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Long-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! …
My 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.")
But 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.
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.