Washington DC bubble?

The Washington DC housing market is not a bubble for 3 reasons:

(1) This is a government, defense, and high-tech center. I believe we have either the 3rd or 2nd-worst traffic in the country. Everyone wants to be here, because this is where the jobs are. That puts upwards pressure on house prices, and it isn't going away any time soon.

(2) There is a TON of money running around this town. It's clearly shown by the fact that people can handle $3500-4500/month mortgage payments. And because of the level of incomes here, that's not going to change any time soon, either. As my dad said, this is as close to a recession-proof town as you'll find.

(3) Shortage of land. Every bit of unbuilt land - even small plots that are only big enough for 10-20 houses - is being gobbled up by eager builders who sell half their houses when the houses don't even exist, and will not be built until 6 months after they're sold!

In this area, we have a total seller's market. The situation may drift back and become somewhat more of a buyer's market (and I actually would see that as positive), but there's no way it's going to become a total buyer's market. I don't know how young families buy into Washington, but it really doesn't matter. SOMEONE is buying, as fast as they can!

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

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

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

Audiorich,

Many people in the DC area own several rental properties.

1) What happens when terrorists set off a dirty bomb in the DC area?

2) What happens when many older people are no longer able to pay property taxes and they have to sell their houses in droves?

3) What happens when interest rates rise and people are not able to make payments on their adjustable rate loans?

4) When people are unable to make their increased ARM payments, many houses become vacant and housing prices drop, then what about others who were trying to flip? Or, those who are being transferred or need to sell - now at a loss?

5) What about all the people who purchased their second, third or fourth rental properties as an investment during this bubble and now they are unable to rent them out at a price to make their mortgage payments, expecially after their ARMs increase?

Simply put, this is the biggest bubble in history, and DC is not immune to recessions or, in this case, a massive impending depression ala 1930's dust bowl.

Someone earlier mentioned that one in four homes in DC are owned by investors. I have heard this anecdotally a number of times, but haven't been able to get hard data on it. If this is true, then that alone has huge implications for the market. Most investors are bidding rental p/e's to unsustainably low levels with the expectation that price appreciation will make up the difference in thier expected return. If that piece of thier investment theses goes away (with even an expectation of a flat pricing environment), there will be a lot of unloading of properties and prices could collapse. That assumes that the one in four figure is accurate. Does anyone have any links to some hard data on investor ownership? If so, please post it.

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

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

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

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

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

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

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

To say housing prices in D.C. can't or won't ever drop, and will only continue to rise, is to say that our children will never be able to buy houses when they become adults. Why? Because their incomes and assets will never catch up to current housing prices. Do any of us really believe this is possible?

Are granite countertops and stainless steel appliances really worth $200,000? A house in Clarendon sold just a few months back for $425,000. Since then, the investor put in granite and stainless and relisted the property at $639,000. Now really, are people behaving rationally when they pay a $200,000 premium for granite and stainless.

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

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

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

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

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

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

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

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

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

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

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

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

We always hear that the bubble won't pop so long as interest rates stay low and the economy strong. But if it is in fact a bubble and not a boom driven by fundamentals, then panic could well bring it all crashing down. Speculators, euphemistically called "investors," are creating artificial demand. That's keeping inventories low and demand apparently solid. So everyone in the real estate industry keeps saying there is no bubble. Meanwhile, in response to big profits, builders are getting greedy and excess supply is starting to build up. And more and more homeowners, enticed by Realtors, are putting their homes on the market in the hope of cashing in. The latest figures suggest that all this is causing inventory to start inching up and so time on the market to rise.

As this trend becomes apparent, more and more so-called investors will decide it's time to cash in, especially with all the talk swirling about the housing bubble. This will cause available inventory to rise still further. Then panic will set in and there will be a cascade effect. As home prices start to flatten, investors will split town, and all those buyers now stretching to buy with interest-only loans and option ARMS will also disappear since no buyers in their right mind would take out such loans unless they thought robust appreciation was guaranteed.

At first prices will just level off instead of plummeting (it's not the stock market). Homeowners will just take their homes off the market when they don't get the prices they'd been hoping for. But some people will have to sell to move to a new job (Washington has a high population turnover). Moreover, by 2007 not only will interest rates likely be higher but also 2/3s of ARMs will start requiring higher interest and principal payments. Then foreclosures could mount and a serious price decline might well occur. All of this could happen without any change in the economic fundamentals because the bubble was not being driven by fundamentals in the first place.

