. There's ... probably 10 percent more listings this year than the same time last year."

Drew

April 3, 2006 01:57 PM

Thanks, dumbcompany, for that thoughtful post. Like I've said before, this thread is getting very shrill. Just like the history books teach us, these episodes end toward the upside with hysteria - the panic buying we saw in late '04 and early '05. What follows is orderly price decline, which occurs in all recorded manias, before the inevitable panic sets in. Panic selling will end in despair, and the whole process begins anew. Not before the last episodes' speculators have been wiped out, of course. And not before "investors" follow the market down to the bottom, hoping, desperately, for the rebound that never comes. Oh, well.

I think the shrillness is the beginning of the panic that will bring the end....

Drew

April 3, 2006 02:34 PM

Here's a post I found elsewhere. For those doubters, I agree that no one can predict the future, so feel free to ignore any portion of this that speaks to what may come. It is, however, an accurate account of the last housing bust, told by an appraisal professional who was there. Bressi Ranch is a development outside San Diego, California. Enjoy.

"I think all cycles play out a little differently. But I also think that past predicts the future.

I remember in 01/1990 seeing a real softening in most of the residential markets. For about 3 months it was real spotty and inconclusive. By about 03/1990 most of the appraisers had figured out that the market was in decline. It took the newspapers about 6 months before they picked up on that and by then it was way too late for some of the "last fools".

The residential markets here started to decline and the foreclosures started to rack up. As the lenders' reserves got quickly eaten up by foreclosing, then selling the foreclosed properties under quick sale conditions, the feds would close them in order to stem the losses. That only made it worse. More lenders went down, more properties came on the market as "bank-owned foreclosures". Believe me, when potential buyers see that sign on a property they know they can lowball the offer even more because the lender is under pressure to sell and they have to liquidate. It sets the market because at the same time the prices are declining that decline is contributing to the rate of foreclosures which in turn swell the inventory and cause further declines. This is the flip side of the "real estate never goes down in value" line that has been so popular these last few years.

As the declines picked up speed, it affected almost every price bracket, but especially the middle ranges. The bottom end lost a bit, but the middle and top price ranges collapsed like an accordion. At one point there wasn't a whole lot of price differential between what would have previously passed for a $350k home and a $150k home.

The subdivision developers had to finish their projects and get out, no matter what, so they had to cut their pricing. That made selling their homes even harder, and on top of that it spurred some lawsuits from previous buyers. The developer had basically undercut their purchase prices leaving them upside down. People were suing because a $50k loss was enough to ruin them. There were a whole lot of people who were basically trapped in their homes for a good 6 or 7 years, until prices caught up in the 1996-1997 time frame. Those who could hang made it through and those that didn't added to the inventory.

All that happened in a market where the peak had topped out about 25% - 30% above the long term trendline. Now that we're 60% above the trendline I don't think I am capable of overestimating how bad it can get. We only wish we were looking at $50k losses. Heck, that one model in Bressi Ranch has basically lost $70k and things haven't even started going south yet."

http://bwnt.businessweek.com/housing/2006/index.asp?campaign_id=yahoo_realestate

April 4, 2006 08:53 PM

http://bwnt.businessweek.com/housing/2006/index.asp?campaign_id=yahoo_realestate

Martin

April 5, 2006 10:19 AM

From CNNMoney about the "danger years" of the 3rd and 4th years of mortgages. Link to the whole article below:

NEW YORK (CNNMoney.com) - Millions of mortgage borrowers are entering their "danger years," when delinquencies peak and owners risk losing their homes.

Although borrowers are often told that the first year is the hardest, delinquencies have historically reached their highest points during the third and fourth years of mortgages, according to the Mortgage Bankers Association (MBA).

There are a few forces at play: After years of strained budgets, borrowers may have little in savings to draw on to handle a crisis; this is also the period when major repairs begin to crop up; finally, many home buyers go through life changes, including starting a family.

The number of Americans affected by the coming danger years could be huge. Half of all mortgage loans are three years old or less, according to the MBA. Nearly $3 trillion in mortgages originated in 2002, $4 trillion in 2003 and $3 trillion again in 2004. Many were refis, but there were also record totals of new purchases as well. In addition, many of these transactions involved risky loans, such as interest-only ARMs and no-down payment loans.

Full article at: http://money.cnn.com/2006/03/28/real_estate/mortgage_danger_years/index.htm

STG

April 5, 2006 10:39 AM

I highly recommend a very level-headed and relatively short article by Andrew Laperriere about the economic and political trends that resulted in the current housing run-up and what might be expected as these trends run their course over the coming months and years. While the article looks at national housing trends, he uses the DC/NOVA area as an example of a city where economic fundamentals don’t support what has happened in the housing market here. Some excerpts from the article:

“The crux of the debate is house prices. If the inflated prices are justified by economic fundamentals and sustainable, then the 82 percent increase in mortgage debt since 2000 will probably turn out to be innocuous and the risks to the economy minimal. If, on the other hand, prices are out of whack, painful adjustments lie ahead.

Unfortunately, the weight of the evidence strongly suggests a bubble. The price of the median home is up an inflation-adjusted 50 percent during the last five years, an unprecedented national increase. It is true, as Alan Greenspan and others have observed, that real estate is regional, and much of the country has not experienced significant price gains. However, prices are overextended in enough areas that a real estate correction would have national fallout. The mortgage insurance company PMI estimates that regions accounting for more than 40 percent of the nation's housing stock are overvalued by more than 15 percent. Other estimates of overvaluation are much higher.

Economists at international banking giant HSBC have identified 18 states and the District of Columbia as "bubble zones." House prices in these zones look remarkably similar to the rise in the S&P 500 during the 1990s stock market bubble. They have dangerously diverged from historic valuation trends, and thus are very likely to drop during the next few years.

Just as cheerleaders of the high-tech bubble of the late 1990s developed ever more creative explanations for why traditional metrics of valuing stocks no longer applied, the same has been true during the housing bubble. Housing bulls point to immigration, building restrictions, Baby Boomer demand for second homes, and other seemingly plausible justifications for skyrocketing home prices. But examining the value of housing using time-tested and common-sense metrics such as price-to-income and price-to-rent ratios suggest the gains in the bubble areas can't be explained by economic fundamentals.”

Link to article: http://www.cbsnews.com/stories/2006/04/03/opinion/main1464727.shtml?CMP=ILC-SearchStories

Sam

April 5, 2006 02:15 PM

Interesting news item on NPR's MarketPlace this morning: The Mortgage Bankers Association reports that overall mortgage applications increased 7.2 percent last week on a seasonally adjusted basis from the week before, as interest rates climbed. Analysts believe this is a result of people rushing to buy before interest rates go any higher (which seems to be a certainty based on Fed Chairman's comments at the most recent meeting of the Fed), rather than based on belief in the strength of the housing market itself.

Data for March home sales is due out next week -- I'll be interested to know if this race-to-beat- interest-rates boosts lagging home sales in the DC area. If not, then I think it would be safe to declare this spring (and the rest of the year) a bust for housing.

Andrew

April 5, 2006 02:22 PM

Not only are house prices at extreme levels by traditional measures, but the manner in which home purchases have been financed in recent years is also disconcerting. Consider the growth of interest-only and "pay-option" adjustable rate mortgages. With the latter, the outstanding balance owed can actually get bigger every month. A few years ago, these loans barely existed. Last year they accounted for more than a third of new loans. What's worse, the vast majority of these loans were extended based on "stated income," which means the bank didn't verify the income of the borrower. Common sense suggests many are fibbing about their income to qualify for a larger loan.

Such loans are risky because after an initial period of three or five years with low rates and no principal payments, the loans "reset," and consumers can experience 50 percent or even 100 percent increases in their monthly payments. About $2 trillion in loans, or a quarter of outstanding mortgage debt, will reset in this fashion during the next two years according to Economy.com. Therefore, millions of households are about to experience significant payment shock.

A recent study by First American Corp. shows that many of the borrowers who have taken advantage of the lowest teaser rates and are going to experience the greatest payment increases have little or even negative equity in their homes. Fully 22 percent of the borrowers who borrowed at initial rates of 2.5 percent or less during the past two years have negative equity in their homes, and 40 percent have less than 10 percent equity. The study also finds that a third of people who took out adjustable rate mortgages last year have negative equity and 52 percent have less than 10 percent equity. How is this possible? One reason is that 43 percent of first-time home buyers paid no down payment last year.

If this isn't a housing mania, why have so many people embraced financing schemes that leave them vulnerable to higher interest rates or even a modest correction in home prices? The nation's bank regulators have seen enough and have issued draft rules that will take effect this spring requiring banks to tighten standards on loans where the consumer isn't required to pay principal up front. That's going to tighten credit in the high cost markets, reduce demand for housing and put downward pressure on home prices. (Quoted from an article in The Weekly Standard)

elle

April 5, 2006 02:29 PM

This is a really fascinating blog. Over the 530(!!!) posts, it tells the financial and psychological story of the making and breaking of the DC area housing bubble. I wonder if BusinessWeek has ever had a topic that has generated such active discussion over such a long time (the first article was posted in July 2005)?

Stewart

April 5, 2006 02:47 PM

Rearden,
Here is a thought for you. You've made your bed, now lie in it comfortably and enjoy your new home. It's a huge waste of energy to worry about what the market is going to do in the short term, particularly since you are not using your home as an investment vehicle and plan to stay in it for the next 5-10 years. And it's an even huger waste of time to try and gain any true insight into the local housing market from this forum. After a long time of periodically checking in on this site to read the ongoing dialogue and offer an occasional comment I've come to realize that it's essentially pointless. Most of the commenters are doomsday scenario types, posting the latest news and anecdotes about plummetting prices and skyrocketing days-on-the-market, ridiculing the "suckers" that bought when the market was going up, and licking their chops for the day when they will supposedly run out - checkbook in hand - and pay 50 cents on the dollar for great properties that the suckers can no longer afford. Anyone who doesn't see the impending doom (which has been impending for the past 5 years) is considered to be crazy.
If you want useful opinions, read what the experts are saying. Otherwise, just relax and enjoy your home.

Maris

April 5, 2006 04:32 PM

Wow! I put my house search on hold for the past 6 weeks while I was out of the country and I can't believe the market now -- some of the properties I looked at before I left are STILL on the market, but the prices have dropped considerably, one by a whopping $100K -- nearly 25% of the original asking price! OK, that one's an outlier because it was so ridiculously priced in the first place, but anecdotally, I'd say that $15K reductions in the past 6 weeks are average for what I'm looking at (2/1 TH or SFRs in DC, Arlington, and Alexandria). I'm not going to rush out and buy anything though until I see what else is on the market, but even then, if prices are dropping like this, I'll probably wait until the market settles down before getting my checkbook out.

I read somewhere that sellers usually price their houses based on market conditions from 6 months earlier, so it seems that only now are sellers starting to price their houses based on the slowing market. I'm willing to wait and see...

Anton

April 5, 2006 05:47 PM

I love the following listing as an example of how schizophrenic the DC housing market is (see MLS DC5409639). This is a 4/2 TH in a very marginal DC neighborhood. It's been on the market for 183 days (since Oct 4, 2005). The listing says the owner is very anxious to sell, will help with closing costs, and will let the buyer choose the floor coverings (whoopee!), but apparently hasn't considered reducing the price from $450K.

The kicker is that the listing also says, "Don't want to buy? Rent for $1350/mo." What's hilarious is that if you bought this little dump for $450K, your monthly mortgage payments would be $2,216 (20% down, 6.25 interest for a 30yr fixed)! Who is the idiot here? The seller, the listing agent, or any potential purchaser who can't do simple math and would think that buying this house makes any economic sense. On the other hand, I appreciate the honesty of a seller who admits in their listing that he/she has overpriced the house.

1345 1ST ST NW, Washington, DC 20001
MLS: DC5409639
List Price: $450,000

Bedrooms: 4
Full Baths: 2
Partial Baths: 0
Square Feet: N/A
Lot Size: 1278 ft
Year Built: 1906
Listing Date: 10/04/05
On Market: 183 days
Type: SFR
Status: ACTIVE

Phil

April 5, 2006 08:00 PM

The market is turning due to a return to the fundamentals. The future (even the foolish and unqualified) buyers were already sucked in during the past few years. Now, all that's left are the TRULY qualified buyers, and they're not going to let their REAL money compete with the Monopoly money of the "what's the monthly payment on a no-income, no-asset, neg-am, 103% LTV, 50% D-T-I ratio" crowd. Real buyers have something to lose, and only want to compete with other buyers who are in their same financial position (high down-payment, good income, excellent credit). When the tight credit market returns (and after the high-risk borrowers are shaken from the market), the qualified buyers will return to the market. They understand fundamentals, and will buy when it makes sense to do so again. In many places, this will require a **minimum** of 30% off current prices. We still have a long way to go.

Stu

April 5, 2006 08:34 PM

This is good news for everyone:

Real-estate brokers step up rebates as market cools

The Wall Street Journal, Wednesday, April 05, 2006

As the real-estate market continues to cool, a growing number of brokers are doing what was until recently unthinkable. They are giving most of their commissions to buyers.

Rest of article: http://www.post-gazette.com/pg/06095/679594-28.stm

tc

April 5, 2006 10:36 PM

Drew or dumbcompany (whatever you're calling yourself for the day)-
http://piggington.com/a_brief_history_of_the_last_housing_bust
Here's the post you managed to copy and paste from a San Diego Area Real Estate Blog. I'm just wondering if you're also copying and pasting posts from the DC Area Real Estate Blog into the San Diego Area because we all know that both the 1990 San Diego Market and the 2006 Washington DC market are one and the same, don't we Drew (dumbcompany). And for the reader's info Bressi Ranch is in Carlsbad, CA and it is a new development started in 2004 and still building.
doh, I've not been able to find the condo in Western Fairfax MLS #: FX5353266 that you're trying to post as a comparable to my properties. (ie you said "sorry I meant these houses, when I was talking about a different one". And as far as your challenge to give information based on economics and logic, look to the the DC area housing economic report from the Center for Regional Analysis. But then you're going to buy all those forclosures for cash so I'm sure your going to say you're also smarter than those 'ole PHDs in the economic department from George Mason University. You're living in lala land (renting). Days on Market have gone up and so having area housing prices and interest rates. So what you could have bought 2 months ago is going to cost you more. Real smart. Here's the bio from one of the researcher's. STEPHEN S. FULLER, Ph.D,
University Professor and Professor of Public Policy and Regional Development
Director, Center for Regional Analysis, School of Public Policy

Professor Fuller joined the faculty at George Mason University in 1994 as Professor of Public Policy and served as Director of the Ph.D. Program in Public Policy from July 1998 to June 2000 and again since July 2001. He also serves as Director of the Center for Regional Analysis. In September 2001, the GMU Board of Visitors appointed him University Professor.

Prior to joining the George Mason University faculty, he served on the faculty at George Washington University for twenty-five years, including nine as Chairman of the Department of Urban Planning and Real Estate Development and one as Director of Doctoral Programs for the School of Business and Public Management.

Dr. Fuller received a B.A. in Economics from Rutgers University (1962) and his Doctorate in Regional Planning and Economic Development (1969) from Cornell University. He has authored more than 500 articles, papers, and reports in the field of urban and regional economic development including monthly reports on the Washington metropolitan area and Fairfax county economies.

His research has focused on the changing structure of metropolitan area economies and measuring its current and near-term performance. He developed a series of indicators to track the current and near-term performance of the Washington's area economy in 1990 and authored Economy Watch, published monthly by the Greater Washington Research Center from February 1991 to September 1996. These indicators are currently available monthly on the Metropolitan Washington Council of Government's website. He also developed leading and coincident indices for Fairfax County in 1997 that are published monthly on the County's website. His Washington area research includes studies on the impacts of federal spending, the hospitality industry, international business, and technology on the Washington area and District of Columbia economies. His research also includes international assignments including on going projects in Portugal.

Professor Fuller serves on the Board of Directors of the Global Environment and Technology Foundation and is an economic advisor to Fairfax County, VA, and Charles County, MD. He served on the Governor's Advisory Board of Economists for the Commonwealth of Virginia from 1991 to 1997 and the Virginia Commission on the Commonwealth's Planning and Budgeting Process from 1998-1999. He presently serves on the State of Maryland Board of Revenue Estimates' Business Advisory Board and is a member of the DC Office of Tax and Revenue Business Advisory Group.

In 1996, he was honored by the Economic Club of Washington as Educator of the Year and in 1997 was selected for the Richard T. Ely Distinguished Educator Award by Lambda Alpha International, an honorary society of land economists. He served as President of the Washington Chapter of Lambda Alpha from 1998 to 2000 and is a member of the Urban Land Institute's Washington District Council. In 2001, he was selected by NAIOP as a Distinguished Fellow for a three-year term running through 2004.

Drew

April 6, 2006 04:05 PM

TC - I stated that I'd copied the appraiser's statement from the last housing debacle. What I haven't said, anywhere, is that I'm looking for anyone's foreclosed home. And I don't understand what this Fuller fellow's bio has to do with the housing bubble.

I'm terribly sorry you are so upset. But, like I said, I think your shrill response is an indication that panic may be setting in, and, as we've noted, panic will bring the end. So it has always been. Thus it will be in the future.

Drew

April 6, 2006 05:07 PM

TC - Curious, I Googled this Fuller fellow and his "Center for Regional Analysis." I've posted, for all to see, what I found at his link, http://www.cra-gmu.org/capabilities.htm

To wit:

PRODUCTS AND SERVICES

The Center for Regional Analysis' expert staff is available to conduct special studies for business and governments in the Greater Washington region.

Client List

Private/Institutional Clients

Smithsonian Institution
National Capital Planning Commission
Washington Downtown Business Improvement District
World Bank
International Monetary Fund
Winchester Homes
Pulte Homes
Richmond American Homes
Edgemoore Land
Dogwood Development Corporation
Greenwest
Washington Area New Automobile Dealers Association
Fairfax City Automobile Dealers Association
Metropolitan Washington Council of Governments
Brookings Institution - Washington Metropolitan Research Program
Greater Washington Board of Trade
Greater Washington Initiative
Mount Vernon Ladies Association

I'm not familiar with Dr. Fuller's work, but I do think it curious his "clients" include major residential and commercial real estate interests. Pulte, Winchester and Richmond American are writing checks, are they? Please.

Would I be guessing, wildly, that Dr. Fuller has concluded, after painstaking study, that "it's different this time?" Real estate only goes up, right? Unfortunately, the website doesn't tell us who paid for the real estate research. Do you suppose it was the car salesmen, that he lists as clients? I doubt it.

What do you think, TC?

Edward

April 6, 2006 06:08 PM

From TC's last post: "You're living in lala land (renting). Days on Market have gone up and so having area housing prices and interest rates. So what you could have bought 2 months ago is going to cost you more. Real smart."

Although interest rates are nudging up, in my own house-hunt, I've actually found that asking prices are going down and/or incentives are being piled on as the inventory increases. I've put a bid on a house that was recently reduced by $27K in the last month, so even with a .25% higher interest rate and an extra month's rent over the same amount of time, I'm much better off having waited. Part of me will always wonder how much more I could have saved if I continued to wait, but the time (and finally, the price) was right for me now.

doh

April 6, 2006 08:26 PM

TC, nice bio, but I was looking for facts (which you presented none of). BTW, the house I could have bought 2 months ago is still on the market and has been reduced 15%, $999,000/$150,000 price reduction = 15% (so who is coming out ahead?). Still waiting for a reply based on facts.

Stewart,
You are the one using "suckers" and "crazy", these words were never used above (but it shows your biased mentality). The experts and usefull opinions all point to the fact that the housing market is out of whack with fundamentals and every time in history a commodity gets out of whack with fundamentals it is followed by a collapse in price. I do not consider anyone to be a sucker or crazy, but I will also have no sympathy when they start clamoring for the Government to bail them out when they are faced with bankruptcy. I am sure there will be lawsuits against all of the real estate agents and mortgage lenders who "lied" to them and coerced them into their bad predicament. The fact is, no one has yet to produce a facts based discussion for why home prices will not fall. You care to take a stab at it?

David

April 6, 2006 09:27 PM

LOL! Dr. Fuller, in addition to all the credentials you list above, makes a ton of money as a consultant to the real estate industry. He's the last person I'd trust for an objective opinion. Email him and ask him how much property HE'S bought recently!

Sophist

April 6, 2006 10:15 PM

Nice plots of housing oversuuply:
http://www.geocities.com/generalzion/nova.html

tc

April 7, 2006 12:05 AM

doh - MLS number FX5353266 that you posted as comparable and price reduced is NOT comparable at all. The listing you referred to is right off the beltway in Tyson's Corner, not in Western Fairfax and it is one of 92 custom townhome/condos that the builder has been building priced from $850k to over one million. That is why the listing has been on for months and the prices have changed. You are either dimwitted and can't read the listing or you are giving only the information that you would like everyone else to read and not the entire truth. I bet your a dem, too!

littletiger

April 7, 2006 09:12 AM

Maris,

I am finding price reductions similar to what you're seeing, especially in the suburbs.

In DC, it's more of a mixed bag, but one-bedrooms are definitely 10% off the peak of last year from what my amateur eyes can see. I bid on some of those properties, and now they're listed and not selling for 10% less. So glad I lost those bids!

Some sellers in DC are being terribly unrealistic, though. In one building on which I've had my eye, there was a 2bd/2ba unit listed for $625K. It stayed on the market about 120 days, didn't sell, it's now being rented. The owner bought it last May for $525K.

Now, in the same building, a unit of the same size is listed for $625K. This is 20% above last year's peak price. In a clearly declining market. What are that owner and RE agent thinking? "Let's try the same losing strategy as the last unsuccessful seller in the building"? The new listing is a more desirable unit, but square footage can be trumped by only so much.

I would love to make a lowball offer, but with such an unrealistic seller, it seems like a waste of time.

Anyway, as people do see more and more sales at lower prices, they will have to become more reasonable. It will mean less inventory, as sellers pull their units off the market, but especially with condos, it just means a longer search to find the right one, but at least then it's at the right price.

Josh

April 7, 2006 11:15 AM

great posts, I was looking for a house a few months ago, but after seeing the market condition, I decided to wait a while before buying. Almost all indications points to increasing supply (foreclosure, investor sell out as price no longer going up, rent doesn't cover mortgage, why would anyone hold on to the property) and that in turns imply lower price in the future. My financial situation is actually fairly good, have a condo that I currently rent out (bought a few years ago when it was cheap, paid off already). I would probably be renting in the next few years, by looking at craigslist, condos and THs near my work place is only renting for less than $1500/month, even though I can easily afford those place on a 20% down and 30 yr fix or even 15-yr fix, but that would mean a 50%+ increase in monthly payment even after all the tax break, with a market more likely to going south than going north, just doesn't seem like a smart choice to buy at this time.

NMan

April 7, 2006 12:34 PM

TC, what's with the gratuitous bio of Stephen Fuller? Keep the discussion relevant.

Guy

April 7, 2006 01:29 PM

Tc,

Sorry bud, but you're a tool. Was it necessary to copy and paste all the credentials of a professor? Just because they have very good credentials, it doesn't mean that they're going to be correct. How many analysts are ALWAYS correct? Oh that's right, none. It's called an ANALYSIS, remember that. If all analysts were always correct we'd all be rich.

Look up the fallacy "appeal to authority," because that's exactly your mistake. Econ is not 100% science, hence the reason why no one can always predict the outcome. It's good for you that you choose to believe Dr. Fuller, but just standing by his prediction is a weak argument. Plenty of good points have already been made to argue why housing will (and is) dropping in the DC Metro area, so there's no need to repeat the points.

Jimmy

April 7, 2006 03:03 PM

We just bought a townhome in the Rockville/Gaithersburg area near Shady Grove metro, and it is clear that the winter months have put a mild dent in the prices. Comps for places similar to our in the same development that sold last summer/fall are about 5% more than what we paid. Not sure if this is sign that we are now entering a long decline, whether it is just a reflection of seasonal buying trends (slower in winter than summer) or some other misc. reason. Hopefully, it is just a sign that we got a good deal and that's it.

Helen

April 7, 2006 05:07 PM

Forbes is now jumping on the bursting bubble bandwagon with the current article, "Click Here to See Your Home Depreciate."

While the tools they talk about are still in the early stages of development, the article does raise an interesting question about how such tools might exacerbate the housing drop if homeowners are able to see in real-time how the value of their single biggest asset may decrease.


http://www.forbes.com/home/services/2006/04/06/housing-valuation-zillow-cz_sf_0407realestate.html

Helen

April 7, 2006 05:09 PM

From the Forbes article referenced above, in addition to info about home value tracking tools, I found this summary of the overall housing market to be good:

"Something's gotta give, right? There's evidence that the carnage has begun, albeit mostly in a few overheated condominium markets. Foreclosures nationally are up 45% in a year. The number of half-million-dollar-plus condos up for sale in Miami is twice the number in Los Angeles, whose population is four times as large. In New York, prices reportedly slipped 13% last summer. In Las Vegas, several developers have canceled projects amid soaring construction costs, spurring suits.

The U.S. Commerce Department said on Feb. 27 that the supply of unsold, newly constructed homes across the U.S. had ballooned to 528,000 in January, up 60% from the average from 1995 to 2004. If the pace of buying doesn't keep up, prices will fall. What then? Will home owners watching their houses' values sink on the Internet rush their properties onto the market, making the pain worse?"

Doug

April 7, 2006 05:25 PM

A good article analyzing (in layman's terms) the evidence for and against a housing bubble from the Center for Economic and Policy Research:

http://www.cepr.net/columns/baker/2006_03_30.htm

The author concludes that the run-up in house prices over the last few years is not grounded in economic fundamentals, but speculation (nothing we haven't heard). What I thought was interesting are the implications for the economy should the Fed allow the bubble to continue -- not just run-of-the-mill hardworking families will be priced out of the market, but the negative impact that the housing bubble will have on the net worth of most families in the US, particularly boomers who are counting on being able to realize the illusory gains.

doh

April 7, 2006 10:25 PM

http://www.cepr.net/publications/housing_bubble_2005_11.pdf

Oh looky, I found a PhD who says there is a bubble. We can play "experts war" or we can look at facts.

Dr. David Rosnick is a Research Associate at the Center for Economic and Policy Research in Washington, D.C. He has written numerous policy papers including "The Burden of Social Security Taxes and the Burden of Excessive Health Care Costs" with Dean Baker, March 2005; "Poor Numbers: The Impact of Trade Liberalization on World Poverty", with Mark Weisbrot and Dean Baker, November 2004; “NAFTA at Ten: The Recount,” with Mark Weisbrot and Dean Baker, March 2004; and "Black Swans, Conspiracy Theories, and the Quixotic Search for Fraud: A Look at Hausmann and Rigobon's Analysis of Venezuela's Referendum Vote" with Mark Weisbrot and Todd Tucker, September 2004; and "The Forty-Four Trillion Dollar Deficit Scare," with Dean Baker, September 2003.

He is the architect of a growing number of calculators including CEPR's “Accurate Benefits Calculator” which compares current-law Social Security benefits to the Bush Plan based on "Progressive Indexing." He also created an earlier version of this calculator which compared current-law Social Security benefits to Plan 2 from Bush's Social Security Commission.

He created the "Housing Cost Calculator," which compares the cost of owning a home relative to renting for a potential new homeowner. This calculator gives homebuyers a sense of how the current bubble in the housing market might affect them.

