Washington DC Bubble Redux

Posted by: Dean Foust on November 9, 2007

bubble.jpgThe thread that I started two years ago on Washington DC sparked the most heated — and most active — debate of any topic to date. Though the comments have slowed down recently, the “Washington DC Bubble?” thread still boasts 1,188 comments.

One long-time reader, Bubba, asked earlier today whether I had any thoughts on the current state of the market. Here’s what I posted on the existing Washington thread (and if you want to throw in your two cents, do so in the original thread. Let’s see if we can crack 1,500 comments):

Bubba,

I saw your comment, and I’m happy to offer my opinion: Washington is still ridiculously overpriced. If you’ve followed this thread, you that it started way back with my impressions after returning to Washington a couple of years ago, and seeing that the house I sold between Old Town Alexandria and Mount Vernon for roughly $228,000 in 1998 was just six years later worth roughly $600,000 to $700,000 (!). A 2,700-square-foot house with no basement, a backyard that flooded when it rained, aluminum siding and in a mediocre school district.

I expressed shock then, and expressed my view that this was a bubble that couldn’t be sustained — the income needed to support a mortgage on a starter house like this was increasingly out of reach for many Washingtonians. There was no way it could go higher, and there were a lot of reasons why it would go lower.

If you’ve followed this blog, then you know that I still follow the D.C./Northern Virginia market via another blog called Northern Virginia Housing Bubble, and see that in exurbs like Centreville, Clifton and Triangle, asking prices are in freefall — down 30% to 40% from the peak. But my friends still there keep insisting that the “inside the Beltway” areas are insulated.

Har. I typed in my old zip code at Realtor.com and came up with a listing for the house below…

http://homes.realtor.com/search/listingdetail.aspx?zp=22308&typ=7&lid=1088792630&fhv=1


stratford.jpgI know exactly where this house is: It’s in a neighborhood called Stratford Landing, right off the George Washington Parkway as you approach the Mount Vernon Estate. It’s on the market for $699,000, and it’s about the same size as my old house (it’s less than a mile from my former house). No basement (the water table is too high), same school district. I’m sorry, but having grown accustomed to the housing market here in Atlanta, I wouldn’t pay more than $325,000 for that house — tops.

In a comparable neighborhood in Atlanta, that house wouldn't fetch more than $260,000. And don't tell me that salaries in Washington are on average 2x to 3x higher than in Atlanta, because they aren't. Sure, there are well-paid lobbyists and executives, but there are a lot of well-paid executives in Atlanta -- probably more (HQs for Coca-Cola, Delta, UPS, Home Depot, Georgia-Pacific, Sun Trust, Rubbermaid Newell, Arby's, Rayovac, Intercontinental Hotels, Checkfree, Cox Cable, and hundreds of software firms).

The REST of Washington is populated by journalists, federal employees, and employees at all of the think tanks and non-profit organizations that make between $65,000 and $110,000. Both spouses have to work to afford a home now. I think the market was propped up by speculators, exotic subprime, "Alt A" and "Option ARM" mortgages that will reset higher -- much higher -- and leave the owners unable to meet their mortgage.

This is not the makings of a healthy housing market.

Reader Comments

Jeff Royce, Realtor, RE/MAX Choice

November 12, 2007 8:13 PM

It is extremely irresponsible and misleading of you to say asking prices are down 30% to 40% from their peak in Northern Virginia. On the Northern Virginia Housing Bubble Blog, they have a section called "Top Discounts," where they list properties that are being offered for 30% to 40% under a previous selling price, usually a sale in 2005 or close to that.

The NVHB Blog provides a nice list where a buyer might look to find a discount on a house for sale. But they are getting those discounted houses from an area that has at least 14,000 homes for sale right now. They have these labeled "top discounts." It does not follow that the whole area has dropped by those same amounts.