I have been following this discussion with fascination, for a few reasons: my husband, daughter and I live just north of DC, in southern Montgomery Cty, MD. This discussion is the ONLY place I have heard ANYONE say they think there is in fact a bubble and it will burst. Real estate is a hot topic of conversation around here--maybe beating out politics these days, which is saying something in DC--and every single person I have talked to says that they think "prices will have to level out, but they won't decline in the DC area."

People cite exactly the 3 reasons that Audiorich gave for "invincible" market here: steady job supply, short supply of desirable locations, and lots of money running around.

We have lived in an apartment here for a year now, and we'd like to buy a house, since we forsee living here for at least 5 more years. A LOT of first-time homebuyers are in our same position--everyone, who, like my husband, is a few years out of law or business school and is now coming to work for the federal government. If you were us, what would you do? --Continue paying $1500/mo in an apartment, or find a house in an "up and coming" area, where the prices are not as inflated, and you could find a comparable monthly mortgage payment (especially after the tax break)?

Is there a certain set of questions house hunters in a "selllers' market" should ask themselves?

To Laurel Dugan:

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

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

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

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

I thought Matt's argument that pessimism will prolong the bubble a bit hard to grasp at first, but apparently it is an argument out there in the debate, for I came across it again today in the Wall Street Journal:

"Now that people are talking about a bubble in housing, I suspect it will take a lot longer for the housing-market bubble to pop. People say they are conscious of it, which means that a good portion of the population isn't entering the market. When the last marginal buyers give up and rush to get in, that will be when it ends. In other words, maybe we have some years left in this, but it will end eventually" (Jesse Eisinger, "Option ARMs Are Fueling Bubble, Aug 1 , 2005).

I admit that I found this argument a bit hard to grasp at first, since the more usual notion is that an increase in talk raises the chance of the bubble popping as people start losing confidence in the market. Having thought about it some more, I now admire this as an interesting piece of counter-intuitive reasoning. But for this argument to be convincing, wouldn't you have to show that the bubble doubters and housing pessimists are indeed a "good portion" of home buyers, a portion substantial enough to actually moderate and therefore prolong the market? But the available statistics I have run across actually suggest that optimism and confidence is at new heights. Thus a study reported on in the Wall Street Journal found that "7 in 10 consumers expect housing prices in their areas to increase over the next year. Significantly, one in three of those who expect rising prices think they will go up by 10% or more during the next 12 months. In fact, nearly 1 in 10 expect housing price increases in the 20%+ range in their areas." And the LA Times reported that "A widely followed University of Michigan consumer survey, released Friday, showed that 24% of respondents nationwide said it was a good time to buy a home because prices would rise. That was the highest percentage since 1988 — right before prices peaked in the previous real estate cycle. ( "It's Not a Bubble Till It Bursts," May 29, 2005).

So I suspect that Matt, and Jesse Eisinger of the Wall Street Journal, are wrong because they are overgeneralizing from nonrepresentative samples. They are positing a spreading pessimism based on their own narrow experience of the views of people who frequent financial blogs and read the financial press, whereas available surveys suggest the trend is in the opposite direction towards increasingly pervasive optimism.

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

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

If there is anything that is going to burst this bubble more than anything else, it is the fact that the recent hubub by the press will lower consumer confidence. if one must work in DC and want appreciating home prices I suggest living in an area such as Loudoun County or to a lesser extent, Fairfax County. When the bubble slowly and eventually bursts (remember that real estate is not like the stock market), there will be a slowdown in appreciation there, but appreciation nonetheless.

The most important piece of data is the disparity between the cost of renting and the cost of buying. Consider this math: it costs about $1000 per month more to buy a 3bed/1.5bath than it does to rent. Considering that most of the country is not in a bubble and therefore rents are w/in $100 or so of holding costs, I could take that $1000 per month that I save and buy 10 houses somewhere unremarkable, but far safer.