Prior to joining CEPR Dr. Rosnick worked as a Research Associate (postdoc) at the North Carolina State University at Raleigh Department of Computer Science.

He can be contacted at the Center for Economic and Policy Research, and via the email address rosnick at cepr dot net.

Web Site Features

Budget Calculator, author, (www.cepr.net) September 2005.

Housing Cost Calculator, author, (www.cepr.net) August 2005.

Accurate Benefits Calculator, author, (www.cepr.net) March 2005.

Policy Papers

"Will a Bursting Bubble Trouble Bernanke?: The Evidence for a Housing Bubble." Washington, DC: Center for Economic and Policy Research, November 2005 (with Dean Baker).

"Scorecard on Development: 25 Years of Diminished Progress." Washington, DC: Center for Economic and Policy Research, September 2005 (with Mark Weisbrot and Dean Baker).

"Is There a Housing Bubble?" Washington, DC: Center for Economic and Policy Research, September 2005 (with Dean Baker).

"Gender Bias in the Current Economic Recovery?: Declining Employment Rates for Women in the 21st Century." Washington, DC: Center for Economic and Policy Research, August 2005 (with Heather Boushey and Dean Baker).

“Social Security Rates of Return with ‘Progressive Indexation’", (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, May 2005.

“The Burden of Social Security Taxes and the Burden of Excessive Health Care Costs”, (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, April 2005.

"Poor Numbers: The Impact if Trade Liberalization on World Poverty", (with Mark Weisbrot and Dean Baker). Washington, D.C.: Center for Economic and Policy Research, November 2004.

"Basic Facts on Social Security and Proposed Benefit Cuts/Privatization," (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, November 2004.

“Getting Mexico to Grow With NAFTA: The World Bank's Analysis,” (with Mark Weisbrot and Dean Baker), Washington, D.C.: Center for Economic and Policy Research, October 2004.

“Going Down With the Dollar: The Cost to Developing Countries of a Declining Dollar,” (with Mark Weisbrot and Dean Baker), Washington, D.C.: Center for Economic and Policy Research, September 2004.

"Black Swans, Conspiracy Theories, and the Quixotic Search for Fraud: A Look at Hausmann and Rigobon's Analysis of Venezuela's Referendum Vote," ( with Mark Weisbrot and Todd Tucker), Washington, D.C.: Center for Economic and Policy Research, September 2004.

"Polling and the Ballot: The Venezuelan Referendum," Washington, D.C.: Center for Economic and Policy Research, August 2004.

"For Welfare Reform to Work, Jobs Must be Available," (with Heather Boushey) Washington, D.C.: Center for Economic and Policy Research, April 2004.

"Public Misconception #103: Bad Sources on 'Insourcing'", (with Dean Baker) Washington, D.C.: Center for Economic and Policy Research, March 2004.

“NAFTA at Ten: The Recount,” (with Mark Weisbrot and Dean Baker), Washington, D.C.: Center for Economic and Policy Research, March 2004.
An early version of this paper appeared as Diez años del TLCAN: el recuento. Economía. Volume 1, Number 3, September-December 2004, Pages 53-61.

"Another Lost Decade? Latin America's Growth Failure Continues into the 21st Century," (with Mark Weisbrot) Washington, D.C.: Center for Economic and Policy Research, November 2003.

"Public Misconception #102: The 126,000 Jobs Created in October Was an Extraordinary Performance," (with Dean Baker) Washington, D.C.: Center for Economic and Policy Research, November 2003.

"Too Sunny In Latin America? The IMF's Overly Optimistic Growth Projections and Their Consequences," (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, September 2003.
A short version of this article appeared in NACLA Vol. 37, No. 3.

"The Forty-Four Trillion Dollar Deficit Scare," (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, September 2003.

"Jobs Held by Former Welfare Recipients Hit Hard By Economic Downturn," (with Heather Boushey), Washington, D.C.: Center for Economic and Policy Research, September 2003.

"Child's Play? The Bush Administration's Misuse of Data," Washington, D.C.: Center for Economic and Policy Research, August 2003 .

"The Real Budget and the Real Budget Deficit" (with Dean Baker), Washington, D.C.: Center for Economic and Policy Research, August 2003.

Education

2001 PhD, North Carolina State University at Raleigh, Computer Science
Dissertation: Free Energy Periodicity and Memory Model for E.coli Codings
1998 M.S., North Carolina State University at Raleigh,
Computer Science & Applied Mathematics
1995 B.S., University of Illinois at Urbana-Champaign, Computer Science
B.S. University of Illinois at Urbana-Champaign, Engineering Physics

David B

April 8, 2006 05:08 PM

Take a look in the MLS AX5423721, just reduced from $568,000 to $529,000. My wife and I looked at townhouses in this development last year in January and the lowest list prices were around 540, sold immediately and with bidding wars.

AnxiousBear

April 8, 2006 08:33 PM

For anyone interested in the Northern Virginia real estate stats, check out the market reports on www.nvar.com The March numbers just came out.

My area of interest is Fairfax County single family homes, and I tried to include a link (I hope it works, this is my first post).

http://www.nvar.com/market/marketstats/march06/fcsf0306.PDF

Inventory has shot up like a hockey stick and both median and average prices HAVE COME DOWN year-over-year in Fairfax County; though not by much yet. A picture is worth a thousand words, so check out the graphs.

Disclosure- I am a renter, but not a bitter one who never got into the market. After 150% appreciation on our home in New England, we sold and are renting in NoVa. We refused to buy at such insane prices.

Trone

April 10, 2006 08:29 AM

Here is a real life example of why the mid-high end (around $1 million) of the DC market may be in for some problems. My wife and I have a combined income above $400k and our income is a bit unstable so we don't really want to spend over $1 million on a place. We have been looking in Arlington, Mclean, and Alexandria. We are finding practically nothing that we feel is worth $1 million. Renting is a way better deal and I think we will hold off until we build a bigger nest egg and potentially reach for something nicer even if it is more expensive in a year or two. Anything we bought now, we would be embarrassed if anyone found out what we paid. Therefore we will sit this one out. Based on the significant slowdown in transactions, I think a lot of my mid-high income breatheren are starting to come to the same conclusion.

BillM

April 10, 2006 02:07 PM

Trone,

Similiar situation here. Sold my house I bought in early 2000 in NW DC for humongous profit. Currently renting a beautifully renovated SFH in the same neighborhood for $3400.000 monthly. This house would list for about 1.2 million. Assuming 20% down and conventional 30 year financing at current rates; monthly P&I, taxes, and maintenance would be over $7,000. This was a no-brainer, tax-benefits of mortgage-interest deduction notwithstanding. Rent,invest the difference, and wait. Only reason to buy now is if you believe prices will continue to rise or you "just feel better" about owning. Neither applied to me. In my opinion there is absolutely no economic rationale for buying now, and the risk is unquestionably high given all of the factors already covered ad nauseum in this thread.

doh

April 10, 2006 10:38 PM

Back to civility (I loved the Democrat comment - it added so much to the discussion). BTW, I apologize for the irrelevant bio post, just wanted to make the point (like others did) that it was worthless to post bios.

Anyways, thanks AnxiousBear for the link. What we are seeing is the last bastions of a classic collapse in prices. The rather large spike in inventory is the realization by sellers that this is their last chance to reap any of the previous years paper equity gains. I expect the majority of those homes to come off the market unsold as many of them are people who probably don't need to sell. But the kicker is all of the investors who now hold a negative returning investment, those who are leaving the area (yes, it is a transient location), baby boomers cashing out and downsizing for retirement, and others who need to sell. The only differentiation they have with the glut in supply is price depreciation (laws of economics at work). This final shakeout is also being fueled by the 75% of homes bought in the last 2 years with 100% financing (i.e. no equity), exotic loans, etc which are begining to reset and causing a spike in mortgage payments that people already overstretched will not be able to afford. I said sometime back that bond prices will begin to rise (which mortgage rates are benchmarked against) as the fed begins its money tightening cycle to hedge against inflation.

Supply is up sharply
Exotic loans are scarce (lenders are too smart to make excessively risky loans when the housing market slows down)
Interest rates are up
Mortgage payment sums are up
Income has gone sideways (if you look at Fairfax county website you will actually see a decline in median household income - which accounts for all wage earners in a household)
Demand has dropped off
NVAR is being very quiet about the March numbers (no reports in the media)

There is absolutely no rational argument for prices not to come down - at least no one has made it yet.

tc

April 11, 2006 02:11 AM

doh - nothing in the website you posted about Dr. David Rosnick says anything about the DC Metropolitan area housing bubble. It is only summizing the national impact of housing prices. At the end of the article where it starts "in conclusion" about the possible continuation of runup prices of homes it says the more likely scenario is that housing prices will fall back in line with their historical values. That's similar to what the CRA study says about DC area housing, in that in 2006 the prices should be going back to normal appreciation in the range of 6-12%.

MC

April 11, 2006 09:52 AM

TC and DOH:

If YOU have something useful to add, then by all means add it, but please lay off the resume wars.

Helen

April 11, 2006 10:34 AM

Thanks AnxiousBear for the heads-up that the stats are out for March home sales from NVAR. I'm a prospective house buyer looking in Arlington and Alexandria and the NVAR stats confirm what I have observed during my house-hunting: much more inventory in March than at the traditional high inventory month of October (and 5x as much as last March) and yes, both median and average prices have dropped. Among the properties I've been looking at (2/1 TH or SFR, under $500K), I've noticed that many (not all) have slightly lower asking prices than similar properties I was looking at last year. I'm also seeing properties that have been sitting for 3-4 weeks are now dropping their asking prices by $15-30K.

This follows a typical real estate pattern: It usually takes about 6 months for sellers to realize the market has changed when they put their house up for sale, but only a few weeks of increasing DOM for them to drop the asking price. In a stable market, CW is that the first 2 weeks a property is on the market is critical: it's new, gets a lot of traffic, and is still categorized as "newly listed" on internet search sites. After the first 2 weeks, it quickly gets buried behind other newer listings. This seems especially true in this softening spring market. If inventory is this high in March, I can only guess what the inventory will look like this October...

Guy

April 11, 2006 10:42 AM

Tc,

Can you not get over the fact that some educated (yes, smart people) have predicted the Washington DC metropolitan housing to come down? Is it that unimaginable? I know SEVERAL "analysts" who have Ph.D's in econ, who predicted prices would drop 20%+ after all is said and done. They have long resumes as well but I'm not going to waste space and post them here. Just because they haven't posted online or written articles doesn't mean there aren't plenty of educated and bright people who think it'll go down.

Stop clinging to the one prediction that says everything will be fine and dandy. It's much like the tech bubble, there were plenty of brilliant people that were fooled and thought "things are different." Why you're clinging to his analysis so hard is beyond me. Most logical people can clearly understand that there's a very high risk of housing pricing dropping significantly over the next several years.

Looking at the nvar's stats for March, the huge spike in inventory should be a pretty obvious sign. Prices seem to be down ~5% so far compared to last year, so I see the steady decline continuing over the next several years.

AnxiousBear

April 11, 2006 12:41 PM

Helen and doh, I'm glad that you might have gotten to look at the nvar numbers BEFORE THEY WERE CHANGED!!! When I originally posted, Fairfax County had a spike of March-over-March inventory of nearly 500% for single family homes. I thought to myself,

"wow, I wonder how they are going to spin this? Maybe they will stop posting numbers soon"

Shortly after I posted the Fairfax County single family link was removed from the nvar page and a "Coming soon" message replaced it.

Now there are new numbers posted that show only a 2.5x increase instead of 5x increase...what is going on??? They changed the segmentation of price breaks, changed the axes on the graphs, etc. The graphing thing is just comical- if I was trying to minimize the appearance of changes, that it what I would do...

But there is the little matter of the actual numbers changing that nags at me. Do you guys think that the numbers were wrong or are they massaging the data??? I actually thought to print out the original version because it was so dramatic that I figured it would get "revised"!!!

Badh

April 11, 2006 01:39 PM

Drew,
Smarmy, know-it-all comments as usual…. It looks as though this professor has been involved in Urban Planning and economic Development for his whole professional life- of course he is going to have real estate related clients. For whom would you expect him to work? Ben and Jerry? Since when do you have to be in a non-real estate related field to give an educated opinion on the housing market? This guy actually knows something about the subject- unlike some of the keyboard economists on this board

Doh,
You know why you are able to find so much info on the ‘bubble’? Because it is a better news story. No bubble=no sensationalism=no news. You, like most of the posters here have bought into the media hype as alarmists tend to do. Possibly the exact words “sucker” and “crazy” have not been used here but they have certainly been more than implied. I was personally called an idiot by one poster. I would be an idiot if I actually let that bother me. Let me be the first to say this: Your “facts based discussion” challenge is ridiculous. There have been countless arguments made on this board regarding influx of jobs and people, previously undervalued properties, gentrification etc. Looking back at your posts, all you have provided is anecdotal drivel from your price-fixing ‘realtor friends’, bad rhetoric, presumptuous crystal ball predictions, bad metaphors and incorrect information about MLS listings. Where is your ‘facts based discussion’?
What we are seeing is the end of the biggest housing boom in history. Of course there is going to be higher inventory and sellers dropping prices. You have people who waited too long to sell who are throwing their houses on the market at peak-boom prices. For the most part they aren’t going to get these prices so they reduce them. Does this mean that the market is going to collapse and prices are going back to pre-2000 levels? I don’t think so.
Since we all have crystal balls, let’s get everyone’s prediction here….Here’s mine: I think prices in DC proper are going to level off over the next year and then we will go back to a normal rate of appreciation. The closer in to the city, the more this will apply. In the outer-lying suburbs there are a lot of folks who overpaid for houses at the peak of the market. These people will have to wait a couple of years before their values equal out to what they paid. OK, lets hear all the Arlingeddon, 70% drop in value, doom and gloom predictions from everyone else…

Bill

April 11, 2006 02:04 PM

NPR's "All Things Considered" carried a good story yesterday on Boston's bursting housing bubble (Boston is often cited as the first city where the housing bubble first became apparent, so it may be that it's also a precursor of what may happen in other frothy cities). It was about the party-like atmosphere of open houses -- serving food, drinks, even a jazz combo, or even big-screen TV giveaways to encourage more foot traffic and hopefully, some bids. But the basic issue was ironically summed up by a so-called RE "motivational speaker" who basically said, why waste money on food, music, and freebies? If you price the house correctly, it will sell.

I have to laugh at the idea of people buying houses because they got a glass of wine and a handful of chips at an open house. Maybe these are the same people who buy overvalued houses with no money down ARMs...

DCgirl

April 11, 2006 05:21 PM

Trone,

My husband and I are in a very similar situation. Our current combined income is $360,000. We have enough for at least a 20% down payment on a million dollar house (thanks to the sale of my husband's condo last spring). We have targeted McLean but like you, did not think any of the million dollar houses looked worth a million dollars. (Also much harder to swallow when the tax assessment records show the owner bought the house for $600,000 in 2002).

Things are much slower now and we think by this fall, many of the sellers will finally realize we are in a different market and start reducing prices. (Current price reductions just bring us down from the high of 2005 - the properties are still overpriced to us.) So we are biding our time, renting and continuing to build up our down payment (just extended our lease with an option to extend further). We know we can't time the market and we will not wait for the bottom (that might not happen for many years). But we feel no hurry to buy at this time.

Earl

April 11, 2006 05:23 PM

For my own personal indicator of how the market is sliding, I see that the Washington Post's RE editor finally admits that the market is slumping, according to the latest online chat she did on Friday: (http://www.washingtonpost.com/wp-dyn/content/discussion/2006/03/27/DI2006032700786.html)

This follows the Post's expanded real estate section last month that offered the following sage advice to sellers who are concerned that the housing market may be plummeting. Quoth the Post, "The key to selling a house today is -- drumroll, please -- don't be a greedy pig."

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/24/AR2006032400946.html


JCC

April 11, 2006 05:38 PM

I'm interested in reports that the Fed is going to issue new regulations soon to crack down on the number of risky adjustable rate loans that are being made. This will certainly have a huge impact on housing demand in DC since an astonishing percentage of DC area home sales in 2005 were made using these risky loans, anywhere between 40-60%, according to various sources.

If even 10% of buyers are prevented from getting home loans due to the new regulations (or limited in the amount of loan they can get), this may be the final prick that finally pops the deflating balloon, resulting in a "phhhhhtttfffffpt" rather than a sudden "POP" or the slow but distinct hissing sound we've been hearing since October.

tc

April 11, 2006 11:52 PM

Guy - I'm not clinging. Rather, it appears that a lot of people posting on the "DC Real Estate
Bubble Blog" are too proud to admit they are not experts in the field. Even though there has been an increase of inventory in the past couple of months, there also has been an increase in prices. Simple facts. If I could predict the real estate market as going south, I would be able to pick up more properties, so it would advantagous for me. But I look to experts rather than wishful thinkers. I at least respect doh that he is actually looking for facts. Unfortunately he goes with the pack. The people that make money don't ride with the pack, it you haven't already noticed.
Information from Housing Tracker for DC metro:
Trend 04/07/2006 1 month 3 month 6 month 7 month
Median Price $475,000 +1.3% +5.6% -2.9% -4.8%
Inventory 9,051 +19.7% +48.3% +24.6% +95.2%
The price of homes in the last 3 months have gone up 5.6% in the area.

smallbean

April 12, 2006 09:55 AM

tc:
There is a misleading information in your last post. For Housing Tracker, it only reports the ASKING PRICE, not the actual SELLING PRICE. If one thinks his 800 sq ft 1-bd is worth 2mil and ask 2mil for it, it doesn't mean the actual selling price of it would be 2mil. There is difference there. For a person that reads so much RE experts' opinion like you, how could you miss such an obvious fact?

StevenG

April 12, 2006 10:19 AM

My prediction for the DC area housing market in the next six months:

1. Inventory will continue to grow to the highest level since the early 90s housing bust (current inventory levels are almost there);

2. Interest rates for a 30yr-fixed will reach 6.75 this year (kind of a no-brainer since the Fed all but said the rate would continue to rise at their last meeting last month), possibly even reach 7.0 by year's end;

3. The Fed will issue tighter regulations about risky loans (these regulations are already being drafted) which will severely limit access to $$ for area home buyers;

4. By the end of summer/early fall when inventory is traditionally the highest, you will see a repeat of what we saw last fall: longer DOMs, large reductions on asking prices, giving way to many properties being taken off the market as the holidays approach;

5. By year's end, I predict there will have been at least a 20% decrease in median housing prices since the start of the year (some areas are already seeing a 5% decrease); and

6. Repeat all of the above next year, except that I think house prices will bottom out at 20% below current prices and stay at that lower rate for a couple of years since there is always a period of stagnation/stabilization after a boom.

I think the only question is how many years of stagnation/stabilization will follow. Some say since the run-up was so high over the last couple of years, that the stabilization period may be longer than the traditional 4-6 year downturn that real estate cycles normally experience.

One very significant factor that didn't exist during previous housing boom/bust periods is the number of households that are holding risky adjustable rate mortgages. Most of these loans in the DC area will start to reset in large numbers next year, putting many households at risk of losing their single largest asset. As the volume of this problem becomes apparent, I think the Fed may have to step in to prevent massive losses to families and banks.

You'll note in this prediction, I'm not conditioning any of this on jobs, the economy, population shifts, dirty bomb attacks, etc. I'm assuming the status quo that prevailed while this bubble formed, i.e., decent economy, normal job creation, normal population movements, and ever-present possibility of another 9/11.

In the interest of disclosure, I'm a homeowner and follow the RE industry since my house is my largest asset, but I don't plan to buy or sell in the next couple of years.

Guy

April 12, 2006 10:32 AM

Tc,

I don't think anyone has to be an "expert" to have a logical opinion and form an argument on where they believe the housing market will go. There are plenty of "non-experts" out there who beat "expert" analysts all the time. Again, I know plenty of "experts" who do support many people's beliefs that the housing market is going south. So how is your "expert" correct?

LOL, it's astounding how stubborn you are w/ your perspective. Btw, the mass droves believed prices would flatten and then go up forever, so you're technically w/ the majority. I've been posting and following this blog for roughly a year now, and people are now starting to realize the market IS on its way down, hence, it's pretty easy to predict that it'll drop further. I made my argument months ago as well as many other people, now I'm merely seeing it all pan out like many people predicted.

Like smallbean already noted, you're using asking prices for your statistics, which are far from accurate. Houses are selling ~5%+ below asking prices, and many times w/ extra incentives piled on. Pull your head out of the sand man, you remind me of all the "expert analysts" that told investors "Oh don't worry, the tech stocks will recover," and the poor fools that listened rode it all the way down.

John Davis

April 12, 2006 10:33 AM

tc,

I think you are misinterpreting your pricing information. The housing tracking data is related to offering prices, not trading prices. Anectdotal information from a number of real estate agents is that houses that are actually moving (and as you can see from other sources, that number has dropped precipitously)are selling for prices below the offering prices by up to 10% and sometime more. The 5.6% number you cite relates only to the fact that owners have put listings on the market that are 5.6% higher than other listings that were put on the market 3 months ago. Given the dearth of sales taken to completion, both numbers are a bit artificial.

The clear evidence on prices is that every month on NVAR, the amount of year over year price increases have declined significantly and it is only a matter of time until we hit negative territory.

The real life examples of Trone, BillM, and DCgirl should make anyone that is in real estate incredibly worried. These are people with extremly high incomes in relation not just to the national median, but more importantly to the DC area median who have decided that the price to value ratio has gotten completely out of whack and that when you run the numbers there is no way to make the numbers work to make owning a better choice than renting right now. That is where the smart money is and it has RE agents quaking in thier boots.

I am not making doomsday predictions of a 50% drop in prices, because that simply will not happen. In some areas that type of drop is certainly justified, however because real estate is not an efficient market and a lot of psychology is involved, you will just see a precipitous drop in transactions and flat or slightly down prices for an extended period until inflation finally catches up.

Everything related to demographics in terms of jobs and people moving to the area is all well and good, however there has been no real effort to link that information to the current price to value ratio. No amount of people moving in will be able to keep up with that ratio if it continues at its current level because those new jobs simply do not pay that much. These are not wall street jobs that pay exorbinant amounts of money, they pay well with respect to median national income, but nothing that would support the cost of living now being demanded by high real estate prices.

Drew

April 12, 2006 01:41 PM

Smallbean - tc and BradH are real estate agents. Don't waste your time.

Howard

April 12, 2006 03:29 PM

My wife and I were planning on moving out of the area soon and took advantage of the strong market last summer to sell our 3/2 TH in an "up-and-coming" DC neighborhood. We're so glad we did -- the process was quick and we made a tidy profit. A couple of friends in our old neighborhood are trying to sell their houses now, in what they thought would be a hot spring market -- they get a lot of foot traffic, but no bids, not even low-ballers. After 30+ DOM, 2 couples are now pricing their houses for less than we sold ours in Aug. They regret not selling a few months ago, but I console them that at least they're getting out near the top. All the indicators seem to point that there's going to be a decline from here -- just how low and for how long???

Stewart

April 12, 2006 03:39 PM

Doh,
No one disagrees with the observation that the market has slowed and prices are falling. I have made it myself. But there is a big difference between falling prices and "collapsing" prices. Whatever they may be saying about other housing markets, the "experts" are not predicting a collapse of prices in the DC market. For all the talk about bubbles, good well-priced properties are still selling - at least in DC. They may take longer to sell and they may be selling for less than they would have sold for last June, but they are still selling. The professional flipper who bought two years ago counting on doubling his or her investment is likely to be disappointed. But the people who bought 5 or more years ago are still looking at hefty profits.
Whether you care to admit it or not, much of the posting in this forum is directed towards ridiculing people that bought when the market was going up and self-congratulations for those "smart" enough to have waited. I have said before, and I'll say again, that most of the people sitting on the sidelines licking their chops will never buy anything anyway because they are just as fixated on waiting until the second the market hits "bottom" as they were on not buying at the top of the market. By the time they've figured out that the market hit bottom, they'll be priced out of it again. My advice to Rearden was to enjoy his home purchase, because it was clearly the right decision for him, as opposed to looking to this forum for validation of his decision.

doh

April 12, 2006 07:15 PM

AnxiousBear, this maybe the reason for the change. Change in accounting standards (hmm, why "revise" previous numbers?)

When NAR releases March existing-home sales data April 25, it will revise national and regional median existing-home prices back to 1999. The fixed reporting sample of representative multiple listing services has been updated to reflect geographic changes over time so that the monthly samples for regional price measurements are as accurate as possible. The changes in price patterns will be consistent with previously reported data.

Above quote is from Realtor.org in their 11 Apr article (at the end). Notice that NVAR did not discuss yoy prices in their March 2006 summary.

tc

April 12, 2006 10:37 PM

smallbean - giving that everyone is talking about the dropping asking price not the closed price (which also has gone up per nvar) I posted the housing tracker info.
drew - I've already disclosed that I am a consultant and own my own home as well as rental properties. If you wanna play that, I would imagine that you are a unemployed tech person that runs with scissors.

Badh

April 13, 2006 09:38 AM

Drew,
More ridiculous assumptions pulled out of thin air. For the record, I am not a real estate agent. I have, however, wondered what you do for a living. I have definitely ruled out Rocket Scientist and Brain Surgeon and have concluded that you are either in politics, possibly an advisor to Marion Barry, or you help old ladies cross the street.
Regarding "experts"... Actually if you do any internet search you will find much more info and experts who are 'pro-bubble' than not. It is difficult to find an 'expert' who isn't predicting doom and gloom for the real estate market. Why?... just like I said before, it's not as good of a news story. The general public tends to go along with whatever the media feeds them. I think this board is a good representation of that.

smallbean

April 13, 2006 12:06 PM

tc:
In case you forgot, Housing Track still reports a -2.9% for ASKING price comparing with 6 months agao, and a -4.8% for ASKING price comparing with 7 months ago.

Sorry to say so, but I seriously doubt your credibility when you couldn't even give a straightforward yes or no answer to my simple questions like "will you buy your rental property at its current price?" and "will you break even by renting them out if you purchase them at its current price (with tranditional 20% down and fixed-rate mortgage)?" And please don't waste our time again by posting irrelevant information.

For disclosure (I mentioned our situation before), I received my graduate degree last summer, found a job and relocated to D.C. with dear hubby. Comparing with Trone, BillM, and DCgirl, we made a humble 200K together and plan to have a baby soon, therefore our comfortable zone is 500-600K range. Unfortunately, this range can't buy us much in the targeted area. As far as I know, people around me who are similar as us are not buying either. If it continues like this, we will think of a plan B, such as leaving the area.

Drew

April 13, 2006 12:27 PM

Alright you guys - TC and BradH - you started the shrieking and name calling, so I'll end it.

This threaded started with this simple statement - go ahead, scroll up, and look:

"Not in the Washington D.C. area! House prices here may rise less rapidly in the future (and that would be a good thing), but they won't stop going up. If you lived here, you'd see that."

Well, prices have in fact stopped rising. And they are falling in many DC area communities. That is not in dispute. How far will prices fall? I've no idea. I do know, however, that your real estate boosterism is becoming increasingly wan, even to those who joined this thread six months ago, with real doubts as to whether prices could ever fall.

If you guys own leveraged, negative cash flow "rental properties," be prepared to bleed, for some years, least you lose your "investment" to the bank.

Oh, and the panic I've mentioned previously is beginning to seep into mainstream press reports. Time will tell, gentlemen.