I work a lot in Fairfax City, which is just a drop in the bucket compared to the area this blog is drawing from. I looked through the 69 sales of detached homes that happened in Fairfax City in the last six months to see if I could find any similar numbers. I did not. At least 65 of the sellers made money on their sales, because they lived in the house over many years, like most buyers do. I searched for houses that sold this year that also sold around 2005 and did find a few. Here is what I found:

10903 Fairchester Dr., Fairfax
1/12/04: $342,000
5/18/07: $442,000

9789 Maple Trace Circle, Fairfax
3/1/06: $775,000
8/20/07: $765,000

10911 Byrd Drive, Fairfax
11/12/04: $400,000
6/4/07: $475,500

4103 Sideburn Road, Fairfax
1/4/05: $420,500
6/4/07: $487,900

Obviously some people have lost money in this market, but some have still made money. We just can't take the worst case scenarios and say they apply to everyone. People sometimes buy at crazy prices, and sometimes sell at crazy prices. But we can't take that to mean that the market as a whole had done that.

The vast majority of people who have purchased real estate, in all sorts of markets over the years, have done incredibly well. In Northern Virginia they have averaged 7% a year in the long run, and will probably do so again over the next 10 year period, and almost certainly over the next 20 year period.

Dennis O'Neil

November 13, 2007 8:46 PM

Thanks for injecting reality into this page Jeff.

It always amazes me how people claim to be so smart becuase they predicted a downtrend in a cyclical market. If they keep doing it long enough, eventually they'll be able to say they were right.

Bubba

November 19, 2007 11:52 PM

Jeff and Dennis,

As a first point, one thing that you have to take into account when evaluating profitability from real estate sales is transaction costs which are, ahem, quite high in real estate due to, ahem, the practices of the real estate industry (which, incidentally, are under investigation by the FTC, I believe.) So when you do an evaluation of "who has made money," you need to take into account lots of things. Not only the cost of possible home improvements, but also the transactions costs of buying and selling a home. Put simply, if I bought my house for $500K and sold it for $510K, I lost money. Just as a rent vs. own calculation requires more than the rental payment vs. the mortgage payment (e.g. what return could I get on the difference between the two?), a measure of profit from home sales must account for other factors such as transactions costs which are very high due to, ahem, realtor fees. (Similarly, an evaluation of returns on stocks, hedge funds, etc. requires some info about transaction/management fees.)

And Dennis makes the fatuous argument that the bears are patting themselves on the back for something that should have been self-evident to any reasonable, informed observer: Real estate is a cyclical industry so a downturn shouldn't be very surprising. But a key theme of Dean's blog on DC real estate is that, if you look back through it, extreme disagreement existed about whether housing prices were actually overvalued. The attitude that "real estate is a good investment that doesn't fall" was pervasive. To now say, "Whoops, didn't we tell you that real estate was cyclical? No? Oh well, my bad, sorry for leaving that out." seems to be a incredibly disingenuous representation of the kool-aid that people in the real estate industry sold to their customers. (Also, if Dennis's current evaluation is representative of those in the real estate industry, it indicates that previous boosters of real estate were incredibly irresponsible in their evaluation of the market.)

And even more important, if you want to appeal to mean reversion (as Jeff does) for asset returns, you have to admit that the run-up over the last few years was unprecedented. And as we look back on it, that run-up was unjustified. So we're not looking at a standard "correction" in a "cyclical" industry (i.e. the ups and downs of business as usual.) Instead, we're looking at the bursting of a bubble. Which is an entirely different beast.

(BTW, so I don't have to check this thread too, why don't you follow Dean's suggestion to post comments on his previous thread. Maybe if we can get it to 1,500 posts, Dean will get that new car.)

Arlington, VA

December 20, 2007 10:47 AM

What a complete crock Dean. I don't really know your motivation for writing such flagrent lies, but I can't imagine it credits your professional reputation.

You do realize that the ever informative Nova Bubble Fallout is a listing of foreclosure sales? They are also in the "most" attractive area of the Washington Metro Region, being Manassas and Woodbridge, some parts of Sterling. For you to so boldly say the "exburbs are in freefall" and that asking prices in general are off 30-40%is disingenuous at best, a flagrant lie at worst. I suggest you round up some data, either by zipcode, city or county on MRIS.COM or NVAR.com and come back to us and try to salvage some of your reputation by giving us actual facts, rather than trying to pass off distressted sales on properties bought and resold in a period of 24 months, in a few selective places an hour and a half commute outside of the city, as the state of the DC housing market in general.

30-40%! Seriously...what kind of professional credibility do you have?

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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