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

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

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

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

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

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

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

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

Interest $2,030 ($24,360/year at 6.09%)
Taxes $458 ($5,500/year, 1.375% of value)
Condo Fee $333 ($4000/year at 1% of condo price)
Other $125 (insurance and internal repairs)
Less
Tax Break -$829 (at 33% on interest and ppty tax)
Total $2117

You can play with the numbers as you like, but in my example, this $2117 represents the price at which you should be indifferent between renting and buying. If you can buy a place and TRULY COMPARABLE rents are higher/the same, then you know you are safe in the event you rent it out (and you are getting the potential for appreciation for free). Since I'm guessing this isn't the case in DC area (1 bedroom rents are substantially below this) then you know you are paying up for the appreciation option.

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

Let’s face the truth: it is impossible to know what will happen to the real estate market in the short-run. There are far too many unknown variables, and you will never have all the information required to know exactly what will happen and when.

The 4-point real estate strategy that will give you the highest probability of success is as follows:

1) Do not buy real estate unless you would be willing to hold it for 10 years or longer, or unless you were willing to sell at a loss if prices were to decline. It is very unlikely that real estate will not produce positive returns over a 10-year period or longer.

2) Buy a property you can comfortably afford and that will allow you to maintain your sanity even if prices decline. This means you should buy real estate based on the monthly outflow you are willing to spend and not on the amount of mortgage you are approved for.

3) Regarding your primary residence, make sure that you will still be able to save some money in other types of more liquid assets after your home purchase. Remember, you will still want to have the option to be able to stop working one day without having to take a major hit to your standard of living – you need other assets outside of your home to be able to provide enough income to you so that you are not forced to work.

4) Always have an emergency fund of cash available even after you purchase your property. The emergency fund can be used to float your mortgage payment if an unexpected financial problem occurs such as the loss of your job, etc. This also means that you should not use all of your cash in the home-buying process.

If you follow these four points, you have a much better chance of being successful.

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

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

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

Alot of good points on this thread. I, too, live in Northern VA and have been really itching to get into the market.

Here is something that recently scared me. I went to get a pre-approval (needed in order for a realtor to even speak to you). I was pre-approved for more than I could possibly afford in a month for a mortgage. I mean, they were pre-approving me for a mortgage amount that was more than two-weeks of income. (Of course, with that, I was offered all of the "exotic" options others have referenced previously)

I too, am starting to see lots of "For Sale" signs on Rt50 as well as Ashburn and other parts of Fairfax, and they are staying there for a LONG time. I get the MLS listings and have also started seeing "Price Reduced" on alot of properties.

What is also happening is that alot of apartment places are conveting to condos (im not really sure what that means market-wise, but just someting else that I have noticed)

Bubble or not, those "exotic-loans" (interest only, Option ARMS) are going to be converting soon. I do know that the housing maket in the DD are has been increasing WAAAAAY more than the rate of the cost of living/inflation since 1999. It has to self correct. It just has to. Someone else on this thread mentioned people here being "paper rich" and they could not have been more right.

I'm one of those buying because I just moved to DC and intend to live in my house at least 10 years. I would rather home prices not increase as fast so I don't have to pay as much taxes. Maybe later when I am ready. Still, for the house we picked (Beechtree in Prince George's County, MD), the selling price has increase 15% since we signed up 4 months ago and we have yet to close and move in. If the so-called bubble bursts in the next five years, then my property taxes will go down and that will be great! ... well, as long as it goes back up long before I sell in 15-20 years or so.....

"Pop!" The difference between rental and mortgage prices is a big indicator of the impending bubble burst.

Beyond that I have read in more than one reputable paper that the majority of people in the DC area who are standing in line to buy condos are investors - who admit they will bail and lose their deposits if prices start falling. They aren't willing to hold on to badly depreciated property.

I myself have three friends who have become investors in the last couple of years. Two of them quit their day jobs. When everyone and their grandma starts to think they are real estate moguls, it's only a matter of time.

During the 90's bubble. I had two acquaintances who had to hold on to badly depreciated property because otherwise they'd be forced to sell at a gut-wrenching loss. One of them held on for 5 years, but then got married, moved and couldn't hold two mortgages. She tried renting to keep her N.Va. home, but renting turned out to be much more trouble than it was worth. She finally dumped it at a loss. The other friend bought toward the end of the slump and lost money at first, but eventually made a profit. Both of them worried often.

The moral of their story for me is, if I'm going to buy it will be toward the end of the slump not in it's dawning day.