Guy

April 13, 2006 02:07 PM

Bradh,

So.. according to your argument, "experts" can't be trusted because they're merely appealing to the media? LOL. Brilliant analysis. But wait.. TC claims that "experts" are the people to follow because the educated ones who know it all..? Who's right?

Interesting analysis.. why was it that "experts" during the tech bubble didn't just all predict "doom and gloom"? You suggest they merely follow the media, so how come many believed prices would level off and then climb again..? The "doom and gloom" would've provided a better story according to your logic.. The only thing that's clear so far is that your argument has more holes in it than the titanic. LOL

Btw, do you know WHY many "experts" these days are all pointing to pro-bubble? It's simple, because the market has already turned south, and looking at the statistics and logical reasons, there's no way it can sustain current prices, so guess what? That means it'll go down. The housing market moves alot slower than the stock market, there were many lemming fools as late as last summer who thought it would keep rising, and many "experts" then thought it would keep going up or level off. All the market statistics are favoring a decline, so guess what, predicting a decline (or bubble if you want to call it that) is only logical.

The tech bubble popped alot quicker than the housing boom (bubble), so you don't see "experts" being anti-bubble, to pro-bubble. Simple.

Last point.. After a market has grown tremendously (record numbers) and seems to have peaked, once investor morale has gone sour (which it has), you're going to have a helluva hard time trying to stabilize prices and keep growth up (which leads to a decline). That's exactly what's happening now. Sure I've oversimplified, but you get the idea.

dcdevil

April 14, 2006 09:18 AM

The Greater Capital Area Association of Realtors has data on inventories and prices:

http://www.gcaar.com/statistics/default.htm

The March DC Single Family Homes statistics show that average price of a home in DC declined from $628,096 in March 2005 to $590,914 in March 2006 (6% decline). The Median home price declined from $489,450 to $462,000 (5.6 % decline). The predictions of price declines are now facts. Prices peaked last year and are coming down. The fact that inventories in DC increased 113% indicates that prices will have to continue coming down. Finally. Now, the question is how low and how long will prices drop.

Nelson

April 14, 2006 09:23 AM

DC's deflating bubble also seems to be spreading to Baltimore. Bankrate.com now pinpoints Baltimore as one of the top 10 cities in the country whose real estate bubble is getting ready to burst. The website says that market is overpriced and homes are over-valued by as much as 17 percent.

Badh

April 14, 2006 01:55 PM

Guy,
“So..according to your argument, "experts" can't be trusted because they're merely appealing to the media?”

No. What I said was that it is harder to find an anti-bubble ‘expert’ because all the information on the web and in the news is pro-bubble. Google ‘housing bubble’ and you will see. If you think that the media is more in the news business these days than in the entertainment business you are kidding yourself.

“ why was it that "experts" during the tech bubble didn't just all predict "doom and gloom"?”

From what I remember, the term ”tech bubble” wasn’t used till after the bubble was bursting. The fact that the media was even calling it a ‘bubble’ tells me that the media was prevalently reporting on the doom and gloom of it all, not the potential recovery. We remember ‘tech bubble’, we don’t remember ‘soon to recover tech stocks’. People have been predicting a ‘housing bubble’ for 5 years. You can predict anything and if you wait long enough it is probably going to happen or at least show signs of happening.
The end of a housing boom and the ‘collapse’ of the market as many on here are predicting are two different things. I don’t think any of the few posters here who are ‘anti-bubble’ (for lack of a better term) have said that prices would keep going up at the rate they had been going. I am not seeing many on this board making hard number predictions. All I am seeing is the usual “prices dropped 1 percent from last month to this month” statistics.

Ron

April 14, 2006 07:06 PM

I can understand why people are anxious about the housing decline. Given the leveraged nature of home-buying, small decreases in home prices can inflict large losses on owners. Consider a $500K home with an initial 10% down payment. If the house price falls 10%, the owner loses 100% of their equity. If the price falls 20%, they end up with negative equity of $50K that would probably bankrupt most households. This can have lifelong consequences by denying future access to credit, which can also prevent future home purchases.

As other posts have pointed out, home sales data (not asking price) from both GCAAR and NVAR show that median home prices are now, in fact, dropping. This doesn't mean that prices will "collapse" or drop 50% or continue to slide indefinitely, but a 15-20% decline over the next 1-5 years now seems a moderate estimate. Considering the leveraged nature of home sales, even a very modest 10% decline (we've seen a 5% decline since last month) will really affect some families.

Hardin

April 14, 2006 07:21 PM

DCDevil:

Thanks for the link to the GCAAR site. I looked at the statistics and it looks like the DC area will soon exceed (if it hasn't already) the inventory backlog from the early 90s housing bust. It has already exceeded the seasonal Sept/Oct inventory high-point from last year -- and this is supposed to be the spring sellers' season! What is most surprising to me is that this has come on relatively quickly, basically, since Aug/Sept last year. Whether you call it a popping or deflating bubble, it's going to have a big effect on a lot of people - namely, the people who over-stretched themselves and bought at the top, but I believe this is going to hurt everyone because it's certainly going to impact the local economy (and the national economy, too, but to a much lesser extent).

Hardin

April 14, 2006 07:25 PM

If there is a bubble, it is likely heavily concentrated in the condo market. However, the effects will ripple throughout the larger residential real estate market. Many condo owners could find their equity wiped out, and condos are often the first step on the housing market ladder. Consequently, condo market weakness will ripple into broader housing market weakness. Over the long run, prices will recover, but as the saying goes, "In the long run, we're all dead."

SimonP

April 14, 2006 07:49 PM

As a prospective buyer, I've been watching the DC/NOVA housing market very closely for the past year. The precipitous drop since last summer has been pretty astounding. I should be happy since I'll be paying less overall even though interest rates have risen slightly, but now I'm concerned that the decline is only going to accelerate -- short of interest rates going back down (unlikely since the Ben Bernanke has all but said that rates will continue to rise), I just don't see anything that will put brakes on the slide. I think the local and national economy will continue to be strong, but that's not going to stop this decrease.

So the bottom line: Rather than jumping into the market now, I'm going to sit it out until this settles down. There's just too much downward momentum in all the RE indicators -- except price -- right now. When higher inventory forces prices down to a more realistic level, I'll consider a purchase, but we're not there yet.

Francis

April 15, 2006 09:45 AM

"The Fed is looking for housing to slow at a moderate pace this year. If the market looks headed for an outright collapse, it could bring a quick end to Fed tightening. But it's unlikely the Fed would react to any one month's housing numbers, especially considering the rampant skepticism at the Fed that even falling home prices would curb consumer spending."

Guess the Fed won't be bailing out the housing market anytime soon since it won't impact the rest of the economy (just like the internet bubble bursting had no effect since investor mania just shifted into the housing market).

See you all at the next baby boomer bubble. They will never learn.

tc

April 15, 2006 01:14 PM

smallbean- I've already said yes, I would buy that rental property again at today's prices. I'm sorry if you couldn't find the response but it's there (above) in black and white. DATED 3-15-06 "Yes, as an investor, I would buy that house again at today's prices because the fundamentals are there. It's a great location in some of the best schools and the neighborhood is maintained very well. Those are the things important to me. I am now in a much higher tax bracket so it would actually be a better investment today. After I take depreciation, upkeep and management write-offs, I am doing very well with that house."
I also posted housing tracker's information on housing prices because I said you would end up paying more for a home today that 2 months ago. Housing tracker points to that. Get over it. If I state something it's fact.

Sandra

April 15, 2006 01:32 PM

A lot of people on here are bickering about how much knowledge of the local housing market they have, but I would venture to say, no one here is actually working in the housing market on a day to day basis. When you post, you should post what credentials you have to help bolster your agrument for or against the housing bubble. And I'm tired of reading these attacks on anyone that doesn't believe that the bottom is falling out of the local market. NVAR March numbers show that through the multiple listing service that the Northern Virginia area average closed price of a home was $523,633 and in March 2005, the average closed price was $504,081. So the prices have actually gone UP. For those who say their number's are wrong, get a life. Or sue them. But don't speculate about how there's some sort of conspiracy amongst the real estate industry to give the public wrong figures. They are a corporation, so giving out accounting figures that are incorrect is a crime as should be the behavior on this board.

good info

April 16, 2006 02:16 AM

The Menace of an Unchecked Housing Bubble

By Dean Baker

An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. Like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, will likely face serious hardships.

The Incredible Increase In House Prices

The basic facts on the housing market are straightforward: Quality-adjusted house prices ordinarily follow the overall rate of inflation. However, in the last eight years house prices have risen by almost 50 percent in real terms, as shown in Figure 1. The run-up has not been even. In large parts of the country (most of the South and Midwest) there has been little real appreciation in house prices. In contrast, the runups in the bubble areas (the West Coast, the East Coast north of DC, and Florida) have been close to 80 percent in real terms.

The housing bubble spurs the economy directly by increasing home construction, renovation, and sales and indirectly by supporting consumption. The run-up in house prices has created more than $5 trillion in real estate wealth compared to a scenario where prices follow their normal trend growth path. The wealth effect from house prices is conventionally estimated at 5 cents on the dollar, which means that annual consumption is approximately $250 billion (2 percent of GDP) higher than it would be in the absence of the housing bubble.

Fundamentals Or a Speculative Bubble?

Nobody doubts that there has been a sharp increase in house prices, the question is why: Is it because of fundamentals or a speculative bubble?

A quick examination of the fundamentals should remove any doubts on this issue. On the demand side, neither income nor population growth has been especially rapid. Real per capita income has grown at a respectable rate of 2 percent annually2 since 1997, but this is considerably slower than the 2.8 percent annual rate from 1953 to 1973, a period which saw no run-up in house prices.

Furthermore, the median family income has actually been falling since 2000.

Population trends also would not suggest a surge in demand for housing. The number of households grew by an average of 1.4 million a year from 1995 to 2004. This is far slower than the 2.8 million annual growth rate in the 1970s when the baby boomers were first forming their households3. The age distribution is also not consistent with a surge in demand for housing. The rapidly rising house prices come at a time when the baby boomers are moving out of their years of peak housing demand4.

There also is no obvious supply-side story. While there are environmental restrictions on building, this is not a new phenomenon, and there is no reason to believe that these have become more restrictive in a period of Republican ascendancy. Moreover, the near record pace of housing construction the last few years indicates that these restrictions have not been an impediment to construction.

The best evidence that fundamentals are not the cause of the run-up in housing prices is the fact that there has been no comparable increase in rental prices. While rental prices did rise somewhat more rapidly than the overall rate of inflation during the first part of the house price run-up (see Figure 1), in the last couple of years they have been falling behind inflation. If the run-up in home sale prices was being driven by fundamentals in the supply and demand for housing, then there should be substantial price increases in both the rental and ownership markets. The fact that only the ownership market shows an unusual run-up in prices strongly supports the view that this price increase is being driven by speculation rather than fundamentals.

The Bubble Will Break Eventually

If housing prices are a speculative bubble, then eventually, prices will return to normal levels reflecting the value of housing services. The country has been building houses at a near record pace for the last few years, and this pace will continue as long as prices remain near their bubble peaks. At the moment, this oversupply has been absorbed by speculators and by a record vacancy rate in the rental market, but eventually excess supply will put downward pressure on sale prices (part of this story is the conversion of rental property to ownership units), which will cause speculative demand to evaporate.

Just as the supply of shares of worthless Internet companies eventually outstripped demand, the supply of housing will eventually place enough downward pressure on housing prices that the bubble levels will prove unsustainable. How fast this happens depends on how quickly mortgage interest rates rise from what are still extraordinarily low levels.

The adjustment process will not be pretty. Residential construction accounts for more than 6 percent of GDP, and construction drops off tremendously during times of recession. For example, in the mid-seventies construction dropped almost 40 percent, and in the early eighties it fell by almost 30 percent. Given the unprecedented burst of construction over the last five years, downturns of this magnitude are certainly plausible. In addition, with a correction in housing prices, the loss of bubble wealth will lead to a sharp decline in consumption. If the full $5 trillion in bubble wealth were to disappear, the implied drop in consumption would be $250 billion annually, or 2 percent of GDP.

Another consequence of the collapse of the housing bubble will be the financial fallout from an unprecedented wave of defaults. Nationwide, homeowners’ ratio of debt to equity is at a near record high. This is itself a startling fact given all the equity created by recent appreciation. People have been borrowing against their homes as they have increased in value and many new homebuyers are buying homes with smaller than normal down payments. When the downturn in house prices occurs, many homeowners will have mortgages that exceed the value of their homes, a situation that is virtually certain to send default rates soaring. This will put lenders that hold large amounts of mortgage debt at risk, and possibly jeopardize the solvency of Fannie Mae and Freddie Mac, since they guarantee much of this debt. If these mortgage giants faced collapse, a government bailout (similar to the S&L bailout), involving hundreds of billions of dollars, would be virtually inevitable.

Breaking The Bubble Sooner Is Better Than Later

Given the prospect for a collapse of the housing bubble and its impact on the economy and the financial system, there is a strong case for a preemptive strike. The government cannot prevent the market from collapsing and sustaining the bubble just leads to more overbuilding, which will make the eventual collapse even worse. The government should have taken steps to prevent the bubble from ever getting this large. Having failed thus far, the best it can do at this point is to burst the bubble before it gets even larger, creating the conditions for an even bigger disaster down the road.

The best and simplest way to burst a bubble is talk. If the Fed and top treasury officials simply made the basic data available and explained to the public about the inconsistency of current housing prices with long-term trends (as they have done with budget deficits), their warnings would almost certainly be widely reported in the media. Every real estate pusher in the country would have to deal with buyers armed with this information. While the typical homebuyer may never understand these economic arguments, the fact that people in positions of authority are issuing warnings about future house prices would almost certainly dampen their enthusiasm for home ownership.

Whether talk would be sufficient to burst a financial bubble is an open question—it has never been tried—but since talk is cheap, there seems little reason not to use the power of information as the first weapon against a bubble. If this fails, the Fed has a second weapon: higher interest rates. Low mortgage rates have been the essential fuel for this run-up in home prices. If mortgage rates were pushed back to more normal levels (e.g., 7 to 8 percent), it would almost certainly lead to a sharp reduction in housing prices.

Deliberately destroying trillions of dollars of wealth may seem like perverse policy, but it is important to recognize the context. If there is in fact an unsustainable run-up in housing prices, then the question is not whether prices will fall, but rather when prices will fall. The wealth is not really there. It is an illusion.

The economy, and tens of millions of homeowners, will certainly be better off if the fall occurs sooner rather than later. The longer the bubble persists, the more overbuilding takes place, and the more resources will eventually have to be diverted from homebuilding to some other sector of the economy. Similarly, the amount of bubble-induced debt, and subsequent defaults, will also grow larger as long as the bubble persists. The recession following a housing collapse will likely be more severe the longer the bubble persists.

Similarly, the number of homeowners who are adversely affected grows greater each month that the bubble persists. A homeowner, who bought a house 15 years ago, sees the price triple and then decrease by forty percent will no doubt be upset over not having sold at the peak price, but he is not directly harmed by this fall. On the other hand, a family that buys its home at the bubble peak and then the value of its major financial asset falls by one-third will be badly hurt. Every year, more than eight million people are buying new or existing homes, most at bubble inflated prices.

In addition, tens of millions of baby boomers are approaching retirement with plans based on the assumption that the value of their home will hold steady, or even continue to rise. As a result, they are saving very little. The decision not to save because of the wealth created by the housing bubble (and previously the stock bubble) will leave this huge cohort ill-prepared for retirement, a problem that worsens each month the bubble persists.

The Fed Needs To Step Up To The Plate

The Fed has taken the view that bubbles come and go and that this is not their business —a view that seems difficult to justify given the enormous consequences from the growth and collapse of financial bubbles. These consequences certainly seem much larger than the impact of modest upticks in the inflation rate, which has been the Fed’s driving concern over the last two decades.

The decision to ignore financial bubbles also seems inconsistent with the Fed’s past decisions, where it has made the stability of the financial system a central concern. This was its justification in stemming the 1987 stock crash and more recently when it intervened in the unraveling of the Long-Term Capital hedge fund. Since the Fed recognizes the need to act to preserve the stability of the financial system, there seems little justification for sitting on the sideline when financial bubbles that pose enormous threats dominate the economy. It is unfortunate that it might require the collapse of the housing bubble, and the enormous damage it will entail, to finally prompt some new thinking on this issue among the nation’s policymakers.

References and Further Reading:

Baker, D. 2002. “The Run-Up in Home Prices: Is It Real or Is It Another Bubble,” Washington, D.C.: Center for Economic and Policy Research, available at http://cepr.net/publications/housing_2002_08.htm.

Baker, D., and D. Rosnick. 2005. “Will a Bursting Bubble Trouble Bernanke? The Evidence for a Housing Bubble,” Washington, D.C.: Center for Economic and Policy Research, available at http://www.cepr.net/publications/housing_bubble_2005_11.pdf.

Schiller, R. 2005. Irrational Exuberance (2nd edition). Princeton, NJ: Princeton University Press.


1The series use the CPI rent index from 1953 to 1982 and the owner’s equivalent rent index (which excludes utilities) since 1982 for the rent index. The sales price index uses the BLS CPI home price index until 1975, averages the change in the CPI index and the OFHEO House Price Index (HPI) from 1975 to 1982, and the HPI since 1982. All numbers are deflated by the GDP deflator.

2 NIPA Table 2.1, line 37

3 Data on the number of households for 1995 to 2004 is from Statistical abstract table 53, for 1970 to 1980 from table U.S. Census Bureau, Mini Historical Statistics # HS-12 [http://www.census.gov/statab/hist/HS-12.pdf].

4 The 35-44 age grouping spends 15.8 percent of its income on shelter, compared to 13.6 percent for the 45-54 grouping, and 12.1 percent for the 55-64 grouping (BLS, Consumer Expenditure in 2003, table 4 [http://www.bls.gov/cex/csxann03.pdf]).

MMGinder

April 17, 2006 09:28 AM

The current housing slowdown in the DC/NoVA area reflects three trends: 1) high prices and rising interest rates have reduced affordability; 2) banks are starting to crack down on risky ARMs and IO loans in advance of Fed regulations; and 3) many speculators are starting to dump homes that were purchased as investments. Even with a good local economy, I don't see anything on the horizon that will counteract these factors to reverse the housing slide in the foreseeable future.

Guy

April 17, 2006 11:00 AM

Sandra,

Perhaps you can't read, but look at the cute little pretty graph they have towards the bottom left that say "average and median price." Oh wait.. WOW, prices went DOWN. LOL I'm not sure where you're seeing the increase in prices... DC property based on their stats seems to be going down as well..

I know 2 people which just sold their homes, and guess what, they sold for ~5.5% less than last year. No.. it can't be..

Btw, "credentials" are irrelevant to discussions. LOL. See, here, we discuss facts and form logical arguments, not just post resumes. If your argument doesn't have enough weight to stand on itself, then it's a weak argument. Perhaps that's something you completely missed in school, if you even attended. Also, regarding whether you "work in the field," there's another one of those useless points.

A car salesman sells cars right? Does he actually know everything about the automobile market? No. Much is the same for people who sell the homes, dish out the loans, etc. Just because you sold a house for a higher price than a comp last year, doesn't mean that's where the whole market is going. If you want to find clear arguments there are TONS of posts w/ clear and coherent arguments supporting an upcoming real estate decline. Hell, there were plenty just made w/in the last few posts citing good articles. Read.

Bradh,

Thank you, you made my point. Many more people can predict a housing "bust" since real estate moves very slowly. The stock market moved much faster so many people didn't even see it coming. All the statistics point to a real estate decline, and I side w/ statistics, not opinions.

JacobL

April 17, 2006 01:14 PM

tc,

Your comment regarding the fact that you would purchase your rental properties at the current market price was pretty amazing. Please provide some data to help people assess the numbers. Because if what you say is true, it would point to a serious undervaluation in the neighborhood(s) that those properties are in.

Here is a real life example of a typical investment property. I work for a large real estate development firm that has done a number of projects (condos and townhouses) in the DC market. We have turned relatively bearish on the market and are trying to unload as many properties as possibe (mostly outside of this area). Our view on DC is more balanced with softening expected, but nothing like what San Diego is about to go through. We developed a condo building in Virginia a few blocks from a metro and made a nice profit since we sold out in 2004. We still have a database of people who purchased the units and their relevant data like thier carrying costs (mortgage, condo fees, etc.). One of my colleagues was recently looking at renting a place and took a look at the properties that were for rent in the building we developed. He saw a ton of them available and played the investors off of each other and was able to get a place for about 50% of the carrying cost (i.e. he pays $1500 for a place that cost the landlord $3000 every month). He also said that the building is like a ghost town because so few people live there despite the fact that every unit was sold by us in 2004.

With those sorts of ecomonics being the norm in the rental property market, anything property with even breakeven cash flow would be a good deal. Anything with positive cash flow at current property values would be a complete bargain and you should buy everyone you can get your hands on.

Harrison

April 17, 2006 01:49 PM

Good article in MSN Money today about the risk to households and local economies as ARMs reset this year and next:

http://moneycentral.msn.com/content/Banking/Homefinancing/P148861.asp#msnhp

Some unsettling statistics:

Nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005, according to First American Real Estate Solutions, an arm of title-insurance company First American Corp. The study of 26 million homes in 36 states and the District of Columbia found that one in 20 home borrowers was upside-down by 10% or more.

The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more.

Interest rates on about a quarter of all mortgage loans outstanding, or $2 trillion, are scheduled to reset this year and next, according to Economy.com. Homeowners who opted for extremely low teaser rates in recent years could see their payments eventually double.

Defaults and foreclosures are already on the rise, thanks in part to higher interest rates, cooling real-estate markets and overextended borrowers. Nationally, 117,259 properties entered some stage of foreclosure in February, according to foreclosure-monitoring firm RealtyTrac, a figure that's up 68% from February 2005.

Borrowers who chose ultra-low teaser rates of 1% to 2% in the last couple of years could be among those most at risk, Cagan said. One in five such borrowers who took out loans in 2004 and 2005 was underwater as of September. These borrowers face the sharpest payment increases as their loans reset to market rates.

The large percentage of home loans in the DC/NoVA area in 2005 (as much as 40% according to some sources) were considered "risky" loans. As interest rates rise and the housing market declines, those households will find themselves under tremendous financial pressure. This will certainly have an impact on the local economy, if not the national economy.

StevenG

April 17, 2006 06:21 PM

All kinds of housing data is due out this week. Here is a precursor of what's in store:

MSNBC.COM SPECIAL REPORT
Home builders' index falls to lowest since 2001
Sentiment dropping as mortgage interest rates rise, housing demand eases

April 17, 2006
NEW YORK - An index of U.S. home builder sentiment fell for a fourth consecutive month in April to its lowest since November 2001, the National Association of Home Builders said Wednesday.

The drop was in response to rising mortgage rates, continued affordability problems and subsiding demand from investors and speculators, the trade group said.

The NAHB/Wells Fargo Housing Market index slid to 50 in April, seasonally adjusted, from March’s downwardly revised 54. It was the lowest reading since November 2001, when it stood at 48.

Financial management profesional

April 17, 2006 06:33 PM

Sandra,

You forgot to post your credentials (or rather real estate affiliation).

Interest rates are still going up (predictions are for 7%-8% mortgage rates since this is the historical norm; a 60% increase from last year).
Wages are flat.
Inflation is up.
No more "risky" loans.

Higher cost of owning a home with no increase in wages to offset it. Please explain your rational for prices to remain overinflated.

This is a forecast based on fundamentals and the pressure it creates going forward, March 2006 numbers are irrelevant as they mearly represent the last bastion of investors dumping before the laws of economics take over.

Anita

April 18, 2006 01:11 AM

Sandra,


I'm not sure what sort of credentials you expect someone to have before you can concede that his or her is argument is valid, but, seriously, anyone with a decent understanding of arithmetics and statistics could tell you that the fact that the average closing price in March 2006 increased 6.26% over March 2005 by no means implies that housing prices are still going up. You can't really say anything conclusive about how housing prices are behaving looking at that indicator alone. It could be that indeed prices of comparable properties increased about 6.26% yoy across the board. It could be that the prices of SFHs increased, but those of condos dropped, or vice versa. It could be that middle-income earners are now priced out of the market and only higher-end properties are selling, in which case at some point prices for middle-range properties will most likely have to come down, if they haven't already started to. Or, with the significantly reduced ytd number of sales and high inventory, it could very well be that prices for comparable properties have actually flattened in the last few months, or even dropped.

Are you the same Sandra who's been posting comments on this thread for a while now? If so, basic blogging manners aside, it's odd how you ate Terrence's face off for confusing new and existing homes sales data when you don't seem to understand basic sales statistics too well yourself.

AnxiousBear

April 18, 2006 10:03 AM

Sandra said with regards to NVAR:
"For those who say their number's are wrong, get a life. Or sue them. But don't speculate about how there's some sort of conspiracy amongst the real estate industry to give the public wrong figures. They are a corporation, so giving out accounting figures that are incorrect is a crime as should be the behavior on this board."

Respectfully, Sandra, NVAR is not a corporation. NVAR is an Association, which is very different. They have members who pay dues, not stockholders. Read the "About Us" section on the NVAR website.

Earl

April 18, 2006 12:25 PM

Previous post from Sandra:

"A lot of people on here are bickering about how much knowledge of the local housing market they have, but I would venture to say, no one here is actually working in the housing market on a day to day basis. When you post, you should post what credentials you have to help bolster your agrument for or against the housing bubble."

So, Sandra, what are your credentials???

Frankly, my first piece of advice to any prospective first-time home buyer is NEVER believe a real estate agent. Why? Because they only get paid when you buy, the bigger, the better. When the market is going up, RE agents will tell you to buy or you might be priced out of a house. When the market is going down, RE agents will tell you to buy because prices can't possibly go any lower.

Credentials are nearly useless on these anonymous blogs - anyone can make anything up. Rude and snarky comments to fellow bloggers as we've seen most recently from BradH, TC, and Sandra, undermine any point you were hoping to make.

My advice to all who are reading these blogs: read the information, check the facts, understand a few fundamental laws of economics, use reason, and make your judgement about the credibility of the argument and/or the blogger accordingly.

And finally, keep the discussion relevant and civil.

Bruce

April 18, 2006 03:29 PM

Here's a link to an article about what realtors are really saying (anonymously) about the housing market:

(From CNNMoney.com: http://money.cnn.com/2006/04/18/real_estate/agents_bearish_in_blogs/index.htm)

Real Estate Insiders Go Bearish in Blogs

In mostly anonymous postings, agents are reporting big problems in the markets.

By Les Christie, CNNMoney.com staff writer
April 18, 2006: 9:57 AM EDT

NEW YORK (CNNMoney.com) - If the secret worries of real estate professionals are any indication, home prices could be heading for a swoon.

When Brad Inman of Inman News, which tracks the real estate industry and is widely read by industry insiders, recently gave real estate agents the opportunity to blog about market conditions, they almost uniformly described them as bad – and getting worse.

"Normally, brokers and agents tend to sugarcoat the news; they don't want to affect consumer confidence," says Inman. "By letting them post anonymously, we gave them a way to really share their thoughts."

Most responded with tales of high inventories, slow sales and languishing prices.

Here's a sampling of their comments:

"Portland, Oregon is mixed . . . more inventory, sitting longer. . . . Sellers no longer king." Posted by anonymous.

"Minneapolis/St.Paul . . . 15 houses per buyer. If we had buyers. Huge inventory in every price range. More foreclosure properties coming on daily." Posted by anonymous.

