My old D.C. house is for sale! (or, Washington DC Bubble redux)

Posted by: Dean Foust on February 15, 2008

myoldhouse.jpgLong-time readers of this blog know that I started a thread in July 2005 titled “Washington D.C. bubble?” that, amazingly, now has 1246 comments (thank you, readers). My premise was that the Washington, D.C. housing market was one big bubble just waiting to pop, and for roughly two years we all debated that thesis fairly vigorously.

The Exhibit A in my argument was the house I’d bought in 1991, lived in for seven years, and sold when me and my family transferred to Atlanta. It was a 2,700-square-foot, center-hall colonial near the Mount Vernon Estate in Alexandria, Va. We bought it for $216,000 in 1991, sold it for $228 seven years later – and then watched as the Washington bubble began to inflate, and saw it appraised on Zillow for north of $600,000 (Zillow shows it now at $588,000 but HomeGain.com apparently didn’t get the memo that the bubble had burst, and still values it at between $686,481 and $805,870). And I said, folks, this is an aluminum-sided house with no basement,with no real yard to speak of – but a yard that floods during heavy rains, given that we sat just about a mile and a half from the Potomac River.

Well guess what? My old house is on the market! …

myoldhouse3.jpgMy wife stumbled on this because it was a “featured house” on realtor.com. The current owner is asking…$529,900. I checked the photos and it appears the owner has done some updating (brick patio, redid the kitchen...though from looking at the photos, it doesn't appear anyone's living there. It looks suspiciously like it's being "staged.")

myoldhouse2.jpgBut what the photos don’t show is that just to the right of the backyard, some other developer clear-cut the woods and dropped in several McMansions that sit literally yards from our back fence and tower ominously over my old house and the ones next door. And the charming cul-de-sac? It’s mostly rental houses now, as speculators moved in during the bubble years, snapped up the houses as investment properties and brought in renters. And there's that back yard that floods...

But I write this because I’d like D.C. residents to give me their best guess on what this house is worth. In my mind, nowhere near $529,000! I believe that home values have to correspond to job growth, income growth and inflation – in other words, increasing a few percentage points above the inflation rate. Funny enough, one of my old neighbors rationalized the Washington bubble by saying, “But people are paying a PREMIUM for houses inside the Beltway.” Funny because my old neighborhood is probably six miles OUTSIDE the Beltway.

I used a compound interest calculator, used 1998 and $228,000 as my starting points, and calculated what the house should be worth assuming 5% annual appreciation. The result: 362,437.55. If that isn’t enough to suit the “Washington is different crowd,” I re-ran the numbers assuming 6% annual appreciation. The result: 396,588.91.

Financial Calculator">Here's the calculator (it's a pop-up). Run the calculations yourself. Even at 7% return--which I think is a reach--it's worth $433,000.

Someone tell me how this house is worth more than $396,000? For what it’s worth, I’m going to send an email to the listing agent inviting her to comment. If she responds, I’ll share her response.

Reader Comments

none

February 15, 2008 7:34 PM

Ffx Cnty property records show the current value at $523K:


Current Land $201,000
Current Building $322,280
Current Assessed Total $523,280

Louis Cammarosano

February 15, 2008 9:53 PM

Hi
This is louis from HomeGain.
There was no memo!
We are on top of it.
There was a recent sale on Pennsylvania BLV in this area for $1.28 million that skewed the results higher. Our next up date late next week will show an estimate for your home at
$582,773 - $684,124

Jim D

February 15, 2008 10:23 PM

What do you estimate it would rent for? What do the houses nearby rent for?

Lord

February 19, 2008 11:48 AM

You would also have to consider the change in long term rates between then and now although with jumbos still not liquid, prices would be stretched.

Lord

February 19, 2008 11:51 AM

Also, 1997-1998 was the low point. Prices may reach something that low again plus inflation, but one shouldn't expect them to stay that low for long.

Jim D

February 19, 2008 4:03 PM

one shouldn't expect them to stay that low for long

Why not? Usually, when prices fall, they stay there for a few years before coming back.

Why is this time different?

SW DC

February 20, 2008 5:51 PM

For whatever it's worth, MLS lists the home as "pending", so it is currently under contract.

Marcio - S. Florida

February 22, 2008 5:27 AM

It is interesting how homes are now being priced on their perceived future value and not on a ratio of affordability by prospective owners.

The post-2000 bubble of the stock market left millions of "orphaned" small investors looking for a new bet to hedge. Guess what? This new bet was the real estate market on a convolution of cheap and readily available money, small investors looking to hedge a highly leveraged debt, and a newly disseminated belief that real estate never drops in price.

Once in a lifetime, we have very simple ways to measure the worth of a home. 120 X monthly rent... for example... and you should spend at most 30% of your gross income on housing. This culture of security in real estate, as if it were the perfect infallible investment, made people completely ignore these rules and just dive in to properties they could not afford.

I would ask other members of the forum to check how much this house would rent for normally and multiply by 120. I am sure it doesn't amount to 500K home.

I still am renting awaiting a good deal here in S. Florida. However, loss aversion and the banks' inability to let go of these bad loans are not allowing the market to normalize.

I have studied enough finance to know ratios and that's the math I play when looking for a new place to live.

Awesome blog

Firebrand

March 14, 2008 4:26 PM

You know the DC bubble hasn't really popped. This is the part of the market where it's all about location location location, and some properties have continued to rise, while others in the area have seen more than a bit of a drop.

My first home in this area I bought for 218, and sold for 240 3 years later. The house I moved to I bought for 550, remodeled and sold as the popup in prices occured at 1.2M. My current house I got into for 1.2 and now valued at around 3.6. That valuation is up from two years ago. But it has flattened a bit. The highend of the market that which is above 2M hasn't really been affected, other than a slowing of sales due to tighter credit. But it is still inching up, and it isn't clear to me that it's going to do anything other than that.

Property if held long enough is still the best investment in the world.

Marcio, you have the right of it. With one exception. It wasn't all of the small investors looking it was the banks looking to get people into houses, and thinking that they would be able to move the rates to a normal rate a few years later after those same buyers had seen their income go up. That was the idea.

The problem came because they didn't look at the fact if that same buyer would be able to afford the house if their income did not go up. That's exactly what we are seeing go on now. And most of these "uneducated" buyers (no offense, but they most likely were not realising what would happen to their payment when the rate went up) did not go out and refinance before that rate hike. Oh wait some of the them tried... And guess what they couldn't afford the new loan so they couldn't refi and then... We we now know where that all leads...

So it's not the small investor that really caused the problem. They just took advantage of stupid low rates by the banks to drive the price up. Now that the rates are going to where they should have been in the first place, we are seeing the result. So yes the small investor played a part, but it was the stupidity of the banks that is the cause.

Wake up and smell the coffee.

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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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