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

Did any one heard about "COPPERMINE CROSSING" by Pulte homes in Herdon VA? It came to my attention as one of my friend bought Yesterday (Some one sold their Investment Home). This was a never occupied Three bed 2 1/2 bath 2 car garage home with Granite, recess lights, brick front, elevation upgrade etc - in market for 3 months listed @ $ 575,000. The seller reduced the price to sell last week @ $ 529,000. Did you hear the sound Sshhhhhhh from the Bubble?? Today I saw some more houses listed @ 524,000(Check http://www.HomeDatabase.com and select Virginia, Herndon 20171.

Lot of people paid $ 570,000 + in the same community still waiting to get their houses(Some are due in Dec 2005).

Pulte Still selling the Single Car Garage homes base price @ $540,000 - go to http://www.Pultehomes.com and look for "COPPERMINE CROSSING".

Now any one can tell me if there is a bubble or not?

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

A follow up post. First, I'm glad to see the many thoughtful comments here representing both sides of the debate. Its nice to have some intelligent discourse.

People frequently cite "job and population growth" as a reason for the continuation of the bullish housing market in DC. That sounds logical on the surface. So I did a little research and what I found was quite interesting.

Over the last 5 years, the population in the greater DC metro area has risen approximately 6% in total (not per year). Average housing prices in the region have risen well over 100% during that same time.

So, we have to ask ourselves if it makes sense that job and population growth of 6% could really be a significant driver of our local housing boom. I don't think it does.

A look at the stats should tell you whether this market is sustainable:

-52% of DC buyers used "exotic" mortgages in the first half of 2005
-33% of DC buyers are investors (and thats the percent who admit it, I'm sure many more tell the banks they are buying principle residences to get lower loan rates)

I believe prices are significantly driven by "artificial demand." What do I mean by that? The flippers are adding to the current demand for housing but their demand is only temporary. Because of the added demand, prices have gone way up. Eventually, the artificial demand will exit the market and its not hard to figure out what will happen to prices.

My best guess is that the DC market is 40 to 60% overpriced at current levels. This is based on average incomes, expected future interest rates, and rental costs in our region. Outlying areas and condos will be hit the worst (closer to 60% drops) while single family houses closer to the city will be hurt only slightly less (closer to 40%). Why? Condos are more commodity-like than single families and outlying areas generally have lower relative demand.

It will be interesting to look back at this thread five years from now to see what actually happened and how accurate peoples' views were.

I'll close with a quote from one of the most successful investors in the world, Charles Munger (Warren Buffett's buddy):

"Never have so many people, made so much money with so little talent."

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

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

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

I believe a very point to consider here is the impact of currently rising short-term interest rates on existing mortgage debt. The media tends to focus on what rising rates will do to housing demand, but equally important is the debt outstanding. As Greenspan himself noted yesterday, a staggering 80 percent of all mortgage debt issued in the past five years (about 4 trillion!) has been second-mortgage refinancing to extract home equity. In fact, in spite of all of the appreciation we've seen during that time, the actual equity Americans have in their homes is at an all time historical low! And worse, all of that debt is issued at variable short term rates. So as rates rise, debt payments will increase simultaneously with falling nominal housing values. When this happens, credit conditions will tighten and the housing market will freeze up. Since the housing market has been the sole pillar of the economy for the past several years, a recession will ensue and the resulting job losses/income drops will have a reverse snowball effect adding to the downward momentum. I don't think, everything considered, there is any historical precedent for what I believe we are about to witness. I recently learned there IS a historical precedent for interest-only mortgages though. The last time they were this popular was in the 1920's just before the Great Depression.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Still no answers but at least I am getting educated.

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

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

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

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

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

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

Really don't know what to tell him..

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

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

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

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

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

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

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

Sara,

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

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

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

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

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

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

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

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

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

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

A couple of interesting points from my personal experience:

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

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

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

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

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

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

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

Sara, I'll respond with a neutral opinion.

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

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

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

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

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

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

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

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

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

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

Just an additional comment to my earlier thoughts.

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

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

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

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

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

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

Sara,

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

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

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

Cheers,
Katharine

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

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

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

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

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

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

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

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

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

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

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

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

nice post, Bubba.

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

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

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

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

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

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

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

Guys,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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