"East Central Florida Coastal area inventories up four times year to year and sales down 75%." Posted by Ramon Rivera (Not all bloggers craved anonymity).

"Some Realtors, Mortgage Brokers & some clients have been more testy than in months previous. Something is in the air." Posted by S. Crowe.

"Northern Ca. Let's not beat around the bush here. There is a slow down!! Home prices are not going up. Sales are down." Posted by anonymous.

Bruce

April 18, 2006 03:40 PM

A related story, also on CNNMoney:

Home Builders Step on the Brakes

Latest reading on home building shows bigger slowdown than expected as pace falls below 2 million; permits also weaken.

By Chris Isidore, CNNMoney.com senior writer
April 18, 2006: 11:15 AM EDT

NEW YORK (CNNMoney.com) - Home builders hit the brakes in March, cutting the number of housing starts and new permits in the face of rising mortgage rates and a growing glut of new homes on the market.

The Census Bureau reported that housing starts slumped nearly 8 percent to an annual rate of 1.96 million in March from a revised 2.13 million pace in February. Economists surveyed by Briefing.com had forecast the rate would slip to 2.03 million last month.

It was the second-slowest pace of housing starts over the last 12 months, trailing only December.

And with the cooling of home buying following a record year for home construction, there has been a significant build up in new homes available for sale on the market, according to a separate Census Bureau report. One in five builders has also reported an increase in the cancelation of new home orders in recent months.

Rest of article:

http://money.cnn.com/2006/04/18/news/economy/housingstarts/index.htm

RobB

April 18, 2006 03:54 PM

Statistics for March home sales will be published tomorrow. Based on my own observations of the local market, I predict the stats will show that home sales will be slightly higher than Feb, but still much, much lower than the previous March. Inventory will continue to grow, approaching record inventory backlog since the housing bust of the early 90s. And I think we will see median home prices in all DC/NoVA/MD counties decrease from the previous month.

I agree with an earlier post that if sales don't pick up this month, it will be safe to declare this spring a housing bust.

Robert

April 18, 2006 04:16 PM

I think some of the shrill tone of some posts on this blog is because this isn't just a theoretical topic -- your house is your single largest asset and changes to what you pay for it and how much it is worth affects you exponentially more than any other asset.

Further, real estate is a highly "reflexive" investment, i.e., people tend to buy when others are buying even when it is highly overvalued, and, conversely, people tend to stay out of the market when everyone else is staying out even when prices are a value. Hence, the common criticism that media coverage will accelerate the current housing slide, pushing it over the cliff, and taking millions of households with it.

REWatcher

April 18, 2006 04:33 PM

I think a lot of investors are waiting to see March sales statistics before deciding whether to "dump and run." March is early enough in the spring selling season to be an indicator of the rest of the season, but late enough to not be adversely affected by snow, and it has no holidays so every day is a potential selling day.

If March stats continue to confirm the slowdown, we'll probably see many more investor properties on the market soon as investors try to get what they can before prices slide further. Since investors can put their properties on the market more quickly than families, this may leave families in the dust since families typically need more time to prepare their house for sale and find their HOC.

Sandra

April 18, 2006 11:56 PM

Anita,
I've posted once or twice before. I'm actually an actuary. I work in economics consulting. I think I know a little about the subject. No, I guess to you the increase would mean little.

Arsenio

April 19, 2006 09:12 AM

NVAR has finally released stats for home sales in N. Virginia for March and it doesn't look good for sellers -- a whopping 322% increase in inventory compared to last March and slumping demand:

Comparative data between March 2005 and March 2006 reflects clear differences in this area's supply of homes on the market: 2,034 listings were active in March 2005 compared to 8,577 active listings for this past March. By any measure, a nearly 322 percent increase in the number of active NVAR listings translates into many home choices for prospective buyers.

There was a 17 percent decrease in demand for homes when comparing March 2005 to March 2006 in Northern Virginia. March 2005 netted 2,260 sales and March 2006 resulted in 1,867 sales.

In sync with the increase in the number of active listings found in NVAR's area this past March, Greater Northern Virginia saw a boost of about 290 percent in active listings, with a total of 18,444. In March of 2005, 4,728 homes were for sale.

Correspondingly, the demand in Greater Northern Virginia reflects a decline of nearly 22 percent. Sales this past March totaled 3,392 home sales, down from March 2005, when home sales totaled 4,331.

Full report can be found at: http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100401

Bob

April 19, 2006 12:25 PM


by: PBernhardt (M/Albany, CA)
04/17/06 09:34 am

"I'm the former RTC REO (Real Estate Owned) Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.

When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle.

While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate's former value from just 2-3 years earlier.

Mortgage defaults and bank REO are increasing rapidly already as of today. Keep in mind that banking regulators will never give lenders leeway to play the market so to speak, or hold on to REO in the hope of an improving market to get a better price or to cover their nut (i.e., mortgage). They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I'm convinced this time it will be far worse because back then we didn't have any of the Geo-Political crises we have now (rampant illegal immigration, wars, we're a bigger debtor nation, we have a bigger trade imbalance with China than we ever had with Japan I'm sure, etc., etc.), interest rates that were artificially depressed to levels not seen in 40 years, dangerous and irresponsible lending products, and because the advent of the internet now facilitates the free flow of information much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It's almost an avalanche of data supporting why all but the most ill-informed should not be looking to buy for at least 2 years.

I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren't going to report it because their largest advertising constituency is Realtors/brokers.

With the internet and the info that is available on it, you'll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.

Homeowners are now increasingly starting to put their homes up for sale to get an early start on the summer home buying season, and some are just now realizing how inventories on their local MLS's have tripled, quadrupled and worse. As of today, ZipRealty reports that San Diego is just about 4 weeks away (based on the average daily increase in inventory I have been monitoring since late last summer) from breaking the old record of 19,250 during the last down cycle.

I know some have said that you can't use that figure because San Diego has a larger population today, but I disagree and here's why. There are far more FSBO related companies today than 15 years ago because of the Internet and collectively, many of their their thousands of listings are not included in the ZipRealty figures. Also keep in mind that last year population in the County went down, and don't be surprised when it goes down again after this year finishes up.

Look how the tone of articles from mainstream media in the last 2 months alone have changed. Panic has already set in for many, but they have no idea how ugly it will get."

Bob

April 19, 2006 12:28 PM

by: PBernhardt (M/Albany, CA)
04/17/06 09:35 am

"The one thing I'm always amazed to find out is how many borrowers think that when their home goes back to the bank, that's the end of their problems. What they don't realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but now penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven. I personally knew a borrower who had 11 rental properties and after he lost the first one to foreclosure, he got hit with a huge IRS penalty. He started selling off the others, but had huge tax hits because of depreciation recapture, and because the market was getting worse, he could not sell some for what he owed. I was an underwriter at the time and on paper, just prior to losing his first property he had equity of over $1,000,000; but in the end he lost it all because he couldn't sell in a market where bank REO dominated, and when he tried, the tax hit from depreciation recapture buried him further.

The same sheeple psychology that drove everyone to ignore cash flow fundamentals by flipping condos and homes based on the greater fool theory, will invert like it did in 1990, and for the next few years you'll hear nothing about real estate except how terrible of an investment it is, and it will be true for those who either bought with high leverage or refinanced with max cash out based on the value of their homes in the last 2 years.

And anyone who says rents will catch up to all the adjusting I.O. and ARM loans is in fantasy land.

Between 1990 & 1994, I had my landlord reduce my rent three times by simply giving notice that I could rent a better condo at the beach for less. And you know why that's possible? Because of all the bank REO that was (and will be again) unloaded on the market. Owners who buy REO can easily compete on price alone. Market rent is meaningless to them. I rent a $750K place now and have been renting since we sold our residence in 2002 and our rent is under $2,000 and in the 5 years we'll have been here, the rent will have only increased by 3% from 2002 through 2007.

To those who ask how long to wait and how low will it get, here's my answer. Even though the Internet will compact the time it takes to crash, I still say don't even think about buying for at least another 18 months. Don't be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are "Dead Man Walking".

As far as the percentage, don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me. Even if you don't for whatever reason, others who are diligent will.

In 1995, my wife and I bought a La Jolla 1-BR condo one block to WindanSea beach with a peek ocean view off the balcony. It was in default and we bought it for a total price of $104,000 AND got the broker to kick in half his commission. That's how bad it was last time : )"

Anita

April 20, 2006 01:19 AM

Sandra,

So, with your formal training as an actuary and your knowledge about "the subject" –which I assume to be statistics, or did you mean the real estate market?–, what is it exactly that the 6.26% yoy increase in the avge. closing price NVAR recorded in March means to you?

To me, a mere mortal who earns a living doing financial analysis, it neither "means little" nor necessarily means that "the prices have actually gone UP." I would have to know more about the composition of the base of each average before I could conclude that prices have gone up or are still going up. Pardon my ignorance, but how do you know just looking at the increase that the bases of the two averages are comparable? Perhaps because you are an experienced observer of the market in addition to an expert statistician? Can you elaborate?

With such different market conditions in March 06 and March 05, I suspect the bases of those two averages may actually be significantly different. One of a number of possibilities is that the base of this March's average is composed of a larger enough proportion of higher-end properties (defined according to objective criteria, such as size, location, quality, etc.) that would push your average closing price up even if prices had stayed flat or gone up and come back down near March 05 levels. Looking at the 22% yoy reduction in the ytd number of homes sold and the 300+% yoy increase in active listings, and knowing incomes have not kept pace with real estate prices AT ALL, this hypothesis doesn't seem all that implausible to me. Anybody, including Sandra, care to comment?

On an entirely different note, since I relocated to the DC area and started watching the housing market about 1 ½ year ago I’ve always been amazed at how high prices in DC proper are considering that the public schools are, from what I understand, pretty bad. I don’t have any children but my friends who do all live outside the DC line (as do I) and say they bought where they did because of the school districts they’re in, paying a very high premium. So, based on that I’d expect there to be a huge gap in prices for comparable properties inside and outside DC, but based on property descriptions and pictures I see in the listings I think that the gap is not so wide and it’s actually narrowing. I find this odd, especially after there was such a run-up in prices; are there really that many fabulously rich and/or child-free people looking to buy in DC? If the answer is no, then I believe the District will be worse hit than the suburbs in the event of housing downturn. Could people who have insights or data to refute or support this hypothesis kindly pass them on?

Sandra

April 20, 2006 01:29 AM

AnxiousBear - Perfect example of the misinformed, idiots on this board. NVAR is a corporation. http://www.e-idc.com/trade_associations/trade_associations_listings_real_estate.php Lists all real estate trade organizations and if you look real close you will see Northern Virginia Assoc. of Realtors Incorporated. What a bunch of morons! Ask Christine Todd the CEO if they're not incorporated. What a laugh!

DCgirl

April 20, 2006 10:37 AM

Sandra,

A piece of advice - calling people "idiots" and "morons" is not the best way to build credibility. And maybe I'm completely wrong (I'm not a securities lawyer) but I don't think being a corporation automatically means you are regulated. My parents run a motel and they are incorporated but I don't think the SEC checks up on them. To my knowledge, the NVAR is not a publicly traded corporation, so it is unlikely they have to file anything with the SEC.

Jerry Sussman

April 20, 2006 10:53 AM

I am reluctant to contribute further to this discussion as the sentiment is becoming increasingly acrimonious. However, I would like to address a comment made by an ostensibly informed observer. My comments are my own, and not "official," in any way.

If I read the posting correctly, they state that they were an analyst with the RTC and that they left in 1991, when it was in the process of "closing down." I infer that they are referring to the RTC rather than to HomeFed. The author-analyst then discusses the dismal state of the real estate market circa 1991, and how things may be much differen this time. Unlike then, we now have wars, etc. Well, not quite.

I worked for the RTC in 1991. The RTC was not in the process of closing down in 1991. It was just gearing up, having come into existence only in August 1989. RTC closed in 1995, not in 1991. Moreover, the RTC was established to contain, manage and liquidate failed financial institutions. In 1991, the financial crisis was at its peak. And, if anyone forgot, we WERE at war then too (Gulf War). The economy was in a basket case compared to what it is like now. Though it is quite correct that, at the height of the savings and loan crisis some real estate sold for but a fraction of its earlier appraised value, the times are in no way comparable. And, while I concur that present real estate prices are out of whack and due for a major correction, I do not think that we are on the verge of a collapse in anyway approaching that of 1991. Just my two cents.

That's not

Badh

April 20, 2006 11:37 AM

Bob,
Nice paste, but to me it sounds like the same old “here’s what happened last time, so here’s what’s going to happen this time” type of stuff that we have seen a thousand times before. We have just been through a housing boom that was unprecedented. That makes me think that all the ups and downs and goings on in the market(or markets given that RE is very regional) are going to be unprecedented. So all of these day-to-day and month-to-month statistics compared to what happened in 1990 really don’t mean a lot. We are in uncharted waters. I do find this Bernhardt fellow’s statement about the internet compacting the amount of time RE takes to crash very interesting. I have often wondered myself how much the availability of ‘instant information’ affects the workings of markets versus when there was no internet. I tend to think with RE, that the availability of information would make people less likely to panic.

Anita,
Good point about the schools. One thing to note is that DC does have a big gay population. I heard a statistic not long ago that gay men have the most discretionary income of any demographic. So I guess it would make sense that they could afford a bigger than average mortgage payment. Just from what I am seeing on a day to day basis, the typical person moving into the city is either fairly young and single or newly married- not ready for kids. Young professionals are getting married later and later these days. Also people who work in politics- aids, lobbyists etc. from what I have seen, tend to be more from upper class backgrounds. So good ole dad might be making a huge down payment on that townhouse and paying for junior to go to private school.

Drew

April 20, 2006 11:38 AM

Sandra - Now you're calling people names. "Idiots, morons?" You claim to be an actuary, and not a real estate agent. Fine, I believe you. But the name calling and shrieking suggest that you may be among those "invested" in real estate, with fading delusions of early retirement, funded by some suburban tract house. I'm terribly sorry.

And just FYI, trade association, like, NVAR, are "incorporated" under section 501(c) of the Internal Revenue Code as "Not-for-profit Corporations." Their structure and purpose is not the same as, say, Xerox Corporation. Going after Anxious Bear on that issue is pretty weak, don't you think? If you feel strongly, please do a better job of at least making a point.

Not a Sheeple

April 20, 2006 11:47 AM

Sandra:

Spoken like a true sheeple that is about to lose their rear end when the market colapses!

doh

April 20, 2006 07:12 PM

Sandra,

Tsk, Tsk. I have never seen a consultant with such shameful language. I guess you got fired because of your poor ability to understand future risk. Don't take your personal shortcomings out on the people of this board.

Sandra

April 20, 2006 09:04 PM

Guy,
I believe it is you who cannot read.
AVERAGE SALES PRICE
MARCH
(6.26%) $535,633 $504,081
It's on NVAR's website under Market Statistics. You're a nasty little a***ole, no wonder you can't make a living or buy a house.

Ballard

April 21, 2006 07:53 AM

This is information from the frontlines. I have been looking at townhouses in the 22201 and 22209 zip codes between $700k and $1 million. I have signed up with one of the online mls sites to get notices when a new property becomes available and also when one of the new properties sells. Since february there have been numerous townhouses listed (20+). Though only 2 of them have sold. In the past few weeks, none have been added and none have been sold. I think sellers seeing so much inventory are getting pretty nervous about the fact that nothing is selling. Townhouses are supposed to be a transitional property and therefore they should be more liquid than single family homes. Given that nothing is moving, something has to give.

Authority on Everything

April 21, 2006 08:51 AM

I've been a consultant for developers for more than 25 years, and in the DC area since 1989. The writing's been on the wall for several years that residential prices were nearing unsustainable levels. Again. Will the market crash suddenly? I don't think so. The big national builders that control a sizable portion of the new housing stock will adapt to lower prices for their products. Their mass production techniques will let them sell the homes for lower prices, despite the fact that entitled (rezoned and approved) lots have much higher prices than in 2000-2003. So, if you want to speculate in the residential market, I suggest you look elsewhere. Want to buy a home to live in for the next 6-10+ years? Buy a house at a comfortable price level, and don't worry about what happens between now and 2012. It's your home...not a Fortune 500 stock.

Drew

April 21, 2006 10:49 AM

Authority on Everything -

Excellent, level-headed advice. Except that, the entire "real estate industrial complex" has suckered the Great Unwashed into believing their houses ARE just like Fortune 500 stocks. You are a day late and a dollar short, partner.

And besides, there are no houses at "comfortable price levels" in the DC area for any but the most affluent. Median income and median price are completely out of whack - that is the whole point.

I have been here since 1994 and know as well as anyone what real estate looked like after the last run up. "Buy now" is typical, industry blather and is comparable to Wall Street's 1999 mantra on the importance of "long term investing." In other words, "give us all your money, right now, you'll be fine in the long run." Right. We'll all be dead, too.

Guy

April 21, 2006 10:54 AM

Sandra,

LOL. Great response. Again, you reiterate your brilliance! Like 10+ people have already pointed out, you merely are mentioning an average, do you know what an AVERAGE is? A much better statistical measure would be the MEDIAN price, which is not listed on their March summary, but in individual markets. Why? Simple. People that can afford 1+ million dollar homes don't care and will continue to purchase houses, this may very well drive up the avg, while cheaper houses may sit.

All but 2 markets (falls church and fairfax city) leveled off or went down, so you saying the WHOLE market went up 5.6% is logically flawed. Fairfax city is tiny as well as falls church w/ both well less than 100 houses. Considering this fact, nvar has some questionable statistics on their page.

I actually feel bad for you now. I took 1 class in statistics in college, and have a better grasp of these basic concepts than you, and I'm a CS guy. Thanks, but I do well for myself and will be picking up a nice house in a few years.

Well, plenty of other people have posted all the holes in your arguments yet no responses to them...? I take it you can't argue your point and concede defeat.. that's definetly the right approach.

It's funny how I'm the a**, yet you go off blasting terrence when he made a mistake, yet you get hurt when I point out your stupidity.. Have SOME fortitude and at least accept when you're wrong. How pathetic...

tc

April 21, 2006 12:54 PM

JacobL,
I've already given enough data, what do you want my accountant's telephone phone number?

Sandra

April 21, 2006 01:04 PM

doh, your crystal ball theory suggesting that I've been fired is about as dead on as your theory about the future of home prices in the DC area. Very interesting. Not!

Sandra

April 21, 2006 01:07 PM

Drew,
I already know NVAR is incorporated, duh! And yes, they do have to report. What does Xerox have to do with this? You on DC crack again?

Saul G.

April 21, 2006 04:28 PM

Wow! This blog has gotten so hostile. I have a few ideas on how to make things happy again:

(1) We should all jointly purchase a commune (I hear there's a property available in Waco, Texas), and live there. The money left over from our respective home sales could then be used to teach realtors new skills (like flipping hamburgers, for example).

(2) We could invite FOX to tape the show where we all bicker about the real estate market, and start calling each other names like "fat," "stupid," or "white trash."

(3) Predictably, a romance would ensure between the two most insipid bloggers (pick a guy, and Sondra), and we could see if the wedding garners even more viewers than Luke and Laura's wedding on General Hospital. Martha Stewart can cater the event, and, in a shameless cross-promotion, fire someone from our show.

Ultimately, everyone on this blog becomes wealthy from the show, and we reunite in five years, after all of us are completely broke, having made poor investments in the resurging dot-com market, and in the "Carnie Wilson Diet Plan."

It's our own American dream.

doh

April 21, 2006 10:26 PM

Sandra = Frustrated new real estate agent who can't make a sale and blames everyone else. Regrets quitting her day job for easy money that isn't there.

Jim

April 21, 2006 11:09 PM

Fantastic column here - despite the shrill bickering - now, I'm no expert, but I have been studying the NoVa market for 2 years now, and I'm convinced that now is a terrible time to buy. I primarily look at the rent/buy ratio, since I'm currently renting a SFH in Arlington. I pay $1900 in rent, and an identical 3/2 1940's cape cod across the street sold for $652K at last spring's market peak. There is no way I could make the numbers work on a buy even being in the top tax bracket. The most damning statistic is the graph of real home prices from the CEPR article quoted above. I saw a version of that in the Economist a while back which went back to 1900. In 100 years, there were only a few times when real prices diverged in a positive direction, and _every time_ they returned and even overshot the mean. And never did they diverge as much as they have now. That does not bode well for new market entrants or anyone who bought after 1997, when prices really started taking off. Go ahead bulls, take me to pieces, but I predict the return of sub-$400k SFH's in Arlington, Alexandria and Fairfax Counties within 4-5 years, and I think the downturn will take at least that long to play out. The molotov cocktail of Carlton Sheets "investors" who will not be able to cover carry on the rent nor find anyone to flip houses to even at a wash, exotic mortgages, unlocking of ARMs, ever-increasing numbers of retiring boomers who sell out of urban and suburban homes to move to retirement areas, and the inevitable belt-tightening that must happen in Federal spending in the near future is too explosive to predict anything other than a big decline in prices in this area.

Bubba

April 22, 2006 01:19 AM

Geez, I haven't been to this string in a few months, and it's amazing to see how far things have deteriorated (in terms of tone.) This is a pretty cyclical string - people get angry and start spouting non sequiturs and ad hominem attacks before someone begs for a return to a decent level of discourse.

I, having just had the arrival of a new baby girl (can we all agree that that's a great event?), am feeling nice and mellow and would like to call for just such a correction in tone.

The reason that I'm posting is that I've noticed something weird in the MLS. I access the MLS through www.homesdatabase.com/barbaraz (thanks to a very pleasant woman named Barbara Zuckerman.) When you initially hit the MLS nowadays, the number for listings in the initial screen before you specify your search criteria has stayed the same for the last 2+ weeks. E.g. my MLS access says that there are 262 listings in Capitol Hill North and has said that since March. For a while, I thought that the stability reflected a steady state where homes were coming on and selling at the same pace. But after a while, I figured that it was too stable to be true. So if you do an actual search for Cap Hill N properties, you find that there are 329 on the market. Similar discrepanices, up to 30%, exist for other neighborhoods in the city (e.g. Dupont/Logan indicates 249 but really has 320, Georgetown says 120 but has 168.)

Does anyone know what's up with that? Is this common across everyone's MLS access?

Note also that these are gargantuan increases in inventory (even using the "fake" numbers.) I recall last summer when there were, at most, 120 or so houses on the market in Cap Hill N. We're looking at an approximate 200% increase in inventory, and it's quite apparent from the listings that some properties are sitting for a long time (check out DC5507367 which started above $800K and now, after 4+ months on the market, is at $565K - a nice looking house I'd say.)

But some places, like the 1000 Sq Ft around the corner from me in G'town that listed for $1.2 mil and sold within a couple weeks, are still moving at pretty high prices. Are we seeing a real "correction"? Will prices "crash"? I dunno. But I will be interested to see what happens if/when some hard data appears, and is publicized, indicating that prices have actually fallen. Then all of the arguments from the NAR, realtors, etc. who reassure everyone that prices will not fall in DC will have to be reevaluated. How will buyers and sellers respond? It will be fascinating to watch.

Thomas

April 22, 2006 02:26 PM

Interesting article on the front page of the Washington Post today confirming what some of us have already observed in the field:

Doors Close for Real Estate Speculators
After Pushing Up Prices, Investors Are Left Holding Too Many Homes

By Kirstin Downey
Washington Post Staff Writer
Saturday, April 22, 2006; Page A01

Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.

"We think the softness of the market is largely due to the pulling out of investors," said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders. "They have not only pulled back, they are canceling purchases."

Rest of the article can be found at:

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/21/AR2006042101720.html

Civility

April 22, 2006 03:50 PM

I recommend blocking Sandra from posting on this blog in future. She has violated all rules of social etiquette and is contributing no value to this discussion.

All in favor say "aye"

RobR

April 23, 2006 11:26 AM

We're starting to see the end of the phenomenon of rising prices and declining sales. This contradictory phenomena is caused either by sellers not realizing that the market has changed, or by unmotivated sellers testing the market - if they don't get their price, they won't sell. You can identify unmotivated sellers by their high DOM and little or no price reductions. (You can even identify these properties visually -- look at the pictures of houses that have snow in their yards!) Likewise, you can identify motivated sellers by incentives and price reductions.

If you look at websites that list properties by price reductions (i.e., motivated sellers), you'll see that even the inventory of these properties are increasing. Add to that the increasing number of investors that are starting to "dump" their properties or back out of contracts (see the Wash Post article on that this week).

Since January, we've seen the contradictory statistics of increasing inventory and increasing prices, but home sales stats now indicate that prices have either plateaued since the previous month or have already begun to decrease. As investors rush to sell properties before gains are further eroded, this will bring further pressure on prices to decrease. I think the real losers will be families that need to sell but don't have the flexibility to beat investors to the market.

Gale

April 23, 2006 07:34 PM

Reports of falling sales and investors stuck with properties they can't sell are just the beginning. Property owners should worry; so should their lenders. (The follwing article is from MSNMoney, 23 April, by Bill Fleckenstein:)

A recent story in the Wall Street Journal, "Hot Homes Get Cold" offered lots of its useful vignettes that serve as a microcosm of manic markets -- starting with the bravado-cum-denial displayed by a medical-equipment salesman in Stuart, Fla.

Concerned about his real-estate investment apparently going sour, he can't afford to reduce the price to what homes now sell for in his neighborhood -- which is about $100,000 less than he's asking. Says the salesman: "If I got in a jam, I would have to drop the price, but I am not at that point." His game plan: Rent the house, so as not to "lose my shirt."

That's the mentality often seen in manic markets -- the belief that you can't possibly lose, and, when the price goes against you, you don't have to deal with it, because it will come back. This fellow (and millions more like him) is going to find out that his belief is a mistaken one, in the same way that folks did when the stock bubble burst.

Dwelling takes a little shelling

The story went on to note that many formerly hot markets in California, Arizona, Washington, D.C., and Florida are now "languishing without buyers or even prospects. Many once-booming markets are seeing double-digit declines in sales." The magnitude of the drop in Florida home prices (once the frothiest market in the country) is striking. Single-family home sales declined 20% in February, year-over-year. Similarly, California sales dropped 15%. Some of the hottest towns in those states were off twice as much.

Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion. Same with the stock bubble -- many folks think it was rising rates that caused the implosion. That isn't true. The stock bubble ran until it popped in March 2000, having ignored everything up to that point.

Symptoms of the doldrums

After having leveled off for a while, the real-estate market is now starting to slide. We're seeing signs of sales slowing and inventory accumulating, which are all quite classic, even though the timing of when this would begin was not possible to predict in advance.

The story cited the plight of investors who'd purchased homes in formerly hot housing developments that now resemble "ghost towns." One such individual is Paul Zani (no pun intended, I'm sure), who'd bought a couple of condos, listed them for more than he paid and now can't sell them. However, he doesn't want to reduce the price (even though he'll probably have to). This mentality is an example that many real-estate "investors" seem to share -- heads we win, tails the bank loses. (Some people are sanguine these days because, as the article notes, "while sales are slackening, they aren't collapsing." To that, I would add: "Yet." They will.)

By and by, heartburn for the bankers

It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt). The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.

The story closed with a description of how slow the market has recently become in Florida -- via the following comments in an e-mail by real-estate broker Mike Morgan: "We went three days this week with not a single showing. That's incredible. I have 35 listings. We usually get 2-6 showings a day. ... I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their 'life savings' if they sell the homes in today's market."

Ladies and gentlemen, unfortunately, a lot of people around the country are going to be badly hurt as this bubble unwinds. And, after they have taken their losses, the financial institutions that were the engine behind this folly will take their own hits. 'Easy Al' Greenspan at the Fed tried to bail out one bubble with another bubble. While it bought some time, it will end in far-worse pain.

Full article: http://moneycentral.msn.com/content/P149596.asp

Badh

April 24, 2006 10:39 AM

Gale,
I have seen several articles by this Bill Fleckinstein fellow in the past few months. I have to say that I find it hard to take seriously any opinions or advice from a middle aged man sporting a mullet.

RedEye

April 24, 2006 11:24 AM

Inman Real Estate News reports foreclosure rates soar in first quarter:

Foreclosures jumped 72 percent in first-quarter 2006 compared to first-quarter 2005, according to RealtyTrac, a company that tracks U.S. properties that have entered the foreclosure process.

The first-quarter 2006 foreclosure report revealed that 323,102 properties nationwide entered some stage of foreclosure, up 38 percent from fourth-quarter 2005. The nation's quarterly foreclosure rate of one new foreclosure for every 358 U.S. households was higher than in any quarter of last year, the company also reported.

"The sharp increase in foreclosures … continues a steady upward trend that we've observed since the beginning of last year," said James J. Saccacio, RealtyTrac CEO, in a statement. "Foreclosures have now increased in four consecutive quarters and are on track to go above 1.2 million in 2006, which would push the nation's annual foreclosure rate to more than 1 percent of U.S. households."

http://www.inman.com/inmannews.aspx?ID=51166

winston

April 24, 2006 12:51 PM

Here is what I posted last year.
-------------------------------------
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!

Posted by: winston at December 14, 2005 06:32 PM

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

I guess I should win the nobel prize for my accurate prediction on interest rate last year. Do you guys still want to believe those idiots on walls st.???

As to my prediction on the decline of housing prices, I believe I'll win by the end of 2006a nd in the next 3 years. Let's wait and see.

BTW, I have no sympathy at all for those "investors" - They deserve the loss and pain. Period.

Sue

April 24, 2006 03:10 PM

One thing I observed a lot in the last downturn was how companies who transfer their emloyees regularly will often have a "stop loss" policy, whereby if the house sells for less than the amount paid for it, the company will cover, say, 90% of the loss. It was very prevalent in the California city in which we lived. Most major corporations have such a policy. We bought our home in 1992 at the peak of the market, and STILL sold it at a loss in 2001. But since the company covered 90% of our loss, it was not that big a deal. And we got a bonus for selling the house before we moved. The bonus for a quick sale, which required listing our house at a lower-than-market level, exceeded 10% of our loss - so we ended up coming out ahead.

Such sales defy the "stickiness" factor to which so many anti-bubble people refer. I wonder what the percentage such sales were at the peak of the last downturn. I know it was very significant where we lived, and definitely contributed to prices going and staying lower. If people who cannot afford a loss don't put their houses on the market, and only repos, desperate people and those with these great company policies end up selling, surely prices get driven down.

Ernest

April 24, 2006 07:29 PM

Bubba:

Re: tracking numbers of properties on the market. I don't know why the number of properties isn't changing in homesdatabase.com -- I informally track the numbers in ZipRealty and can tell you the number of new properties increases every day. In fact, I've been noting the number of new properties in DC, Arlington, and Alexandria since early Feb. Here are the changes:

Feb 9
DC: 2121 active listings
Arlington: 657
Alexandria: 644

March 9
DC: 2479
Arlington: 785
Alexandria: 783

April 9:
DC: 2609
Arlington: 877
Alexandria: 869

Today (April 24):
DC: 2833
Arlington: 991
Alexandria: 915

If you look at these numbers every day, typically what you'll find is that the numbers decrease slightly at the beginning of the week as contracts are ratified, then surge up on Thurs & Friday as new properties are listed just before the weekend.

Further, if you look at the market statistics on NVAR and GCAAR, you'll find charts with the number of active listings each month in DC, MD, and VA. What you'll find from those stats is that in all areas of DC, MD, and NoVA, the backlog of unsold houses has already reached, and in many cases has exceeded, last year's seasonal high inventory in the fall. You'll also see the "double whammy" of negative home sales compared to last year. If the inventory backlog looks this bad now, I predict it will double by fall.

Real estate booms AND busts are created by herd mentality. When potential buyers see that others aren't buying, they don't buy. That's what we're seeing right now and will continue to see until prices come back into line with basic economics.

Badh

April 25, 2006 09:21 AM

Winston,
Please stop before you lose all credibility.

Ballard

April 25, 2006 10:10 AM

Interesting updated observation from the frontlines. As I mentioned earlier, in the past few weeks there has been a marked decline in the amount of new properties being put on the market. This can be seen in the weekly housing tracker data for last week. I would guess that is because a lot of sellers started seeing the huge amount of inventory that was not moving and figured they should wait it out until the market recovered. However the front page article about investors driving the DC housing market must have scared the daylights out of a lot of people as there have been a ton of new listings on Monday and Tuesday of this week. I would guess sellers are starting to panic and think that if they don't unload now at the current still way too high prices, they will be stuck with a cash flow negative rental property. Interesting to see how this investor psychology plays out.

tc

April 25, 2006 05:33 PM

Sales of Existing Homes Edge Up in March
Apr 25 10:02 AM US/Eastern

By MARTIN CRUTSINGER
AP Economics Writer


WASHINGTON


Sales of previously owned homes edged up slightly in March but not enough to keep the inventory of unsold homes from hitting a record high as the once-booming housing market continued to flash signals of a slowdown.

The National Association of Realtors said Tuesday that sales of existing homes edged up a tiny 0.3 percent last month to a seasonally adjusted annual rate of 6.92 million units.

The March increase followed a bigger 5.1 percent jump in February with the two months representing the first advances since five consecutive monthly declines.

The median price of a new home rose to $218,000 last month, a gain of 7.4 percent from a year ago. That price increase was far slower than the double-digit gains turned in last year as the housing boom was peaking.
(most of us will take 7.4% return on borrowed money any day)

Bubba

April 25, 2006 11:21 PM

Many recent posts concern the following: mean vs. median prices, conditional vs. unconditional prices. Here's my two cents.

A stats lesson for you folks out there. If you want to obtain a characterization some outcome (e.g. housing prices), ideally you'd examine the entire distribution of outcomes. How likely was it that outcomes fell in certain ranges? This is sort of what NVAR, for example, gives when they break home sales down by price ranges. People, however, often want a single number that tells whether the market has gone up or down. In such a situation, the common practice is to focus on one of two measures: the mean (or average) or median. Technically, which one you prefer depends on your loss function, i.e. the loss that you experience if you're wrong in predicting a future outcome (quadratic loss = mean, absolute value loss = median.) That's neither here nor there, but generally people tend to focus on the median. The mean can be distorted by outliers, which in the case of real estate would tend to pull the mean up (since prices are bounded below by zero by are unbounded above.) Think about looking at incomes and having Bill Gates in your data - he would pull the mean way, way up, but wouldn't really alter the median. Perhaps you think Bill Gates isn't unusual, but normally we'd prefer to think about the median if we have to settle on a single number.

What the hell am I talking about? Well, I think that, when examining something like real estate prices, most reasonable people would rely on median prices as the appropriate data characteristic to examine.

If you actually look at median prices from either NVAR (http://www.nvar.com/market/mktreports.lasso) or GCAAR (http://www.gcaar.com/statistics/default.htm), you'd find that for many, not all but many, areas, median prices fell from March 2005 to March 2006. Admittedly not everywhere and not by much, but at the very least it's clear that we're not seeing a run-up like we saw for the last few years.

As one objection to the previous observation, some people will say that the price declines are small enough to be inconclusive. I agree. That's essentially a claim about the statistical significance of drops in the median price from year to year. We'll see if future data provides more evidence of price drops. But, at the very least, the current data indicate that we cannot reject that the market has slowed substantially from it's previous pace so that current median prices appear to be about the same as median prices a year ago.

The other, less meaningful, objection is that we haven't taken into account characteristics of the sold houses. Obviously, we would ideally like to see the same houses in one year and the next, but that rarely happens. The next best would be an analysis of house prices given house characteristics. Unless you're a realtor, you don't have access to that info. And in any case, most evaluations of the market focus on unconditional analysis (perhaps segmented by local markets and condo vs. single family home) in which one looks at median prices alone. Since this is the common metric for evaluating the strength of the housing market, I find it difficult to now argue that we need to start accounting for whether a house has granite counters, a new bathroom, etc. (Again, obviously important house characteristics, but not what market watchers rely upon when evaluating overall market performance since data with characteristics are so disaggregate and inaccessible - also, who wants to run, and interpret for the masses, the regression desired by those who want to account for house characteristics.)

Upshot is that the data clearly indicate the following: we have no evidence that the market is rising at a rate anywhere near it's previous pace. In fact, we cannot reject that the market has stagnated with a year-to-year gain of zero percent. The current data are insufficient (or exhibit insufficient variation) to conclude much beyond that.

April

April 26, 2006 09:57 AM

Does anyone have an opinion about buying a lot and building right now? I posted on here awhile back when my husband and I first moved here (Annapolis) in January. We have watched DOM increase significantly and incentives begin to pile up for both condos and SFH in the area. Also the listings are up as well...I think the real winners right now are the helium suppliers- I've never seen so many balloons on Saturdays and Sundays in my life (and I have been to quite a few kiddie B-day parties with my 6 and 8 yr old!)We are contemplating buying a lot in our area (water-priv neighborhood) and placing a quality modular on it (approx $225,000 for a turn-key completion of 2000 s.f plus 2 car garage.) A small lot (50X100)with a water view is going for $250,000 and another nicer lot (60X250) is right around $190,000. We have the luxury of waiting for building permits to come thru (average of 6 mo) since we are renting and can go month to month. I just wanted to know if anyone out there knows if land values may follow the housing market down the slippery slope? Sonds like a basic question but I am a healthcare consultant and not a real estate expert. Thanks for the interesting input on here!

gov mule

April 26, 2006 01:41 PM

It was a good week, if not a great week. A house I bought just outside of Houston, (pre-86 bubble burst), closed-sale, 21 years later, for 67% more than I paid for it. not a great ROI, but the number masks the fact that I had it rented for the past 20 years, and made three times it's purchase price in rents in those 20 years.

Whats this have to do with DC? A home I purchased in Fairfax in 1990 now languishes for sale on the news of all this real estate "gloom and doom" in the NOVA/DC area.

Ladies and Gentlemen, the POST-speak downturn currently in effect has nothing to do with a real economic downturn like 1986 Houston.
I been there, done that. Federal employment is increasing, and the only question on everybody's minds is if the current USG employees will receive 2.3% or a COLA-adjusted 3.1% wage increase next January. And just like every other DC businessman on his business goods, I will raise the price on my (if then still) unsold house in lockstep with the FEDGOV wage increase. Done so every year since I bought it.

Even better news, my realtor, who has also been my renting agent on this house for years, tells me RENTAL PROPERTY is now only on the market for DAYS after listing. RENTS ARE GOING UP.

So if you see a bare to the walls house for sale in the DC area, lest you think the owner is a twentysomething who leveraged 5 credit card cash advances to purchase a home to "flip" and is now "tearing my hair out desperate" I assure you I wasn't that desperate when I was twentysomething back in Houston when the market really/really crashed in 86 and I lost my job, I just moved to DC and rented out my "couldn't give it away home" in Houston. And contrary to what the POST reports, I am not desperate now. If it doesn't sell, I rent it out and raise the price the next time I'm inclined to try to sell. Been like that in DC since they started building govt employee townhouses in old town Alexandria in 1785. So sit on your hands and do nothing as long as you like, pay me rent or pay the bank to own. I make my money either way.

TBill

April 27, 2006 10:05 AM

Good article from CNNMoney.com likening the current real estate market with a "twitching zombie" kept alive by huge cuts in new home prices. Some excerpts:

NEW YORK (CNNMoney.com) - New home sales posted the biggest jump in 13 years in March, but sales got a boost as builders cut prices to cope with higher mortgage rates and a growing backlog of houses on the market.

With rising mortgage rates driving up the cost of financing home purchases, most economists have been looking for the real estate market to cool off in 2006 after several years of record sales.

But economist Bob Brusca said last month's drop in new home prices is a sign that the market for new homes isn't nearly as strong as the jump in sales would suggest.

He noted that the report showed an unusual drop in prices from both February and a year earlier, which could be a sign that home builders are cutting prices to move a large supply of new homes now on the market.

"New homes sales sprang back to life like a zombie in a cheap horror flick," Brusca said. "And like that zombie, housing really is dead. Don't let all that twitching fool you."

In fact, about one builder in five has reported a jump in cancellations of new home orders, according to a recent industry survey. And Wednesday's report showed that there were 553,000 new homes for sale in March, up 25 percent from a year earlier.

Meanwhile, average prices fell 7.1 percent from February to $279,100, after topping $300,000 for the first time in the February revised figures. The median price, which reflects the point at which half the homes sell for more and half sell for less, also fell 6.5 percent to $224,200.

And while month-to-month declines in home prices are not unusual, more significantly, prices also fell from a year earlier: a 2.2 percent decline in median prices and a 3.6 percent fall in average prices over that time.

New home sales, while a fraction of the overall real estate market, are more closely watched since they're more of a leading indicator of conditions in the housing market.

http://money.cnn.com/2006/04/26/news/economy/newhomes/index.htm

Jim

April 27, 2006 12:03 PM

TBill - excellent article. In financial markets this is called a 'dead cat bounce'.

Also it's worthy to note, especially in light of the post immediately prior to yours, that builders are corporations, who act rationally in response to market conditions, unlike individual owners and investors, whose emotions often rule their business decisions. Therefore, their actions are more likely reflective of the current state and direction of the market than those of individuals listing existing homes for sale.

david ragu

April 27, 2006 05:57 PM

gov mule:

Your 67% price appreciation is less than the 75% increase in the Consumer Price Index over the same time. So, in real terms, you actually LOST money on your transaction. Oh, but you collected 3x that amount in rent over those 21 years. Congratulations. If you had invested in the S&P index in 1985 you'd have 7x the original amount now. That's a great investment strategy.

Don't break your arm patting yourself on the back buddy.

FRS

April 27, 2006 07:04 PM

A surprisingly sober assessment from the "housing market's chief cheerleader" in Florida, the epicenter of the housing bubble:

National real-estate expert says 2006 will be tough

By Jeff Ostrowski, Thursday, April 27, 2006

The housing market's chief cheerleader has a surprisingly stark message for Florida Realtors: 2006 is going to be a tough year.

The region's real estate economy must recover from a hangover wrought by a spasm of speculation and easy money, David Lereah, chief economist at the National Association of Realtors, told Realtors at a West Palm Beach hotel today.

"We're in a cleansing mode right now," Lereah told about 400 people. "It's gonna hurt."

http://www.palmbeachpost.com/business/content/business/epaper/2006/04/27/0427housing.html

Anti-Gov Mule

April 27, 2006 08:05 PM

Gov Mule,

Nice try, but rents are going down as the market has become flooded with rentals since no one can sell. I took my equity out of the real estate market and put it into stocks (which were at historical low valuations last summer, unlike houses which were at historical highs). I have since earned a 113% return on my equity in one year. Let me see, took you 21 years to garner half that return. Keep spinning, smart people buy low and sell high; suckers buy high (on hype) and sell low - which is what you admit to doing twice now.

Good luck with the foreclosure.

Anita

April 28, 2006 12:34 AM

gov mule,

Congratulations on your Houston property sale. I wonder, though, if when you say you "made three times it's (sic) purchase price in rents" you're not masking the fact that those rents actually paid for the house and its mortgage. Or are you saying you made a 300% profit just from the rents after you recovered your investment. Not that you ought to, but would you mind clarifying that?

Good luck with your Fairfax property, too. I actually believe that, ceteris paribus, reasonably priced properties in the DC area will always sell well, and if yours is one of them, then there's certainly no reason for you to be desperate.

I'm not so sure your argument about federal government salary increases, higher housing prices and higher rents really works, though. If the housing market (both sales and rental) were now, and remained in the foreseeable future, near equilibrium price level, then I guess you'd be right. Once the doom and gloom mentality dissipated, you'd be able increase the price of the house and sell it, or else rent it fairly easily now and perhaps increase the rent above inflation next year. But I'm afraid you're dismissing much too quickly the possibility that the Post's article is correct and that the current housing supply far exceeds non-speculative demand. How do you know that's not the case? Are you basing your assumption that employment growth can absorb the construction boom housing on actual data?

I subscribe to the Post's view that nobody knows how much of the housing prices run-up was caused by speculators, but that it was a substantial share. This is a problem because speculative demand assumes there'll always be a buyer or tenant out there on whom to make a profit, and speculators obviously want to realize that profit at some point; so speculative demand has a limit. What causes it to reach its limit? Well, that’s what people have been debating for two or three years now. Maybe it’s tighter financing. Maybe it’s speculator panic setting in after priced-out the market and financial savvy non-speculative buyers retreat. Whatever it is in the DC area’s case, if speculators have indeed been as important players in the market as the Post suggests, they will really hurt selling prices as they try to unload their property en masse. This is quite possibly what’s been happening in the last few months. And if selling proves too painful, speculators will turn to the rental market, saturate it, and bring rents down, too. If that happens, dear gov mule, you might be able to increase neither the sale price nor the rent. And you might be able to make some money whether it’s renting or selling, but it could be a lot less than you think.

DCgirl

April 28, 2006 08:18 AM

Govmule - you sound a little angry for someone who is happy to sell or not sell. If many people are choosing not to buy right now for one reason or another - why should that make you angry? I would actually prefer people to keep renting than to stretch themselves on a neg-am loan with a high risk of foreclosure.

Sandra

April 28, 2006 11:54 AM

Anti- Your lack of intelligence is showing no matter what user name you're hiding behind. Rents have gone up dramatically in the last 5 months and so have rental applications. Our Houstonite made a profit on the total price of the home, some of that equity, some leveraged. Whereas you only invested what would have ammounted to downpayment. My 6th grader pointer that out!

Badh

April 28, 2006 12:33 PM

April,
If I were buying today, that is exactly what I would do- buy a lot and build modular. That is certainly my plan when I move out of the city in a couple of years. It's amazing what modular home builders can build in a factory now. I think modular is the wave of the future not only for modular builders but also for traditional builders. There are a few traditional builders already who are building some parts of their houses in a factory. I believe Pulte Homes is one of them. I haven't been able to find any info or stats regarding whether the land market follows the home market but I have been watching the listings for about the past year. To me it does seem like land follows the housing market. The desirable, reasonably priced lots sell fairly quickly and lots that are overpriced and not so desirable tend to stay on the market longer. To me, the math is a no-brainer. In Loudon County for example you could by a lot with a few acres for around 300k, build a modular home for about 300k- in a neighborhood where similar homes are selling for close to a million. Unfortunately for the modular industry there is still a bit of a stigma attached to 'modular'. Alot of folks still think this means 'doublewide'. Check out the website for Epoch homes out of Connecticut to see some of the amazing homes being built modularly (and no Drew, I am not a rep for a modular home manufacturer.)

Herndon

April 28, 2006 06:08 PM

From Inman Real Estate News:

Forecast calls for 12% dip in new-home sales
Home construction is also expected to drop in 2006

Inman News, Friday, April 28, 2006

David Seiders, chief economist for the National Association of Home Builders, said he expects new-home sales to drop 12 percent this year compared to a record 1.28 million units in 2005.

New-home sales in the first quarter of this year were down 10 percent from fourth-quarter 2005, and he said he expects sales to ease further in the coming months before leveling off in 2007. Seiders spoke Thursday during a National Association of Home Builders Construction Forecast Conference in Washington, D.C.

Rising interest rates, affordability problems and the flight of investors and speculators have contributed to a softening demand for housing, economists said at the conference, according to an announcement by the home builders group.

"After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition. Sales and starts are trending lower toward more sustainable levels," Seiders said. "Hopefully, most of this decline will be due to investors and speculators stepping out of the market. What we don't want to see is investors dumping homes on the market."

Economists agreed in their prediction that the Fed will raise its benchmark short-term rate to 5 percent at its May 10 meeting, which would be the 16th consecutive quarter-percentage point increase since the Fed started lifting it from 1 percent in June of 2004.

Mark Zandi, chief economist for Moody's Economy.com, said that "builders have done a pretty good job of matching supply and demand" and that "nationally, house prices and supply will go flat in 2006, 2007 and 2008," which implies that there will be some price declines in key markets.

Markets where Zandi anticipates significant corrections – more than a 10 percent peak-to-trough decline – are in the Northeast, the Mid-Atlantic, Florida, California, parts of Arizona, and Las Vegas.

"Any fundamental rise in interest rates will bite hard," Zandi said. "The rise will lock out two key groups that are important to local and regional markets: first-time home buyers and investors."

Thomas Lawler, a housing and mortgage market consultant who worked for Fannie Mae for 22 years, said there was not a national housing bubble, though regional bubbles do exist. "Nationwide, no. But in some regions, absolutely."

Lawler, who spoke on house prices and local dynamics, said, "all of the signs of a bubble were present: a surge in speculative investing; a surge in innovative financing; easy credit and loose underwriting; home inspection waivers; and home purchases sight unseen. You had to be 'on something' not to see a bubble in some areas," he said.

http://www.inman.com/inmannews.aspx?ID=51251

doh

April 28, 2006 09:09 PM

Well, the Friday night scan of Zip Realty shows an explosion in listings this week with significant drop in listing prices. Homes in neighborhoods that sold for $770,000 just last month are being listed at $650,000 (yes, same size and model type). Looks like the purge has begun and the dead cat bounce has landed with a thud. I recommend any last hold outs bail and dump your property while you can (everyone else is).

gov mule

April 29, 2006 12:01 PM

thanks for all the comments to gov mule. my intelligence? I work for the gov, nuff said. when i am reminded by someone of how unsophisticated an investor/businessman I am, i first the ask remindee if they are bill gates, if they say no, then I just say sit down, you're rocking the boat.

I had hoped to remind everyone of the difference between a recession and a depression. If the other guy loses his job, its a recession, if you lose your job, its a depression. And neither of those tragedys have ever hit DC. When the Great Depression hit, DC eventually got around to creating the WPA, ergo, an agency which created more Gov jobs. I believe the Fairlington townhomes went up in the midst of all that dark despair US-wide. But more homes needed for USG employees.

And if I cajole someone to get off their hands, its just because I've paid 12.125% mortgages and 10% mortgages six years later. You buy a house in those rate climates, you just get less of one. Only the bank makes money. So like Carly Simon once sung, Even at 6+ percent and climbing for 30-year notes, Stay right here, for these are the good old days.

Luigi Fuigi

April 29, 2006 01:23 PM

I went to some open houses this weekend and (besides being the only traffic the agent had all day) the agents were practically begging me to put in an offer. Almost all were using the hook line "motivated seller willing to accept any offer below asking price". I just shrugged and told them the house was still over priced and they gave me the look of acknowledgement. Tells me its time to stay of the sidelines and let the mounting pressure continue to build. It will burst soon as desparation is setting in and the rush to underprice thy neighbor in order to get a sale will happen. Kinda the reverse of the last few years.

heather

April 29, 2006 10:35 PM

So, what do we do? Between the two of us, we make a quarter of a million dollars a year. We have 200K in savings. We rent a great place, in a fabulous area, for $2300 a month. It would sell for 600K, and the HOA is 450/month. Should we buy a place? It seems cheaper and easier to rent? Or am I missing something?

Randall

May 1, 2006 11:37 AM

Heather:

There are plenty of online calculators that can help you figure out the economic sense of buying vs. renting (see mortgageprofessor.com, or motleyfool.com, among others). However, those calculators won't give you insight into the state of the market and whether it makes sense to buy or rent NOW. The best gauge of that is whether you could rent the house you're thinking of buying at roughly the same amount as your monthly mortgage payment. If not, then the house is over-priced.

I assume you've already done this calculation and have determined, like many other people, that it doesn't make sense to buy right now regardless of your income. This seems to fly in the face of those who tell you that it always makes more sense to buy, to build equity, etc, but in a wildly overvalued market like the DC area, you'd be buying close to the peak of a speculator-driven frenzy. As many RE analysts, journalists and bloggers on this site have already commented, the inventory backlog is starting to drag prices down as the fundamental laws of economics come back into play. Houses prices are "sticky," i.e, sellers are reluctant to sell their houses for less than their neighbor sold his for 6 months ago, even though market conditions have clearly changed. That said, prices are coming down, but there's still more deflating to be done. Unless/until you find a property where mortgage = rental price of a comparable price, continue to rent and invest the difference.

littletiger

May 1, 2006 02:35 PM

I just had an agent ask me for a prequalification letter before she'd show me a property! I told her that I planned to have one for each offer, and that I would not ask my lender for one just to see a place.

That's nervy considering the place has been on the market for 27 days, has had just one open house, and is wildly overpriced--by at least 15%, probably 20%.

She has not called back.

Talk about ignoring reality!

Anti-Gov Mule

May 1, 2006 08:07 PM

Sandra,

No wonder you lost your job, you have to have your 6th grader do your thinking for you.

If you actually read my post (instead of leaning on your 6th grader), you would have realized I made a 150% profit on leveraged real estate in 18 months. Realizing the market fundamentals were turning against real estate, I cashed out (read sold high) and moved my money into the stock market (read bought low) and earned a 113% return on those profits in 12 months.

Now, pay attention or get your 6th grader, I took a 150% leveraged return and added a 113% return on top of it at a time when the Real Estate market earned 7%. I know, its a little complicated but you can figure out who won and who lost. All I know is the $650k sitting in my bank that was earned with $0 in investment in just 30 months sounds like a good return to me.

Margolis

May 1, 2006 09:41 PM

I've also been out house-hunting recently and found that while casual traffic looks good at sunny weekend open houses, they tend to be curious neighbors. Three weeks ago, I had an agent corner me as I was about to leave an Open House at the end of the showing period and asked for my opinion. I thought it was a "Hail Mary" price, but I came by to look at it because I wanted to see what yard sizes looked like in the area. I pointed out a similar row house down the street that was listed for $35K less, but was on a slightly bigger lot. He seemed surprised. Doesn't anyone do their homework???

I have to wonder about this kind of pricing strategy? Do sellers think that buyers don't know that inventory is piling up or don't search for current comps, vice comps from sales a few months ago?

Given the current frosty climate for home sales, it seems like it would be a much better strategy to price below the comps to attract multiple bidders to bring the price up rather than over-price it and let the property languish on the market and accrue the stigma of a high DOM.

Elizabeth

May 2, 2006 09:56 AM

In a slow housing market, you have to price aggressively from the start. Conventional wisdom in realty is that if you don't generate a lot of traffic and some serious interest in the first 2 weeks a property is on the market, it's going to be difficult to stand out after that. Typically, a property is categorized as a new listing for only a week, afterwhich it quickly gets buried by other, newer listings and starts to get stale.

There's some debate about when a property becomes "stigmatized," e.g., potential buyers are turned off because of the high "Days on Market" (DOM) and not necessarily because of anything about the property. Typically, sellers start to feel this stigma when a house in on the market longer than the current average in that area, but with the backlog of inventory right now, I think we're starting to see a situation where the entire local housing market is viewed with growing apprehension by potential buyers.

A sure antidote is to go back to the basics: focus on curb appeal, make sure the inside of the house is appealing to the broadest range of people, and most importantly, price aggressively from the start.

Andrew

May 2, 2006 10:31 AM

Just from walking around my neighborhood (Arlington courthouse area) this past weekend and reading the rap sheets for the opening houses, it seems like the Spring sellers have not gotten the memo regarding the change in the housing market. Every price I saw was a Hail Mary. One very modest 3br house (The best thing it had going for it was that it was only a couple of years old) was priced at 975K. There was a 4br/2 bath house 2 streets over priced at 670, which I thought was overpriced due to it being was built in the 20s and not that large. I guess all of this wishfull sellers' thinking is due to this being the first Spring of the new housing market.

Eddie

May 2, 2006 11:48 AM

Here's some common sense advice from the WSJ:

As the Market Cools, Is Now
The Time to Buy a Home?

By Terri Cullen
From The Wall Street Journal Online

Sales of existing homes edged up 0.3% in March to an annual rate of 6.92 million units. But the number of homes on the market is climbing: Total housing inventory rose 7% to a record 3.19 million units in late March, a 5.5-month supply.

WHAT TO DO: Home buyers who have been frustrated in their attempts to find new homes now have more to choose from. Home prices have fallen rapidly as the number of homes for sale jumped in once-hot markets like California, Florida and Washington, D.C.

If you plan to stay in your home for a decade or more, don't let market conditions dictate when you buy -- housing prices will likely recover from any short-term drop. If you're in the market for a second home, keep an eye on these five vacation spots, where homeowners are already slashing prices. But if you're a first-time home buyer and it's likely you'll move in a few years -- or if you need a riskier interest-only loan to afford a home -- reconsider buying now. If home prices fall and you need to sell, you could owe more on your mortgage than the home's market value.


http://www.realestatejournal.com/buysell/tactics/20060428-cullen.html

daleinDC

May 2, 2006 12:02 PM

This from the WashingtonPost real estate forum:

HOUSING MARKET DECLINING RAPIDLY

Friday's New Home Sales report added further evidence that the housing market is declining. Monthly New Home Sales showed the biggest decline in 9 years. The decline in New Home Sales was larger than the real estate mythologists predicted. The annualized New Home Sales rate declined 10.5% during the last month. (Technically, if 0 new homes had been sold during the last month, the annualized sales rate would have only declined 1/12th, or 8.3%. So some previously sold homes must have become "un-sold.") January's number was also revised downward. Had January's number not been revised, the decline would have been 12.5%. The annual New Home Sales rate has declined 21% since July. Median annual PRICES also declined to a -2.9% annualized rate of increase. Inventories increased from 5.3 months' worth to 6.3 months' in February.

Since October's peak in New Home Sales of 1.345 million/year, the rate has declined to 1.080 million/year. Unsold inventories of New Homes have risen 4 of the last 5 months, from 4.5 months worth in October to 6.3 months' worth in February. The unsold inventory of New Homes is the highest in 10 years according to Briefing.com at:

http://www.briefing.com/Investor/Public/MarketAnalysis/Calendars/EconomicReleases/newhom.htm.

Over the past year, there has been a 24% increase in new homes on the market, according to CNN Money at:

http://money.cnn.com/2006/03/24/news/economy/newhome_sales/index.htm.

Also, according to CNN Money, the current median price for a new home is now $230,400. This is down $6,900 from February 2005. In addition, the current median New Home Price is down 5.5% from October's $243,900.

In some areas the decline was much larger. In the West, the 1-month decline in the annualized New Home Sales rate was 30%, declining from 357,000/year to 252,000/year. In the West, the annual New Home Sales rate has declined 49% from its October peak of 410,000/year. This information can be found again at:

http://www.briefing.com/Investor/Public/MarketAnalysis/Calendars/EconomicReleases/newhom.htm.

EXISTING HOME SALES

The Existing Home Sales report from Thursday, March 23rd, was reported with unjustified opitimism. The seasonally adjusted sales rate actually DECLINED from the previous year. February 2006's annualized rate was 6.190 million/year, marking a -0.3% change from February 2005's 6.930 million/year rate. Meanwhile, Existing home inventories INCREASED 5.2% over the last month, and increased 30.2% over the last year. Below are links to charts from HoweStreet.com (http://www.howestreet.com/articles/index.php?article_id=2213 showing these changes.

Once again, the declining numbers are even more extreme in the West, especially in California. Existing home sales dropped 15.5% from the same period 1 year ago. The inventory of unsold Existing Homes in Calfornia is now 6.7 months' worth, compared to 3.2 months' worth a year ago (from the Orange County Register.) In Orange County, California, there are currently 10.4 months' worth of unsold inventory of Existing Homes, compared to 5.7 months' worth a year ago. The median PRICE of existing homes in California declined 2.9% from January 2006.

The Mortgage Bankers' Association purchase index also declined dramatically. The 4-week Purchase Index moving average has declined from 470 in October to 401.5 at present.

In summary, both New and Existing Home Sales are declining, with New Home Sales declining much more. Meanwhile, inventories are rising rapidly in both New and Existing Homes. The biggest inventory increases and sales declines are in bubble areas, especially California. PRICES are actually declining in some areas, most notably Southern California. Housing Starts actually increased over the last month, which will increase inventories even further, and put further downward pressure on home prices.

The Housing Bubble is definitely deflating, and appears to be deflating even faster than many predicted.

doh

May 2, 2006 08:42 PM

I have now seen a house relisted for the third time. Don't they realize that resetting the DOM does nothing to increase the likelyhood of a sale when the property is overpriced? I am awestruck by how many realtors think that buyers are just plain dumb.

Psst-if you are a seller and want to sell your house then drop your price to something that is a) reasonable and b) affordable. No one really cares about paint and corian anymore.

Holy Condos Batman

May 2, 2006 08:43 PM

I just read that Condo builders are increasing their overbuilding in the DC area. HOLY COW! Adding to the supply will do nothing but drive prices up, up, and away. See you at 20%+ appreciation next year.

Sandra

May 3, 2006 02:02 AM

Anti-
There you go again, showing your intelligence. (ignorance). Now you say you have earned $650k over 30 months with $0 investment. You are TRULY an idiot. Not only can you not follow your own previous postings but you can't even keep your story straight. (sorry not only is my 6th grader smarter than you are, he's not a blatent liar like you) If you own a home in this country you're rewarded for it by the way of leveraged appreciation and tax benefits. There are plenty of calculators out there. The only ones who shouldn't buy a home in this area right now are those people that are too far in debt to begin with or they make too little income to benefit from the tax relief.

HJanson

May 3, 2006 11:02 AM

From the Wall Street Journal's Real Estate section:

Mark Zandi, chief economist of Moody's Economy.com, pointed out that home prices have soared so high in many parts of the country that they're out of reach for many buyers. "Affordability has collapsed to where it was in the `90s, despite very aggressive lending," he says. The rapid rise in interest rates over the past few months have become a barrier for many first-time buyers, he says, and are prompting many short-term home flippers to sell their holdings. That could lead to localized crashes, which he defines as a peak-to-trough price decline greater than 10%, in markets like Washington, D.C., the Jersey Shore, Miami, Las Vegas and Orlando, Fla.

Housing consultant Thomas Lawler, former senior vice president for risk policy at Fannie Mae, notes that flattened or declining home prices are already apparent in places like Northern Virginia, Maine and Massachusetts. "They turned more quickly than anyone thought." He adds that preliminary data suggests that aggregate home prices were flat in the first quarter of this year compared to the previous quarter -- the slowest growth rate since mid-1996.

http://www.realestatejournal.com/columnists/housetalk/20060428-fletcher.html?rejpartner=mktw

Elizabeth

May 3, 2006 03:44 PM

From an article, "Blink and They're Still There" in the Washington Post today (3 May):

The article says, "Those who study local real estate markets say the homes are lingering for two main reasons: because of a housing glut in areas where builders put up large developments during the housing boom of the past five years and because of buyers who are counting on better prices as the market cools."

The article is not about buyers who hope to get a better price, but about sellers who have unrealistically priced their homes. The data clearly shows that you can't price your house now based on what your neighbor got for his house 6 or even 3 months ago, much less on last year's housing frenzy.

Conventional wisdom for a slow housing market is that you need to generate a lot of traffic and some serious interest in the first two weeks a property is on the market. (A property is only categorized as a "new listing" for one week in the MRIS.) After that, it quickly gets lost in the shuffle of other, more recent listings. If a house languishes on the market after others' homes have sold, it becomes "stigmatized," which is the kiss of death for home sellers in any market.

In a hot market you can overprice your home with marginal consequences - at worst, maybe you accept a slighly lower offer after a couple of weeks. However, in the current dropping market, you have to price aggressively from the beginning, i.e., BELOW what other sellers are currently asking. When you take this approach, at best, multiple offers will generate a bidding war and you'll get more than your asking price. At worse, you sell your house in a short amount of time.

Elizabeth

May 3, 2006 03:45 PM

BTW, the link to the Washington Post article is here:

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/01/AR2006050101751.html?nav=mb

Jan Barnett

May 3, 2006 06:10 PM

Come on people!!!
We have the power to drive this market back down to affordability! The best thing you can do is refuse to pay such stupid prices, and RENT for a year or two-- You will be able to buy the house of your dreams for a whole lot less in just a few short years.....BE PATIENT!!

Anti-Gov Mule

May 3, 2006 06:29 PM

Sandra,

Once again you are coming in broken and stupid.

Bought $203k house with zero down (read $0 invested)
Sold at $538k (508-203=305...305/203=150% return)
Invested $305k and turned it into $650k (113% return) in the stock market (I know you can scan financial websites and find plenty of stocks with this level of return to verify).

Once again, sorry you got fired.

Does your mommy know what you do after school?

timothy

May 3, 2006 06:35 PM

Sandra - Give it up before you hurt yourself.

James

May 4, 2006 12:48 AM

Think housing prices aren't overvalued? I decided to calculate INFLATION-ADJUSTED housing prices for the D.C. area going back 30 years. The result? D.C. area inflation-adjusted prices are the highest they've been in 30 years. In fact, they are a full 70% above the peak of the previous market boom in 1989. Again, these are INFLATION-ADJUSTED prices.

I have graphs of the data available at my web site (www.jparsons.net/housingbubble). Just click on the link for Washington, DC.

DCgirl

May 4, 2006 02:23 PM

Another article about the housing bust...

http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/index.htm?cnn=yes

(Follow the links at the bottom for additional articles.)

Sandra

May 4, 2006 02:28 PM

Your assumptions are just about as good as your assumptions on the DC real estate market. I've already disclosed what I do for a living and I doubt any of the 'ner do goods here have either my income or assets. Enough said. It seems like the real losers on this board are the ones that don't agree and attack those whose opinions are different from theirs. Just because you think real estate purchases in this market are a "bad investment" does not make it true. As Jan just implied in the statement "come on people, we have the power to drive this market...", sorry you do not have that power. Sorry you took your money out of this market and now you want everyone else to follow. Not everyone is that stupid. Not even on this board.

Future

May 4, 2006 02:47 PM

From the fool.com (Motley Fool's site) calculator and my personal information. There is also a good rent vs. own calculator on Lending Tree's website. Assuming a conservative 5% appreciation rate over 5 years, my tax bracket and what the market rate of my current home is.
Owning will save you $68,444 compared to renting over the 5 years, in today's dollars.



Regarding ownership for the 5 years

Total tax savings
$39,784

Total maintenance
$3,500

Selling price
$525,029

Equity
$206,349

Selling costs
$31,502


Total payments

Owning Renting

Principal and interest
$2,029 N/A

Taxes and insurance
$400 N/A

Mortgage insurance
$0 N/A




Total initial payment
$2,429 $1,815

tc

May 4, 2006 03:13 PM

From washingtonpost.com. No bad news for condos?

Rent or Buy? Markets Reach New Equilibrium
By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, March 25, 2006; Page F10
During the real estate boom of the past five years, many area renters anxious to enter the caffeinated market before it was too late stretched and searched and scraped to become homeowners.
But now, most market-watchers agree that double-digit increases in prices won't continue this year.
So is this the time to buy rather than rent?
There is no quick answer. There are a lot of individual factors -- the financial situation and lifestyle desires of each would-be buyer differ. But here are some things to consider.
In the cooling real estate market, more than a few builders are offering incentives to buyers and some home sellers are dropping asking prices.
At the same time, vacancy rates in the region's apartments have declined, rents have risen and concessions have become increasingly uncommon, according to recent surveys.
The Washington area, with its steady stream of transient workers, has traditionally been among the nation's stronger rental markets. But a growing economy and solid job growth have made the market particularly tight for today's renters.
By the end of 2005, the vacancy rate for higher-end apartments, or "Class A" buildings, had dropped to 2.3 percent, from 2.8 percent in 2004 and 3.4 percent in 2003, according to Delta Associates, a real estate information firm based in Alexandria. The vacancy rate for all types of apartments is now at 2.4 percent, said Greg Leisch, Delta's chief executive.
"We have the healthiest apartment market in the country from a developer's standpoint," he said. "From the tenant's perspective? Bad news."
The going rent for the region's apartments had been fairly stable through 2002 and 2003, but began creeping up after that, especially in the higher-grade buildings, data show. By the end of 2005, the going rate for Class A apartments were $18.16 per square foot, or $1,816 for a 1,000-square-foot apartment per month, according to San Francisco-based Global Real Analytics, which researches real estate markets.
That was a 5.9 percent increase from 2004, which saw a 5 percent increase from 2003.
The strong rental market means apartment managers are offering fewer freebies.
At the end of 2004, Washington-area tenants in an average 1,000-square-foot Class A building were getting the equivalent of about $70 off each month's rent; by late last year, the concessions had dropped to about $40, Global Real Analytics said. And with the fewest number of new apartment units in the pipeline since the 1990s, according to Delta, rents are likely to keep climbing.
Home prices, however, won't keep going up at the breathtaking rates of recent years, most economists agree. Signs of a cooling market are everywhere -- inventory is up, sales volume is down, homes are taking longer to move, price appreciation is slowing.
In fact, the sale price of condos was flat locally during the first quarter of 2006, according to a recent Delta survey. And unlike with apartment rental units, developers are planning more condos. Nearly 26,000 units are under construction or being marketed in the region now, up 78 percent from a year ago, Delta said. That translates to 2.7 years of inventory, making it unlikely that there would be "a meaningful increase" in condo prices for the next 18 months, Leisch said.
A note, however, to those who are considering paying the rent while waiting for a condo market crash.
"That could happen, if in the next three to six months we see either a significant increase in the number of projects under construction, or if there's a decline in sales velocity," Leisch said. "But we don't expect either of those things to happen."

smallbean

May 4, 2006 04:40 PM

From the Fortune Special Report:

http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/

Welcome to the dead zone
Real estate survival guide: The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others.

NEW YORK (FORTUNE) - The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.

The message is clear. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers' pockets, and ignited a building boom that bolstered the nation's economy. (To relive the frenzy, see "Riding the Boom.") But it's over. The great housing bubble has finally started to deflate.

You won't find that news in broad national statistics or the upbeat comments from the real estate industry. Thelatest official figures, for example, show both new and existing home sales rising in March, a mixed bag on prices - and a record number of new homes on the market.

But FORTUNE's on-the-ground reporting - in what up to now have been some of the nation's hottest areas - paints a very different picture: Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day - so the downward pressure will only get worse.......

But things are suddenly looking very chilly indeed in four coastal cities - Boston, Washington, Miami and San Diego - as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento. So far this year, monthly sales have fallen 11 percent to 25 percent in Miami, Boston, northern Virginia and San Diego, according to local housing experts.


smallbean

May 4, 2006 04:43 PM

Second Part of the Fortune Special Report.

http://money.cnn.com/2006/05/03/news/economy/realestateguide_2_fortune/index.htm

Unmaking the myths
Real estate survival guide: The sudden shift in the nation's housing markets is exploding some long-held beliefs. Here's the conventional wisdom you should ignore.

NEW YORK (FORTUNE) - The sudden shift in the nation's housing markets is exploding some long-held beliefs. The first is that a scarcity of buildable land on the coasts keeps a cap on supply and prevents prices from falling.

But high prices inevitably work their magic, encouraging more people to sell existing homes and sparking new construction. Sure enough, prices are already tumbling in Boston, where a swarm of downtown condos is swelling the number of properties for sale and punishing the price of all housing.

A second myth is that today's big homebuilders learned their lesson in past downturns and now launch projects only when they have firm buyers lined up. But housing starts are still running at near-record levels of some two million units a year.

Big builders, notably D.R. Horton (Research) and Pulte Homes (Research), are starting 20 percent to 30 percent of their units on spec, without signing up buyers in advance. Risky move.

A third tenet holds that home values NEVER drop in areas where employment is rising. But today some of the hardest-hit regions rank among the strongest job machines, notably Northern Virginia and San Diego. The reason: Young buyers filling those jobs can't afford the houses for sale. (See a gallery of markets that are due for a fall, and ones that will hold up.) ......


smallbean

May 4, 2006 04:45 PM

Final part of the Fortune Article:

http://money.cnn.com/2006/05/03/news/economy/realestateguide_3_fortune/index.htm

Who will be hurt most?
During the boom, condos were catnip for would-be tycoons. Now investors are bolting, developers are slashing prices, and unsold units are piling up.

NEW YORK (FORTUNE) - The most troubled sector of the housing market, the one that will fall first and fastest, is the condominium market. Typically cheaper than houses and easier to buy, sell or rent out, condos are catnip for investors.......

Builders don't have the luxury of waiting out a slump; they need to sell for what they can get. At first they hold the line on base prices by offering incentives, from free pools to flat-screen TVs. Then, as unsold units collect, they move merchandise with huge discounts.

Builders also pitch in when potential customers are having trouble unloading their current home. A typical example is the help Pedro Kritselis is getting. He had to sell his house to afford to buy a new one in Bristow, Va. But the market is so soft that he couldn't get the price he needed, so he told the builder he'd have to walk away. To keep the sale, the developer shaved $25,000 from the price of the new house. That enabled Kritselis to sell his house for $25,000 less and still afford the new home.

One northern Virginia realtor is doing good business assisting homebuyers who need to sell a house to buy a new one. Ashley Leigh, among the region's most successful independent brokers, offers the following deal: If he can't sell the old house in 120 days, he'll buy it himself at a fixed price. Leigh is trumpeting the guarantee in an ad that appears on area billboards and grocery carts at the local Safeway.......

If interested, please click on my name to see the each part of the whole article.

LA Guy

May 4, 2006 06:18 PM

Heather wrote:
>So, what do we do? Between the two of us, we make a quarter of a million dollars a year. We have 200K in >savings. We rent a great place, in a fabulous area, for $2300 a month. It would sell for 600K, and the HOA is 450/month. Should >we buy a place? It seems cheaper and easier to rent? Or am I missing something?

Yes, you missed the boat. You should've bought
quite a while ago. It will all work out in the
end and I wouldn't buy now, but you'd be far
ahead if you would've bought sooner. Why would
a couple making $250K/year rent?! You could be
paying $2300/month and owning the place plus
getting tax deductions, but you waited too
long to decide to buy. What were you waiting
for? If you'd taken some of that $200K and put
it down on a house you'd be in a much better
situation now. Don't make the same mistake twice.
Wait for the market to soften (you choose your
own definition of when that it) and buy for
God's sake. Who is your financial advisor?!


blip

May 4, 2006 08:05 PM

Quote from Sandra: "It seems like the real losers on this board are the ones that don't agree and attack those whose opinions are different from theirs."

Quote from Sandra: "You're a nasty little a***ole, no wonder you can't make a living or buy a house."

'nuff said, I rest my case.

doh

May 4, 2006 08:47 PM

TC,
Thank you for the informative post. I was reading this weekend where condo construction is back at a high rate. I guess the last line was wrong. Since that article was written in March and the one below was written in May, we can see that Leisch's prediction that a significant increase in projects under construction was wrong. That mean's, by his own words, that a condo market crash is impending. (this must be the guy who fired Sandra)

"In projects with five or more units of housing, such as condominium and apartment buildings, the number of permits issued rose by 32 percent, to 2,683 units authorized.

That comes even though the condominium market is the sector already grappling with the most new supply. Far from pulling back on their construction of new multifamily housing, builders are taking out permits to build more even faster, adding more to the copious supply"

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/29/AR2006042901741.html

doh

May 4, 2006 08:53 PM

OUCH! 72% jump in mortgage payment.

""I don't want to sound like Chicken Little here, but we're heading for a big fall," Rheingold said. "Our policy of using our homes as our banks is bad public policy, and we need to think of the long-term implications of the debt we have. It's a homeownership economy where people don't really own their homes."

Mortgage brokers say that what has been happening is a last single burst of refinancing activity, particularly by people who have adjustable-rate mortgages and want fixed-rate loans. Adjustable-rate loans usually start out at lower interest rates than fixed loans but can shoot up as rates change.

Mahesh Desai, 38, who sells software, decided that because interest rates were about to rise, it was time to refinance his house in Darnestown. He had a three-year, adjustable-rate loan at 3.625 percent, and he knew from news reports that rates that low were coming to an end.

"I'm still going to have sticker shock in my next payment, but I've enjoyed lower rates for a while," Desai said. "Guess the party's coming to an end."

His new rate is 6.625 percent, and the monthly payment will jump 72 percent. It is an interest-only loan, but he will be pressed to afford the new payment, even without paying down the principal."

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/02/AR2006050201606.html?nav=hcmodule

doh

May 4, 2006 09:06 PM

When do the April numbers come out?

Bubba

May 5, 2006 01:46 AM

Here's another "bubblicious" condo development to go along with the "bubblicious bench" from the Post article a few weeks ago: 2501 Wisconsin Ave which is known as Georgetown Heights (and is only in G'town in the broadest definition of the neighborhood - not near anything interesting except Whole Foods, a few bars and restaurants, and nowhere near a Metro stop - perhaps being near the Russian embassy is a big draw.) The following listings in that development have come on the MLS in the last week or so:

DC6028464
2501 WISCONSIN AVE NW #404
$1,999,900
2 BR 2.5 BA

DC6028171
2501 WISCONSIN AVE NW #407
$1,999,000
3 BR 3.5 BA

DC6027384
2501 WISCONSIN AVE NW #408
$1,899,900
2 BR 2.5 BA

DC6010323
2501 WISCONSIN AVE NW #208
$1,695,000
3 BR 3.5 BA

DC6028497
2501 WISCONSIN AVE NW #101
$1,499,900
2 BR 2.5 BA

DC6028456
2501 WISCONSIN AVE NW #405
$1,299,900
2 BR 2.5 BA

DC6028476
2501 WISCONSIN AVE NW #402
$1,299,900
2 BR 2.5 BA

DC6023423
2501 WISCONSIN AVENUE NW #203
$1,295,000
2 BR 2.5 BA

DC6030114
2501 WISCONSIN AVE NW #401
$1,099,900
2 BR 2.5 BA

DC6020967
2501 WISCONSIN AVE NW #105
$1,095,000
2 BR 2.5 BA

DC6036861
2501 WISCONSIN AVE NW #206
$998,900
2 BR 2.5 BA

DC6020583
2501 WISCONSIN AVE NW #301
$995,000
2 BR 2.5 BA

DC6031753
2501 WISCONSIN AVE NW #107
$985,200
2 BR 2.5 BA

DC6031877
2501 WISCONSIN AVE NW #209
$949,900
2 BR 2.5 BA

DC6032096
2501 WISCONSIN AVE NW #309
$948,000
2 BR 2.5 BA

A few initial comments. Note that these are being sold by individual investors, not by the developer as the listing agents differ across all the above properties. Also, we're hitting Manhattan prices here, folks (albeit not the really good parts of Manhattan.) $2 mil for a 2 BR 2.5 BA condo in an inconvenient part of Glover Park? That's like buying an expensive condo on the upper west side.

And some specific comments:

1) What's up with the variation in prices across these lisings? Sure some of the condos are on the 4th floor and others are on the 1st, but it seems that everyone is a bit confused about where to price their condo (altho there is interesting clustering too - and people trying to undercut others by $900 or so - big freakin' deal when you're talking about a $1.5 Mil property.)

2) Given the current condo market, who the heck is going to pay almost $2 Mil for any condo, much less one in an inconvenient location? Is someone really going to say "Wow, $2 Mil for a G'town Heights condo? That's a bargain (and/or great investment)!" They should look around the better parts of G'town and they'd find better and bigger places for less.


3) Supposing these places won't sell at their list prices (which might be a bit presumptuous), are these guys going to be able to rent out their holdings at any price that approaches their debt obligations? I'm not sure, but I doubt it. I suspect that the upscale rental market is thinner than the upscale purchase market for pricey condos.

4) Will we see even more of these on the market in the near future?

All I know is that I'm glad that I didn't decide that the next "stellar investment" was a condo in the G'town Heights development. 15 upscale condos on the market at the same time are going to be difficult to unload.

littletiger

May 5, 2006 07:48 AM

Alta at Thomas Circle, in downtown, is offering 6 months of mortgage payments. This is the first time I've seen such a large incentive advertised in downtown DC.

It is still not even 5% of the purchase price of these places, but it is only the beginning. . . .

doh

May 5, 2006 07:56 AM

Toll Brothers contracts decline 29%

By MarketWatch
Last Update: 5:31 AM ET May 5, 2006
LONDON (MarketWatch) -- Toll Brothers, the Horsham, Pa.-based luxury home builder, said the value of signed contracts declined 29% in the quarter ended April 30.

Toll Brothers also cut its estimate of home deliveries for the year, as speculative buyers quit the market and ordinary demand slackens on concerns about the direction of house prices.

Toll Brothers reported a cancellation rate of 8.5%, higher than its historic average of 7%, though it believes that figure is the lowest among major public home builders.

It said it's entering the ninth month of slower sales in most of its markets.

JJ

May 5, 2006 10:55 AM

Future,

I take it from your analysis that you are pro buying right now. I can only assume that in addition you have concluded that houses are not overpriced. If either of these assumptions are wrong I apologize.

Here is where I have fault with your analysis. You assume a 5% increase in housing prices. You are making the same logical mistake that the California economy professors made. You essentially assume an annual increase to prove that houses are not over-valued. This is a circular argument. If houses are over-valued then you will most likely not have the 5% increase.

I could play games and assume that my rate of return is greater than the tax rate plus interest rate and be able to justify any price amount for a house. But of course I would never believe my assumption about rate of return if, say, I paid $500 million for a condo.

Bob

May 5, 2006 08:54 PM

$1.5M - $2M Condo prices above are absolutely ABSURD. This just confirms my belief that real estate is TOAST for many years to come.

Just look to JAPAN and you will see what awaits our future. For those of you not familiar with Japan, they have endured a 50% reduction in real estate prices over the last decade as their bubble popped. You may scoff at this thought, but it will actually be worse when adjusted for inflation.

Remember, in a BEAR MARKET, those who sell first WIN. And we have already entered one heck of a Bear Market in real estate.

Future

May 5, 2006 09:34 PM

JJ - Looking at historical appreciation over the last 20 years, a 5% home appreciation rate in the DC metro area is extremely conservative. History shows the 20 year average to be well over 6%. Play games? Hardly!

tc

May 5, 2006 09:47 PM

doh condo market crash impending? Somehow I didn't read it in the article you posted the link for. Perhaps that's why you only posted the link and not the entire article. You cannot control the market. Here's the entire article you referred to. Dimwit.
BY THE NUMBERS
As Housing Market Slows, the Supply Continues to Grow
Monday, May 1, 2006; Page D02


This spring, the region's housing market is visibly slower than it was a year ago, with much higher inventories of homes for sale and fewer transactions. However, it appears that developers aren't dialing back their production of new housing by much, especially for large, multiunit properties.

Local governments issued permits for 8,154 new units of housing in the first three months of 2006, compared with 8,455 in the comparable period a year earlier. That's not much of a drop, but it continues a steady decline since 2003 in the number of units of new housing being put into the development pipeline. It is too soon to tell whether the pullback in permits will be enough to help stabilize housing inventory.


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One particularly worrisome element is the balance between single-family and larger properties. The number of permits issued for single-family homes was down 14 percent to 5,464. In projects with five or more units of housing, such as condominium and apartment buildings, the number of permits issued rose by 32 percent, to 2,683 units authorized.

That comes even though the condominium market is the sector already grappling with the most new supply. Far from pulling back on their construction of new multifamily housing, builders are taking out permits to build more even faster, adding more to the copious supply.

-- Neil Irwin

Sandra

May 5, 2006 10:38 PM

The CFO of the public accounting firm that I deal with on a regular basis called me today and we were discussing the DC area real estate prices. Appears the talk amongst their clients is that there are a lot of renters holding out in hopes of bringing down personal debt, while taking money out of the stock market in hopes of capturing some real estate investments if the prices come down. Also of note, the money taken out of the market is being spent to support expensive life styles. Accountants think this tax year will be especially hard on those people that have good incomes, are renting and are asset poor. Very interesting perspective coming from tax accountants.

kataqueen

May 7, 2006 12:38 AM

10 months of analysis....yet no one has discussed the true bargain in housing yet.

I can't take credit for it, a Wall Street analyst - Gary North, publishes a daily newsletter and he has already shared this secret with his readers several times over the past months. You can get his letter emailed to you daily, free, so wait one, and you won't have to subscribe to his service to research old articles, as you will see his discussion come round again.

oops, I know why it hasn't been discussed. perceived social standing, or lack thereof. What rocks your world.

ya see, the greatest bargain in housing right now is manufactured housing. I'm talking foreclosed or estate sale doublewides already parked in trailerparks.

They aren't expensive to begin with, and yet they are modern, energy efficient and BIG. They can be parked in exclusive parks, like age 55 (retirees) and older parks where no kids are allowed (except to visit gramps) or open parks. Either place, the incumbents can't or won't afford to pay much, so ground rent is dirt cheap per month. And then you have the estate sales, where the relatives can't wait to get rid of gramps trailer, often for a song, or distress sales, where the nefarious lending practices of some mobile home makers cause many a lower income family to depart the trailer soon after buying it, and then a barely lived in trailer goes relatively dirt cheap to the next owner (investor).

But that would be a heckuva water cooler conversation, wouldn't it?, to tell your co-workerbees that you lived in a trailer park, because the numbers just made perfect analytical sense in today's housing market.

But you would be in good company, because the (recent) purchaser of one of the largest mobile home manufacturers (and I think he even has or is considering buying another maker) is none other than the man who analyzes rates of return to here and beyond, our hero - Warren Buffet.

And do buy the land in the park if you can, fairy tales do come true, it can happen to you....

http://www.sptimes.com/2006/04/22/Floridian/Briny_Breezes_cools_t.shtml

JOhnson

May 7, 2006 11:24 AM

Good trilogy of articles about the housing market on CNN/Money (see link below).

Buyer beware: look to see where DC ranks in its list of dead, dying, and safe real estate markets:

http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/index.htm

Andrew

May 8, 2006 01:32 PM

Future,

While it is reasonable to expect that Dc real estate will continue to increase at an average of 6% annually, the word to focus on is *average*. It takes either a large number of years slightly below 6% or a few years way under 6% to average out a few years of 20%+ returns.

To play around with the numbers a bit let's assume that 6% average and apply it to the average price circa 2000 ($250,000ish if I recall). A 6% annual return of the initial investment over ten years will yield a total of about $447,000. So the 6% average here tells us that in 4 years DC area homes will be worth about $100,000 less than they are now according to the current average of about $550,000 according to the Northern Virginia Association of Realtors.

Now this picture might be too bleak, since it's reasonable to assume that real estate was undervalued in 2000, however to assume that today's prices are not inflated is more likely further from the truth.

Matt S.

May 8, 2006 02:40 PM

Since I purchased a house in July '05 I have been watching this forum non stop since it started.

Well today, I can say the bubble trully bursted in my new development in Prince William County. The builder, Centex, overnight has reduced the base price on my model by $80,000 from $665,000 to new price of $585,000. What's scary is that this development is still new (2nd year) and is not scheduled to be completed untill late '08. It seems as if Centex is slashing their pricing on all of their developments within northern VA. Using cached google searches you can see previous prices (as recently as yesterday May 8th) vs. today's prices in different Centex developments. These price reduction are substantial and are going to have a ripple effect in local real estate. Houses in the same development that are for sale by private owners are now out of whack, other new constructions in surrounding neighborhoods are high= meaning other builders will have to reduce their prices, and other comps outside of new construction (few years old) are going to be priced high.

From a quick cached search on google, Centex has even dramatically reduced their base prices on condos as well. While the price decrease in my community is nearly 12% a close condo community (Manassas Park Station) has been reduced from $344,990 to $292,990 for a 15% price reduction.

*For Reference- Current Manassas Park Station Condo Prices, http://www.centexhomes.com/Washington-DC/N45635.asp

Yesterday's, May 8ths Manassas Park Station Condo Prices, http://72.14.207.104/search?q=cache:U_oO-9ZYHekJ:www.centexhomes.com/Washington-DC/N45635.asp+centex+manassas+park&hl=en&gl=us&ct=clnk&cd=1

I'm surprised at the large price reductions in the base prices across the board. This is now a step beyond the incentives I have been seeing (ie, finished basements, $20K in closing cost, etc) and these newly lowered base prices do not reflect any incentives, if any, that are included. And this is supposed to be the "selling season", one can only wonder what will happen come winter time?

dodson

May 8, 2006 03:12 PM

On Friday, Toll Brothers adjusted downward their estimate for new house contracts this year based on the slower-than-expected spring market. This is important as new home sales are considered a leading indicator of where the market is heading (vice existing home sales which are considered a lagging indicator). Other builders are also reporting an increased number of contract cancellations, due in part to investors and speculators trying to get out of the market before it sinks any further:

HORSHAM, Pa. - Toll Brothers Inc., a leading builder of luxury homes, said Friday its signed contracts fell 29 percent in its second fiscal quarter, and cut its full-year home deliveries forecast.

For the three months ended April 30, Toll projected preliminary contracts of roughly $1.56 billion, down from $2.2 billion in the year-ago period. Backlog for the quarter rose 3 percent to roughly $6.07 billion from $5.87 billion a year ago.

Toll Brothers also forecast it would deliver between 9,000 and 9,700 homes in fiscal 2006, a reduction of 200 homes from its previous outlook.

Thompson

May 8, 2006 03:47 PM

The following listing gave me a good laugh:

If you look up AX5556184 (534 Duncan Ave, Alexandria) on ZipRealty, you'll see that this dumpy little rowhouse has been on the market for more than 60 days at the "Hail Mary" price of $459 (2 other rowhouses on the same street sold for $369K and $389 in the last 4 months) and what has the seller done? INCREASED the price by $20K! This is NOT because the house has been renovated since the listing says the floors need to be refinished and the appliances need to be replaced. In fact, my dog and I walked by this house over the weekend and the seller apparently doesn't believe in "curb appeal" - or even basic yard clean-up, for that matter. The crappy yard made me shudder to think what the house looks like inside: Probably week-old dirty dishes in the leaky sink, and smelly socks strewn about the unfinished wood floors.

But I did get a good laugh from the listing and the fool's hope that not only does he NOT have to maintain the house, but he can overprice it once, then jack up the price again when it doesn't sell. I guess this falls under the "it's so stupid, it just might work" strategy. good luck...


charles

May 8, 2006 04:27 PM

Warren Buffet and Berkshire Hathaway VP Charles Munger weighed in on the housing market at their shareholders meeting over the weekend:

Buffett: Real Estate Slowdown Ahead

The "Oracle of Omaha" expects the housing market to see "significant downward adjustments," and warns on mortgage financing.

By Jason Zweig, MONEY Magazine senior editor
May 8, 2006: 3:29 PM EDT

OMAHA (MONEY Magazine) - At this weekend's annual meeting of Warren Buffett's Berkshire Hathaway, security is tighter than usual, with several entrances to the parking lot of the Qwest convention center closed...

...Their views on housing prices and the energy and commodity markets may ruffle some feathers.

On the real estate bubble

Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."

On mortgage financing

Munger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it. Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."

Article from Money Magazine: http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm?cnn=yes

doh

May 8, 2006 09:46 PM

Buffett: Real estate slowdown ahead
The Oracle of Omaha expects the housing market to see "significant downward adjustments," and warns on mortgage financing.
By Jason Zweig, MONEY Magazine senior editor
May 8, 2006: 3:29 PM EDT


OMAHA (MONEY Magazine) -
...But their views on housing prices and the energy and commodity markets may ruffle some feathers. Buffett played his usual role of the talkative, cheery extrovert, speaking in perfect paragraphs, while Munger took the role of the laconic, crotchety critic whose favorite sentence is "I have nothing further to add."

These are not just their stage personas, but how they normally think and speak. What follows is an edited and approximate transcript of their remarks.

On the real estate bubble
Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."

On mortgage financing
Munger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."

http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm

doh

May 9, 2006 09:05 AM

Sold -- or Not: When Home Buyers Walk
Some Will Give Up Thousands to Get Out of This Market

By Sandra Fleishman
Washington Post Staff Writer
Saturday, May 6, 2006; Page D01

...Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship -- more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places...

...The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago...

..."I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less,"...

REWatcher

May 9, 2006 09:24 AM

Finally! A comment from Sandra that doesn't disparage other bloggers or use expletives!

StG

May 9, 2006 09:31 AM

NVAR numbers have just been released for April and it's safe to say that the spring "sellers market" is officially a bust:

April 2006 Market Statistics for N. Virginia:

http://www.nvar.com/market/marketstats/apr06/index.html

Alexandria City SFH

Contracts -29%
Settlements -38%
Listings +242%

Arlington County SFH

Contracts -32%
Settlements -9%
Listings +145%

Fairfax County SFH

Contracts -35%
Settlements -22%
Listings +307%

Loudoun County SFH

Contracts -46%
Settlements -40%
Listings +286%

Prince William SFH

Contracts -45%
Settlements -35%
Listings +316%

Condos/Townhouses

Loudoun

Contracts -33%
Settlements -20%
Listings +517%

Prince William

Contracts -39%
Settlements -32%
Listings +607%

doh

May 9, 2006 12:52 PM

Buffett Predicts A Housing Bubble Burst At Annual Meeting

May 7, 2006 9:46 a.m. EST


Matthew Borghese - All Headline News Staff Writer

Omaha, NE (AHN) - Financial giant, Warren Buffett has given the world his economic predictions at the annual meeting of his company, Berkshire Hathaway.

Buffett and Berkshire Hathaway Vice Chairman Charles Munger held their traditional question and answer session with shareholders in Omaha, Nebraska.

According to Buffett, the U.S. housing market is coming upon a correction, saying, "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets."

Munger adds, "There is a lot of ridiculous credit being extended in the U.S. housing sector."

Buffett says that Miami-Dade and Broward counties are seeing "a rise in unsold inventory and stagnation in price."

Buffett believes, "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it."

tc

May 9, 2006 03:34 PM

settlements (actual home closings) are UP not down for Single Family Homes.
http://www.nvar.com/market/marketstats/apr06/index.html

Prince William
2006 listings - 4200
2005 listings - 1009 up 316.3%
2006 settlements - 4376
2005 settlements - 2813 up 52.3%

Loudoun County
2006 listings - 3697
2005 listings - 957 up 286.3%
2006 settlements - 3197
2005 settlements - 2092 up 52.8%

Fairfax County
2006 listings - 5633
2005 listings - 1381 up 307.9%
2006 settlements - 7330
2005 settlements - 4468 up 64.1%

RichardC

May 9, 2006 04:57 PM

The Wash Post article on rapidly rising housing contract cancellations in the DC area is really incredible:

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/05/AR2006050501516_pf.html

These cancellations are going to further exacerbate the backlog of housing inventory already on the market. And if builders have to drop prices on new houses, that is going to put more pressure for sellers of existing houses to drop prices as well, resulting in a double-whammy of high inventory and decreasing prices to further lower prices. This won't happen overnight as housing prices are notoriously sticky, but it will happen -- it is happening. The laws of basic economics cannot be suspended indefinitely.

Thom

May 9, 2006 07:02 PM

While no one will shed a tear for investors who lose money in this sinking market, those who will really get soaked are families who had to over-stretch to buy a house or have to sell in this deflating market.

We're seeing investors quickly dump their properties (and increasingly back out of contracts altogether - see the recent WashPost article) to salvage what they can before the market drops further. However, families generally need more time to put their house on the market, thereby losing valuable time and money and increasing the chance that they won't be able to sell when inventory is increasing.

doh

May 9, 2006 07:35 PM

Now that we have erased all of 2005's gains, how long after the April numbers will it take to erase 2004's gains also?

doh

May 9, 2006 10:42 PM

A Chill Is in the Air for Sellers

Many Americans who planned on real estate as their path to wealth are beginning to find that there are limits to how high is up.

Skip to next paragraph
Multimedia

Graphic: Toward a Buyer's Market Blame market forces. As higher interest rates dampen demand in cities and suburbs that only a year ago were battlegrounds for fierce bidding wars among numerous buyers, sellers are grudgingly lowering their prices to drum up interest.

A house at 57 Marina Boulevard in San Rafael, across the bay from San Francisco, was originally listed at $1.45 million. The owner recently dropped the price to $949,000 when a competing house on the same street lowered its price to $959,000, from $989,000. In Marin County, the prices of about a quarter of all listings have been reduced. County records show that 57 Marina Boulevard was sold in February for $700,000, so the owner, Dan Marr, is unlikely to lose money even at the lower price, though he may not make as much as he had hoped. "I don't want to talk about it," he said.

It is getting tough out there for sellers. What is happening in Marin County is being repeated in cities and suburbs across the United States. Nearly a year after the sales of homes peaked, buyers are wresting control from sellers in many areas as inventories of unsold homes have grown, in some markets doubling.

http://www.nytimes.com/2006/05/09/business/09home.html?_r=6&oref=slogin&oref=slogin&oref=slogin&oref=slogin&oref=login&oref=login

Alan

May 10, 2006 08:48 AM

This is an excerpt from a very sobering article from CBS MarketWatch (for full article, see link below):

PAUL B. FARRELL
Speaking truth or crying 'wolf'?

Last Update: 6:02 PM ET Mar 13, 2006

LOS ANGELES (CBS.MW) -- Back during the '70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I've worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.

But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm.
But when it gets up close and personal -- like my family's home -- well, suddenly I'm shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us -- from San Francisco to San Diego -- is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs investment banker John Talbott in his new book, "Sell Now! The End of the Housing Bubble."
Next time you're in a bookstore check out his top 130 metro areas. The chapter's titled, "Are You in Trouble?"

Warning: Chances are you're in big trouble, or in denial.

And folks, this is not just an isolated West Coast phenomenon. Talbott points out that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer: "Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B0CF65944%2D4955%2D4F0B%2DACCB%2DD163F5758FAA%7D&siteid=mktw&dist=

Brandon

May 10, 2006 09:12 AM

Yesterday's New York Times article about the housing chill (see link below) uses ZipRealty's function to track reduced asking prices and finds a 30% reduction in asking prices in some areas. This is an indicator that closing prices are also falling and that median prices are starting to tumble as well. We're already seeing lower median prices in almost all DC/NoVA/MD counties.


http://www.nytimes.com/2006/05/09/business/09home.html?ei=5087%0A&en=15fec3cc779315cc&ex=1147320000&pagewanted=all

MarkG

May 10, 2006 09:16 AM

Think about it. 40% decrease in spring, which is the peak season for real estate. What do you think would happen when the summer's gone and the fall comes? Take the CNN's advice, get out of the market now before it's too late:

"If you're a speculator ... get out now. So don't repeat the mistake that tech investors made during the dot-com bubble. As stocks spiraled downward, they held on, thinking that the market would bounce back quickly. Just accept that you're going to lose money on that Miami deal."

http://money.cnn.com/2006/05/04/real_estate/realestatetips_selling/index.htm

doh

May 10, 2006 11:27 AM

Sales down 36%
Inventories up 308%
Median prices continue their slide.

Nothing but good news in April.

doh

May 10, 2006 02:55 PM

Rate-hike winners and losers
By Bankrate.com

The headline "Fed raises interest rates" has become old hat since 2004, when the Federal Reserve first began ratcheting up its benchmark federal funds rate.

But each quarter-turn of the interest rate screw creates a fresh impact on consumers, although it's not felt evenly by borrowers or savers. It depends on which loan you have or which savings product.

To sort out the effects of the May 10 interest rate hike, Bankrate takes a look at each of the most-common borrowing and saving products and tells you whether the holders are winners or losers.

Here's a closer look at who the rate increase will affect, and when:

Adjustable-rate mortgage holder or shopper: Loser
Rates on adjustable-rate mortgages, or ARMs, have been rising as an indirect consequence of the Fed's rate increases. If your ARM adjusts monthly or every six or 12 months, the rate almost certainly will rise when the adjustment period arrives. If you recently got a hybrid loan such as a 5/1 ARM, in which the initial rate lasts five years, your rate won't go up immediately.

Fixed-rate mortgage shopper: Loser (probably)
If you already have a fixed-rate mortgage, the Federal Reserve's rate increase won't affect your monthly house payment, so you don't lose anything because of this rate increase. It's a different story if you don't have a fixed-rate mortgage yet and you're shopping for one. The Fed's increases don't directly affect fixed mortgage rates. In fact, sometimes they move in opposite directions.


But so far this year, long-term mortgage rates have risen roughly the same amount as the federal funds rate, albeit with lags. Since late January, the Fed has raised the federal funds rate 50 basis points. Over the same time, the average rate on a 30-year fixed has gone up the same amount -- 50 basis points -- in Bankrate.com's weekly survey.


Bond and mortgage markets will parse every utterance by a Fed official for hints as to when the central bank will stop raising short-term rates. When they become convinced that a pause or halt is imminent, it's anyone's guess how long-term mortgage rates will react.

Home equity line of credit borrower: Loser
Home equity lines of credit, or HELOCs, feature variable rates that move up and down roughly with the prime rate. The prime rate will rise immediately. If you have a HELOC now, the rate might adjust upward in the next one to three payments, depending on how often the lender adjusts the rate. The average rate on a $30,000 home equity line of credit was 7.32 percent at the beginning of the year and 7.9 percent May 3.

Home equity loan shopper: Loser
Homeowners who already have home equity loans don't have anything to worry about, because these loans have fixed rates. If you have been waiting to get a home equity loan, keep in mind that rates have been rising gradually this year. The average rate on a $30,000 home equity loan was 7.44 percent at the beginning of the year and was 7.63 percent May 3. The trend is slow but upward.


This is all excellent news for Home sellers.

smallbean

May 10, 2006 04:58 PM

tc: I don't know where your numbers are coming from, but this is what I have leant from their market reports for SFH in the 3 counties you mentioned:

Prince William
2006 settlements - 2171
2005 settlements - 2813 up down -23.7%

Loudoun County
2006 settlements - 1583
2005 settlements - 2092 down -23.7%

Fairfax County
2006 settlements - 3631
2005 settlements - 4468 down -18.3%

doh

May 10, 2006 08:57 PM

TC is smoking dope, for example: the actual numbers for Fairfax County SFH is 2005:2003 2006:1293 a 36% drop in sales. Nice try loser!

doh

May 10, 2006 09:12 PM

Silly TC, he got his years reversed.

Jim

May 11, 2006 02:37 PM

Anything telling here that NVAR did not post a Market Summary report this month? Or does this always lag the individual county reports?

doh

May 11, 2006 09:50 PM

Jim,

Until last month, they released them simultaneously. It takes a lot longer to put a positive spin on a declining (rapidly) housing market. They don't want to push any bad news since they are biased towards a rising housing market.

Ernest

May 12, 2006 05:54 AM

Jim:

NVAR's Market Summary lags their stats by about a week. What is interesting, however, is that NVAR doesn't seem to be heavy on press releases these days. Since about Feb, I've noticed that NVAR has been pretty quiet on the PR front -- if you don't have anything good to say about your industry, don't say anything at all.

Bubba

May 14, 2006 01:09 AM

Even the NoVa branch of the Natl Association of Realtors realtor cheerleading squad can no long sell the DC/NoVa real estate market as being strong. Reading through the nvar.com market summaries for March and April are revealing. First, there are statements like "One accurate observation is that this spring's real estate market does not parallel that of last year" from the April report. Second, up until March, almost every summary referred to the year over year price gains - those types of references have been notably absent in the last couple months. And the summaries note the dramatic increase in the number of listings and fall in sales. We're talking huge, HUGE, increases in inventory here folks. It's a perfect storm of fewer sales and more listings. At what point do you, as a seller (e.g. DC5333974 listed for $785K with "Preferred august closing" - LAST august, the idiot, since this has been listed since last summer), decide to start cutting price? Where does it end when buyers dry up and/or competition for those buyers gets fierce? As another poster noted, we're in the middle of the "hot" spring season. What happens as this season passes, with inventory ticking up, up, up and we hit the "slow" season? One could argue that people who bought in the last few years are fine since prices have gone up so much. True if you bought in 2002, 2003, 2004 but a heckuva lot of people bought last summer and are looking at a serious negative equity position. Yikes!

Monika

May 14, 2006 09:28 AM

We're now more than half-way through the "spring sellers season," but it's clearly not a sellers' market. I don't track NVAR's numbers, but can tell from the number of listings that the housing backlog is increasing. What happens when people don't sell their houses this spring, as they hoped? Only two ways to go: take it off the market or lower the price.

I pity the seller who still has his/her house on the market this summer or fall...

Bubba

May 16, 2006 11:53 PM

One thing I'm curious about is the way that real estate agents in the DC area are dealing with the tighter market. The last few years, my dog could have sold a house if she were to hold an open house and bake some cookies (sure she's pretty smart since she's a border collie, but she still eats raw garlic so she's not that bright.) But now we're dealing with a market where it's important to price and market things correctly. Can one still write clever alliterations like "big beautiful bodacious abode with beneficial beautiful boutique benefits" and then, kazaam, sell the house in a week? Anyone know if the tighter market is causing a shake-out in the real estate agent market? Personally, I received a mailer from an agent about dealing with the "current housing market crash." Not that this made me feel better about the agent who sent it, but it was interesting.

DD

May 17, 2006 10:27 PM

The following is a summary of an excellent article from Smart Money magazine and referenced in an article in the WashPost this weekend (see link below to the whole article). These points are especially relevant for both buyers and sellers to keep in mind in the current sliding market:

Ten Things Your Real Estate Broker Won't Tell You

By Michael Kaplan

1. "Your open house is really a party for me."

While open houses are promoted as a great way of finding a buyer, a National Association of Realtors study found that their success rate is a mere 2%. Having an open house serves another important purpose — for the broker. It gives him a database of clients.

2. "My fees are negotiable."

Sellers should shop around for broker's fees. The internet has usurped a lot of the work a real estate agent does, so you shouldn’t have to pay the kind of commissions you used to pay for their services.

3. "Think you've had no offers? Actually, there've been several."

Legally, the broker you hire to sell your home is obligated to tell you about all offers that come in. In reality, some don't. Perhaps he thinks the offer is insultingly low for you, but more likely, the broker thinks it's too low for his own purposes. He wants to hold out for a bigger commission. Or else there's an outside broker (or "co-broker") circling your house, and the primary broker is waiting for one of his own clients to make an offer so he can keep the full 6% to himself. Check the listing agreement drawn up when you hire the broker; if the promise to disclose all offers isn't listed explicitly, insist that it be added.

4. "I talk about you behind your back."

Legally, brokers are obligated to provide their sellers with any information that can help them get the best prices for their homes. If you tell the broker that you're willing to pay $500,000 but want to offer $450,000, they'll pass that on to the seller. They have to.

5. "Sometimes I forget whose side I'm on."

The past 10 years have seen the proliferation of the buyer broker, agents who are supposed to work strictly in the buyer's interest. Unfortunately, things don't always unfold so nicely. While buyers may think they're getting a broker who isn't commission-hungry, many buyer agents are just that: They usually get about 3%, the same amount any broker typically earns when he gets involved with another agent's listing.

6. "I know zilch about zoning."

Real estate agents love to suggest big ideas to prospective buyers — say, removing trees to enhance a view, or even squeezing a rental unit out of a roomy garage — meant to happen once the deal is done and they're out of the picture. Before you buy into your broker's creative thinking, check with your local zoning commission.

7. "I won't let termites — or pesky inspectors — kill a deal."

If a broker is selling a house, you figure he knows the place pretty intimately — after all, he talks a good game about the new kitchen, the big closets, the heated garage. What you need to worry about, though, are the home's features that he keeps to himself. You'd figure that the home inspector, who comes to check out the place before you close the sale, might notice those things. And he will — if he's not in cahoots with the broker.

8. "I'm not a lawyer, but I play one in your house."

Most states strictly regulate the contracts used in real estate transactions, stipulating the use of boilerplate agreements that offer little room for creativity — but some brokers can't keep their clause-adding instincts in check. Whether you're the buyer or the seller, it's worth the legal fees, he says, to get the offer contract reviewed by your lawyer before you sign.

9. "My Web site is a dead end."

One common flaw: posting houses that sold long ago. While the mistake can be simple negligence, others think that it's a bait-and-switch-style ploy.

10. "You may not need me at all."

Brokers like to create a lot of mystique about selling homes, insisting that the process is complicated and best left to professionals with multiple listings and loads of house hunters. Not so, say homeowners who have sold their homes themselves (about 20 to 30% do so each year). Properly priced and advertised, a house sells itself. In a strong market with low interest rates, the asking price can be up to 10% above what the appraiser thinks it will go for; in a weak market it might be wise to price at or below the appraisal.

http://www.smartmoney.com/consumer/index.cfm?story=tenthings-february02

Indra

May 17, 2006 10:38 PM

Thanks for the article, DD. One major point that is missing, however, is Rule #1:

NEVER TRUST YOUR REAL ESTATE AGENT FOR FINANCIAL ADVICE. In other words, never believe your agent when he/she tells you, "Now is the best time to buy a house." When houses were waaaaay over-priced last year, agents would tell you to buy now or risk being outpriced of the market forever. Similarly, in a housing slump, agents will tell you to buy now because housing prices never drop (we're already seeing the fallacy in that).

The bottom line: Agents only get paid when you buy a house, so to them, of course, now is always a good time to buy a house, regardless of its value or what sense it makes for your own personal financial situation.

Bob

May 18, 2006 12:25 AM

Unfortunately, the charts will not post. From itulip.com. Bottom line - real estate will get slaughtered.

Housing Bubble Correction

Fifteen Years to Revert to the Mean

Housing bubbles don't collapse suddenly. They go through a long series of self-reinforcing deflationary stages that typically last five to seven years. Given the extreme and unprecedented nature of the current housing bubble, I expect a ten- to fifteen-year downturn to follow this boom. The government will step in with all manner of supports and bailouts along the way, similar to those that created the bubble in the first place, so the exact trajectory of the decline is impossible to predict. Here I estimate how and over what time period the decline may occur.

Chart 1 above shows that housing prices are strongly correlated to the unemployment rate. Housing prices fall as unemployment rises, and vice versa. Given that 43% of all jobs created since 2001 are housing (bubble)-related, a decline in housing-related payrolls can be expected to reinforce housing price declines in the bust part of the cycle. The rate of home equity extraction is a good proxy for the housing market itself. Home equity extraction tends to rise in line with property values and declines on the way down; no home owner wants to borrow against a deflating asset, and no bank wants to secure a loan against one either.

We'll use home equity extraction as our yardstick to project the bust. Thanks to my friend Paul Kasriel at Northern Trust for the original of Chart 2, which shows home equity extraction from 1950 until 2005. I have modified it to show a possible trajectory of home equity extraction decline in seven steps, A through G, from now until 2020. While I'm fairly confident in the length of the entire process, the length and timing of each step is subject to a wide range of error.

Step A: You are here. Whether the rate of home equity extraction implodes from here (as shown) or decreases more gradually is a matter of debate, although in past boom-bust cycles, the bust rate of decline has been significantly more rapid than the boom rate of growth. What is not debatable is whether the rate of home equity extraction will revert to the mean rate of about zero, from the current rate of more than $250 billion annually. It will.

In fact, the rate of home equity extraction will tend to overshoot the mean to reach an extreme negative rate of equity extraction (building equity) that's twice the rate of positive extraction that occurred during the boom phase. This relationship occurred in the previous two cycles, which bottomed in 1982 and 1995, respectively. This implies negative equity extraction of minus $500 billion per year at the cycle trough. Chart 2 shows a more optimistic prediction of negative $250 billion occurring between 2015 and 2020. This more prosaic estimate accounts for government efforts to mitigate the impact and minimize the overshoot, by offering specialized loans, making direct purchases of securitized mortgage debt, and so on.

Step B: As housing prices begin to decline, sales will continue, though more slowly and less frequently. Old habits die slowly. One year into the decline, housing speculators will have left the market, but home owners will generally still believe that prices will either resume their rise or at least flatten out, not continue to decline. Remember the first year of the stock market bubble decline, when most people hung in there until they'd lost all of their money? The first lesson of behavioral finance is that the most common mistake made by market participants is to hang on too long and fail to cut losses.

While home owners at this stage will borrow less against their houses, and loans will be more difficult to come by, the average home owner will still make frequent trips to Home Depot or hire contractors to make home repairs and improvements, believing they'll "get their money back" in an increase in the value of their home at least equal to the cost of fixing it. Some home owners will put their home up for sale—if they purchased early enough in the boom so that they can still realize a profit, even selling at five to twenty percent below the peak price.

Step C: After prices have declined for two years, large numbers of buyers who purchased near the top of the market will begin to feel the psychological effects of being underwater on their mortgage. They will be less inclined to borrow money, or to spend money fixing up their home, as home improvement value increases will be swallowed up by general market price declines. There will still be profits to be made by those who bought very early in the previous boom cycle, but fewer people will have this option.

As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.

Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.

Step E: Five years into the downturn, rising unemployment will begin to more seriously affect the market, as indicated in Chart 1. As unemployment rises, homeowners will leave housing bust regions to move to areas where there are more jobs. Many houses will be sold at a loss, or even abandoned, as the market price falls below the loan value. Given the choice between paying cash out of pocket to sell their home or leaving the keys with the bank, many home owners will make the latter choice.

Step F: Ten years into the downturn, real estate will be widely regarded as a terrible, "can't win" investment. McMansions will be subdivided for rental as multi-family homes.

Step G: Ten to fifteen years after the start of the decline in housing values, prices will bottom out, setting the stage for the next boom. Time to buy.

Bob

May 18, 2006 09:01 PM

Bubba,

You say that "One could argue that people who bought in the last few years are fine since prices have gone up so much."

I wouldn't be so sure about that. More likely only those that bought before the bubble took off ,5 years ago or more, will come out OK. Let's not forget that this is the mother of all real estate bubbles. Buyers have dried up and we are already seeing price reductions of 30%. Sellers who are willing to drop their prices quickly and get out NOW will do the best. Otherwise forget it. Prices will only continue to collapse and those that bought 5 years ago will be lucky to get out with no loss if they continue to hold on.

I repeat, what we have just witnessed was the mother of all real estate bubbles, similar to the Japan bust of the last 14 years (RE prices are down 60% from 1992 peak). We are talking about an enormous speculative bubble here, NOT a cyclical runup of housing prices. When speculative bubbles pop, they ALWAYS retrace the entire upward move. This fact does not bode well for anyone who has paid the inflated prices of the last 5 years. There are so many people right now who own several properties bought in the last 5 years who think that they are millionaires. Most are in for a rude awakening when their paper profits completely evaporate and many will be forced into bankruptcy as a result.

Wait for a "Death of Real Estate" article on the cover of Newsweek magazine (similar to the "Death of Equites" article circa 1980) in about 10 to 15 years from now, then it will be time to start buying real estate again. In the meantime, forget the garbage that RE agents are spewing (it is their livelihood after all) and don't trust any stats other than your own.

ZIS

May 21, 2006 08:00 PM

This is a great forum. It's clear the new home and condo market in the DC region is taking a by the fact that buyers are backing out of new construction contracts and builders are offering up to 100K in rebates/incentives to attract buyers. But what about the resale market do prices there follow the same path as new construction. It seems that inventory is up but sellers seem to be asking a lot $$ and offering a little.

I recently toured 20 townhomes in reston and only saw one I'd actually consider making an offer on? Is it a buyers market and do the sellers and their agents know this yet?

Jim

May 21, 2006 09:12 PM

Friday's "Charting the Market" article in the Wahsington Times struck a chord - the chart in the article is not online, but shows a sickening (for sellers) divergence in the trend line this year vs. the last 3 - sales in April went _down_ from March, which were already down from the past 3 years. Also, Mr. Sicks stated that 20k new homes went on the market last month - looks like the fun times (for buyers) are just beginning.

Slight drop in prices as sales slow
By Chris Sicks
May 19, 2006


Home sales slowed last month in the Washington metropolitan area, falling to 9,372. It was the slowest April in six years.
Sales were down 27 percent compared to April 2005. Sales were even down compared to March, which is uncommon. Most years, April is a busier month than March -- but this is a very different year.
If you've tried to sell a home recently, you know. Home sales have slowed dramatically.
The slowest market of all was Loudoun County, where homes took an average of 136 days to sell. That is six times longer than it took to sell a home last year.
Only Prince George's County experienced relatively quick sales last month.
Nearly 20,000 homes were placed on the market in April. Despite the fact that the seller's market of 2000-2005 is now history, plenty of people are still trying to sell.
But, with sales down by 17 percent in Maryland and 37 percent in Virginia, new listings aren't going to sell very soon.
The surplus is having an effect on prices. When homes sell quickly, they usually sell for more money, but when homes are selling as slowly as they are now, they often sell for less.
In most jurisdictions, homes sold for 97 percent of the asking price last month. A year ago, homes were selling for 100 or 101 percent of the asking price in most markets.
The change is probably due to two things: Some sellers are still reaching for the stars when they set their asking price, and buyers aren't getting into bidding wars that push prices higher.

http://www.washtimes.com/fhg/20060517-111231-3949r.htm

Bubba

May 22, 2006 12:27 AM

Bob,

I'm as bearish as you about the state of the housing market (perhaps somewhat less so, but same basic sentiment) so I don't want to argue fine points. However, I think that one could argue that, after the mediocre performance of DC real estate over the 90s, properties here were somewhat undervalued in the late 90s relative to the historical trend. Around that time, one could see people realizing (not in unison but over time) that real estate prices were somewhat low due to 1) improvements in the city (Cap Hill, Logan Circle, and U St have undeniably undergone significant renaissances); 2) low interest rates; 3) innovative (i.e. risky... irresponsible?) loan products; 4) poor returns in other markets (i.e. dot com bust in the stock market.) As such, it would be reasonable to see prices appreciate somewhat out of line with their historical averages over the short term. My opinion is that this rationale ran out of steam around 2003 or, perhaps, 2004. That's why I suspect that people who bought at or before those times will be ok. "Ok" does not mean that they'll be rich, but they won't be taking their check book to closing to pay the bank when selling their house (gentle reader, ask your parents about this which has not historically been an unheard of occurrence.) I don't know that for sure, but I certainly would be willing to buy any house in the DC area at 2003 prices if offered (I suspect that most other readers of this thread would agree.)

Now, I do think that things got completely out of hand over the last year. Spring 2005 was complete insanity. So we overshot where prices should really be. (I bet that if you look at historical appreciation and plot it through the 2000s, you'd find that we passed the appropriate value, after the weak 90s, around 2003 or 2004.) If that's true, and if my earlier observations are right, then we'd be looking at a fall in prices somewhere around 20-30%. That seems pretty reasonable to me. Of course, things don't work smoothly with an immediate adjustment to the new prices, so who knows how we'll reach an outcome like that.

I do also agree that no one in the real estate business, not the NAR, the NVAR, the GCAAR or any agent, builder, etc., is an objective analyst of the real estate market. Frankly, I think that it's stunning that the press gives so much ink to "economists" from the NAR (believe me, these guys aren't economists.) The conflict of interest is like talking to Frank Quattrone about internet IPOs in the late 90s, but even worse since the SEC claims to oversee conflicts of interest in investment banks, but no such regulator exists for realtors.

But I also think that the story that Bob posted from itulip.com is pretty silly. Sure, the writer was just proposing one scenario, but it's really reasonable to consider other scenarios. We've never been in a situation like this, so any prediction that purports to predict the future has to be viewed through a seriously critical lense. At the very least, ask yourself the following question - if you were offered a house in (fill in the blank with your favorite DC area neighborhood) at a 2001 price, would you buy it? A 2002 price? 2003? 2004? 2005? 2006? Where do you really feel that prices got out of hand? I think it's clear that things are nuts now, but it's less clear where things got out of whack.

CG

May 23, 2006 06:03 AM

Does any real estate website effectively distinguish between condos and every other kind of property? There is such an incredible deluge of condos on the market right now, likely from investors dumping and running, that I'd like to weed those out. Unfortunately, all the sites I've seen lump condos with townhouses.

I'm also interested if there is any DC area statistics that weed out condos from the market data. This massive inventory of condos right now is probably skewing the rest of the market data.

danny

May 23, 2006 10:01 AM

Based on data as well as my own personal observation about the spiking inventory, it seems like everyone is rushing to get out of the housing market now before prices slide any further. I pity the families who *have* to sell now because of relocation, or other necessities and have to put their houses on the market when so many investors are dumping their properties. I don't care if the speculators lose money, but families will be hurt most if they can't sell now before prices drop further.

LA Guy

May 23, 2006 09:02 PM


Prices got out of whack in 2003, I would say.
They were high in 2001 and 2002, but interest
rates were so low that it made sense. However,
the question that needs to be asked is not if
you would by at a 2003 price today, but if you
would buy at a 2003 price if interest rates were,
say, 7.5% (assuming you are financing and not paying all cash).

I bought (in California) in 2001. If I assume my mortgage balance is exactly the same, but interest rates are 2% higher than my current 5.5% then
my payment would be $400/month more. That is
significant. If we rolled back to 2003 prices
(instead of the much lower 2001 price) I'm not
sure I could afford the house without some serious
pain.

IrwinB

May 24, 2006 08:37 AM

Some interesting articles recently digging into the psychology – and reality - of deciding on an asking price when selling a house in a slowing market. Interesting to note the studies that indicate that when the original asking price is too high, sellers’ generally end up closing for much less than even subsequent reductions (see excerpt and link to article from SmartMoney).

From SmartMoney magazine:

Selling a house is all about price. Ask too much, and you could get stuck with a home that languishes on the market. The longer it sits, the harder it is to unload. "The first question a buyer asks is how long the house has been on the market," says Pamela Liebman, chief executive of New York-based real-estate firm the Corcoran Group. "If it's been on a while, they ask what is wrong with the house."
Ironically, homeowners who ask more for their homes tend to get less in the end. According to Liebman, studies show that if you price your home properly it will sell faster and at a higher price than if the home was priced aggressively. "Overpricing leads to low bids," Liebman says. "Proper pricing leads to high bids."

http://www.smartmoney.com/consumer/index.cfm?story=20030924


Radison

May 24, 2006 08:55 AM

Re: Pricing

The "rule of thumb" about pricing is that you need to generate serious interest in the first two weeks a property is on the market. If priced too high, you get little traffic from your true target audience, then the listing gets lost among other more competitive listings. If it sits on the market longer than other homes in the area, it becomes stigmatized and becomes very difficult to sell, even at lower-than-market prices.

In the current sagging market, sellers may want to consider listing a property for a few points below the appraised value to generate interest, and even multiple bids which generally raise the price to your ideal price or even higher. In this kind of market, this is a good way to get a good price on your house.

Bob

May 25, 2006 02:44 AM

How does the housing bubble end?

On the way up, housing bubbles grow differently than stock bubbles. They're regional, because folks buy homes near where they get their income, usually withing a 40 minute drive. Now I realize that in Northern California that could be two miles away on Rt. 101, but bear with me. That means prices fueled by too low interest rates will manifest where people and the jobs they drive, take a bus or train, or walk to are concentrated. Also, they happen in areas where land is scarce, such as waterfront property; speculation is encouraged by the reality of land limitations. Popular belief today is that prices won't decline much in the future because land is limited relative to the number of people who want on it. Tell that the the Japanese who have seen real estate prices decline for more than 12 years. Too much land and not enough people in Japan? No. Even though interest rates have been near zero for years, the problem is that their incomes have been declining.

Low rates are the input of a housing bubble, areas of concentration of population or scarce land are where they happen, but low interest rates will not sustain the bubble forever. Just as housing bubbles are unlike stock bubbles on the way up, they're different on the way down, too.

Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear.

The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about no one shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.

Can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?

Bubba

May 27, 2006 11:54 PM

For those of you who are interested, here's an update on the Georgetown Heights condo development (at 2501 Wisconsin Ave NW) that I wrote about on 5/5/06. At the time, there were 15 listings ranging from $1.9 mil to around $900K.

As of 5/27.... there are 18 listings.
- None sold
- 3 new listings since 5/5
- 6 price reductions (ranging from 50K to 200K)
- Interestingly, 7 listings have new MLS numbers (4 with new prices.) I'm not sure what game the agents are playing, i.e., if they're trying to keep DOM low.

In any case, I find this to be a fascinating case study since I can keep track of these places on the MLS. So I'll keep all the (undoubtedly many) interested parties up to date as these condos "sell."

Note also that the "bubblicious bench" from a NoVa condo development that was pictured in a Wash Post article is no more. See

http://bubblemeter.blogspot.com/2006/05/rip-bubblicious-bench.html

Alas, one of my favorite examples of the insanity in the DC real estate market has disappeared. (I bet it's b/c all of those places sold. Hee, hee, hee.)

JF

May 29, 2006 01:39 PM

I read almost all the comments ... very very interesting .... I started with the first one (Audiorich, July 7, 2005).... It all reminds me the tech boom-bubble ... Back in 2000, I was working in audit for the famous Andersen accounting firm, at the Montreal, Quebec office. At that time, audit meant nothing, Andersen changed its logo form brown to orange, financial statements were useless, and every young accountant left the firm for start-ups in Montreal, Boston, and CA. I remember Andersen's top guys telling that the offices would be almost virtual, that the staff would only have mobile offices ... I felt so guilty of still doing audit .. Everybody around me was having stock options worth a few hundred thousand dollars .... Let say the pressure was quite strong to do the move ...
(also, before 2000, remember it was Y2K .. Y2K party .. !!)

None of my former colleagues have yet retired .... Sarbannes-Oxley have kept a few people busy ... Controls are everywhere ...

Now it is real estate .... It is very tough .... I've got a decent salary, wife not working, two young kids .... a 1,700 sqf small house in a very nice close suburb ... We've got no mortgage, and don't watch at all the rebates or discounts at the grocery or elsewhere ... Pressure has been so strong for us in the last year to move and go from our $400k house to a bigger $650k .... All of our friends either have bigger houses or a secondary houses .... And they have lower salaries, with double income ... I keep reading about the real estate bubble .... I strongly think it will happen .... But believe me ... I've got pressure to put the sale sign in front ... We already had an agent visit us ... But we decided not to sell it ....

One last comment on our personnal dilemna .... Back in April, we wanted to buy a ski condo. They were asking $250k ... But up here, were are able to obtain (from databases) how much they paid + what is the mortgage balance. 18 months ago, they paid $182k and had a $165k mortgage. So we decided to make a $195k offer (we were willing to go up to $205k). But eaven the agent that we dealt with never caled us back ...
I'll keep reading this blog ... So far, it's been usefull ...

Irwin

May 30, 2006 05:25 PM

Just this weekend I started hearing radio ads encouraging home sellers to use real estate agents rather than attempting to sell on their own (sponsored by NAR, no doubt). Could it be because business is drying up???

DCDerek

June 3, 2006 01:49 PM

To the earlier seller who was concerned about little buyer traffic this year and the effect of high DOM on his/her ability to sell his/her home. You need to do something to generate interest now -- if you don't sell by the end of July, you can bet it's going to sit on the market through August, the dead season in DC since it's too @#$! HOT and everyone leaves town during that month. Think of August like the Christmas/New Year holiday -- you need to sell it before then or get stuck with it during the slowest season.

At this point, your best marketing strategy is to simply lower the price, ideally into a lower price bracket, e.g., from $425 to $399, so people searching for properties under $400K will see it. Reducing the price from $425 to $420 and throwing in some incentives isn't going to make any difference, especially since it's been sitting on the market for 60+ days.

Unfortunately, time is not on your side. If you really need to sell the house, you need to drop the asking price. Good luck.

VeloDC

June 5, 2006 09:47 AM

Spring is over and it clearly was not a sellers' market in the DC area. Now the slower summer season is upon us, followed by the "dead season" of August. There may be more slightly more activity in September, but by then, the housing inventory may have reached or exceeded the record inventory levels of the housing bust in the early 90s.

As houses stay on the market longer, sellers need to be mindful of the onset of the next dead season: the holidays (in real estate terms, that dead season runs from Thanksgiving until the Super Bowl). The next spring "sellers' season" starts the weekend after the Super Bowl.

Sellers need to keep their eyes on these "dead seaons" because houses on the market at those times usually rack up 30+ extra DOM since there are so few buyers around.

In my experience, sellers are better off reducing their asking prices to the next lower price bracket in order to sell their house before these dead seasons. Without a reduction to the next price level, a house will likely languish on the market through the dead season and risk being stigmatized when buying activity picks up again, not to mention more competition from other, newer listings.

And in a slowing market like the one we're currently in, you're always better off pricing a little lower from the outset than holding out for a higher price (and that one last buyer who just crawled out of a cave and doesn't realize the market is dropping). Real estate research shows that those who price lower in the beginning end up getting their price - or higher - while those who price too high end up selling for less - in some cases much less - than comparable properties in their neighborhood.

PersonOne

June 5, 2006 05:24 PM

Washington, DC Area DHS spending cut/reduced by 40%. Please share your thoughts and insight how this will impact area housing prices withing the next 12 to 24 months. Thank you.

Dr. Nick

June 6, 2006 01:22 PM

I found this quote on yahoo today (June 6, 2006). Interesting that even NAR is getting worried about interest rates.

"This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable."
- David Lereah, National Association of Realtors chief economist.


doh

June 6, 2006 10:18 PM

POP!

Bubba

June 6, 2006 11:57 PM

Regarding CG's post from 5/23 asking for differentiation between condos and single family homes, you can find a breakdown for NoVa at www.nvar.com. Go to their "market stats" and look at "market reports." There you can find things broken out by condos and single family homes. For other parts of DC, you can find similar info at www.gcaar.com.

It will be very interesting to see what the May stats reveal when they're posted by the realtors. Monitoring number of listings across parts of DC indicates that the inventory keeps ticking up, up, up. Some of these inventory increases are getting scary (but, notably, some properties still sell even at pretty crazy prices.)

Dentsen

June 7, 2006 06:53 PM

A very sobering report last night on the Lehrer Newshour on the increase in foreclosures due to higher interest rates. Foreclosures are up by a third, including for houses that were purchased in just the past year.

http://www.pbs.org/newshour/bb/business/jan-june06/foreclosure_06-06.html

Coupled with the Washington Post's recent article about how little people know about their mortgages, this is certainly the start of a huge wave of foreclosures, especially in the DC area where risky, sub-prime loans made up a higher percentage of new home sales than almost anywhere else in the country.

Future

June 8, 2006 08:24 AM

Washington area richest, most educated in US: report Thu Jun 8, 4:05 AM ET


WASHINGTON (Reuters) - The Washington area has the wealthiest households and most educated work force of any metropolitan area in the United States, according to a report released on Thursday by a local business group.

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The greater Washington area, including the District of Columbia, and neighboring areas of Maryland and Virginia, had the highest U.S. median household income, at nearly $72,800, ahead of the San Francisco area at $71,201 and Boston at $63,958, according to the report from the Greater Washington Initiative, which cites data from the U.S. Census Bureau, the Bureau of Labor Statistics, market data firm Claritas Inc and other sources.

The report also found the Washington area, which has seen a major increase in defense-related technology employment in recent years, to have the largest science and engineering work force of any U.S. metropolitan area, at 324,530, ahead of the combined San Francisco and San Jose, California, work force of 214,500 and Chicago at 203,090.

The report said 42.5 percent of Washington-area residents have a bachelor's degree and 19 percent have a graduate degree, greater than San Francisco's bachelor's degree rate of 37.3 percent and graduate degree rate of 14.1 percent. Washington also claims the highest percentage of PhDs, at 2.5 percent of the population.

Housing costs in greater Washington were ranked 4th, with a 2005 median price of $424,700. San Francisco was highest at $715,700, followed by Los Angeles at $529,000 and New York at

$446,000.

But measuring total living costs among cities internationally, the report ranked Washington 78th, based on the W.M. Mercer Cost of Living Index for 2005. The most expensive city was Tokyo, while London was third and Paris 12th.

Greater Washington had the largest employment growth from 2000 to 2005 at 270,800 jobs, ahead of the Miami area at 208,400 and Atlanta at 47,900. However, Miami ranked tops in 2005 employment growth, at 90,300 versus 71,600 for Washington, 69,100 for Atlanta and 66,400 for Dallas.


Dr. Nick

June 8, 2006 08:55 AM

Washington Post Online today...
"2 Major Condo Projects Canceled".

http://www.washingtonpost.com/
wpdyn/content/article/2006/06/07/
AR2006060701959.html?sub=AR

TedD

June 8, 2006 01:16 PM

Developers really take a financial hit when they cancel on mega-projects like this, but they figure it's better to get out now than be stuck with a 574 unit white elephant that will hemorrhage $$$ for years:

Developers Cancel 2 Major Condo Projects

Thursday June 08, 2006 9:13am

ALEXANDRIA, Va. (AP) - Developers are abandoning plans for two condominium projects in the Washington region, citing slow sales and a cooling real estate market.

D.C.-based Monument Realty says it is reversing course on its plans to convert the three-building Park Center apartment complex with 574 units to condos in Alexandria. Company officials say deposits with interest are being returned to buyers who had signed contracts for about 50 units.

In Annapolis, the Wood Partners development firm is changing plans for a new 300-unit building under construction. The company will make them rental units instead of condos.

Gregory Leisch of real estate consulting firm Delta Associates estimates about 1,200 more units will be taken off the market by year-end.

Right now, about 25,000 condo units are being marketed in the area. More than half are under construction.

BenjiB

June 8, 2006 03:54 PM

This excerpt from BusinessWeek on the likelihood of another interest rate hike at the end of June and its impact on the housing market:

"Up until his June 5 speech, Bernanke gave the impression that he was being careful not to tank the housing market, vowing in congressional testimony on Apr. 27 to "monitor housing markets closely." Since then, though, the housing market has done nothing but weaken, points out David Rosenberg, Merrill Lynch's chief North American economist. Housing starts are down over the past three months at a 56 percent annual rate.

"So Mr. Bernanke is 'monitoring,' all right," Rosenberg wrote in a report on June 7. "He's monitoring the collapse of the housing market, and by the sounds of it he wants to reinforce the bear market already under way."

Benji

June 8, 2006 03:58 PM

And another insightful quote from BusinessWeek:

"What goes up must come down. One housing analyst, Ian Shepherdson, chief U.S. economist for High-Frequency Economics in Valhalla, N.Y., wrote June 6: "Ultimately, we expect the level of home sales to head down to, or even below, the long-term trend. When bubbles burst, they usually burst properly. Gentle deflations are rare."

Saul G.

June 9, 2006 10:36 AM

The problem with the statistics is the fact that incentives are not being reflected in sale prices. What should be deducted from sale price (and what would further indictae a decline in prices) are: (1) subsidies, (2) closing costs (typically 3% of sale price), (3) other incentives (such as condo fees, parking, plasma tvs and other nonsense). The non-reporting of these incentives is making it seem that things really aren't as bad as they really are. I wonder what David Lereah would say about it if confronted?

Winston

June 9, 2006 06:18 PM

I think it's very telling that even David Lereah, NAR's chief economist, is sounding concerned about the housing market. His response to Ben Bernanke's recent comment about a further rate hike definitely sounded like a plea for the Fed not to stick another needle into the balloon.

BBrown

June 10, 2006 03:16 PM

Interesting that the questions analysts and this blog have wrestled with over the past year have gone from:

1) "Is there a housing bubble?" to
2) "Is the bubble deflating?" to
3) "Is the bubble going to burst with a POP or a slow hissssssss?" to
4) "Is the bursting bubble going to take the national and/or local economy down with it?"

This blog has actually been a pretty good guage of public sentiment about the housing industry. I wonder what the next hot question will be...

Gil

June 10, 2006 03:21 PM

"Housing stocks plunge; Housing is next"

http://www.moneyandmarkets.com/press.asp?rls_id=309&cat_id=6

Article from "Money and Markets" about what the steep decline in the top homebuilders stocks means for the housing industry as a whole. It would also be interesting to know whether the value of homebuilders' stocks is considered a "leading indicator" of the industry, much like data on new home contracts and starts are.

JoeMartin

June 10, 2006 03:45 PM

Another common question is whether prices will drop 10, 20, 30% or more from peak prices last summer and in what timeframe.

From what I've been reading among economists, a common prediction is a "peak to trough" drop of about 20%, but the timeframe varies. If the 30 year rate hits 7% this year as expected, I predict prices will sink to a 15-20% decrease sooner rather than later, i.e., in the next year, then stay low for several years to allow the rest of the economy to catch up.

Many of the gray-haired analysts and economists who have seen the ups and downs of the market almost unanimously say that the run-up in the last five years exceeded any previous boom, so making predictions about the length and depth of the bust is difficult, but it will have a serious negative impact on households and local economies that played a part in the speculative boom.

halton

June 10, 2006 06:43 PM

I think the confusing signals of the current housing market are due primarily to: A) homeowners (not investors) reluctant to sell for less then their neighbor got last year, versus B) homebuilders and condo sellers offering huge incentives so that sales prices don't decrease.

I came across a really good article about reluctant and unrealistic homesellers clogging up the market. It's specifically about the bubble-zone in