Months of inventory are up slightly from last month in Fairfax and Loudoun counties, and down 1.3% in Prince William County. These statistics are taken from the "Daily Resale Watch" by Merv Forney at the Northern Virginia Real Estate Guide.
11/26/2007
Fairfax -- 11.2
Loudoun -- 14.4
Prince William -- 17.5
10/29/2007
Fairfax -- 10.7
Loudoun -- 12.6
Prince William -- 18.8
10/01/2007
Fairfax County -- 9.1
Loudoun -- 11.3
Prince William - 16.6
09/07/2007
Fairfax County -- 7.0
Loudoun -- 9.0
Prince William -- 14.3
03/01/2007
Fairfax -- 4.2
Loudoun -- 6.3
Prince William -- 10.0
Tuesday, November 27, 2007
Months of Inventory
Posted by Harriet at 12:58 PM
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61 comments:
This statistic is quite misleading.
The only reason for the increase in months is due to the slow or nonexistant pace of sales.
Number of homes for sale is actually decreasing and is right around where it was this time last year.
Dont believe me - check it out for yourself...
http://www.virginiamls.com/charts/index.htm
Like I have been saying on this site - NOBODY is buying homes right now.
2 Reasons for this - not many people who qualify to buy a first house actually want one ( who would with all the press ). Secondly people who have a home cant move, or trade up because they cant sell their current home.
Sellers might as well take their homes off the market because price drops will be futile.
I think another reason NO ONE is buying homes right now is because everyone who had the financial wherewithal to buy one already did (or bought two) during the panic of "buy now or be priced out forever." No one has dry powder anymore and the few that do aren't pulling the trigger.
Doug,
"Months of Inventory" refers to the "Backlog" of sales as Merv labels it in his chart. In other words, current inventory/current sales. What it shows is whether the sales pace is declining or increasing.
The total number of properties for sale is also a useful statistic, and I post that mid-month along with the % of price reductions.
"Sellers might as well take their homes off the market because price drops will be futile."
Of course not, priced correctly a house will sell quickly. The problem is that many sellers aren't willing to admit that the market has changed as much as it has.
Sellers can take their houses off the market if they want, but if they relist them at the same price they will just get to watch them sit again.
The super-inflated prices are the problem.
You are wrong Leroy.
Buyers will simply wait for more price drops because they think the market has more to fall. They want a high quality home for the price of a foreclosure. Occasionally, some people will get such deals from desperate sellers and that will encourage others to wait also.
Its market psychology and the primary reason people dont buy houses during a housing bust. They wait until the next boom.
Its the same with other commodities. Why didnt you buy gold when it was 400$ an ounce? Because you waited till it was 800$ an ounce and everyone was talking about how much the price of gold is rising and how it will hit $1000. You end up making 20% instead of 120%.
If you follow the markets you will find this type of thing over and over again.
Buy low, sell high - its simple but for some reason people cant seem to psychologically get themselves to buy something while its being trounced in the marketplace.
The coming wave of ARM resets will force sales - people will avoid losses for as long as possible, but foreclosures will force mark-to-market pricing. We'll see the true reality sink in after the "spring market" has come and gone with little to no volume.
Doug,
Your argument is not entirely correct. It is true that market psychology has started to reverse, but it will take a long time for prices to turn around. For those of us who are 'fundamentalists', the reason we wait is simply that prices are still nowhere near fundamentals. Sellers are still expecting prices in the late 2004/early 2005 levels when the bubble was in full swing. Valuations will start making sense when sellers price houses at mid-2003 prices. Some would say it is 2001 levels, but for me at the mid-2003 level, I can accept any further loss.
So Leroy is right. Though none can correctly identify the bottom, the change in the level of inventory is certainly a good indicator that there is a long way to go. Every situation is different and housing is not a commodity; the demand for housing is very localized. Your analogy to a commodity like gold or stocks doesn't make sense.
Wrong again.
You cant force a sale, you need a buyer! If there are no buyers, who do you sell your home to?
And you cant sell a home you 100% or 95% financed if you bought in the last 3 years. Ditto if you took out home equity.
You can only foreclose, or renegotiate with your bank which a lot of people are doing.
Countrywide is offering 5.65% 30 year fixed loans to THEIR loan owners who have a resetting ARM. They are also offering an additional 2 year extension to teaser rates.
Other banks will follow. It makes more sense to keep people in their home then kick them out and get pennies on the dollar.
I agree that prices will continue to decline, but not for your reasoning.
The primary reason is because its so much more expensive to rent than to own. This will drive out all potential new buyers.
New buyers are the only ones who will stop or slow the housing recession. New buyers are needed because existing owners cant move their property.
Once pricing becomes reasonable enough that renters are drawn into buying, it will start a chain reaction of people selling to buy up ect.
"Buyers will simply wait for more price drops because they think the market has more to fall. They want a high quality home for the price of a foreclosure. Occasionally, some people will get such deals from desperate sellers and that will encourage others to wait also."
That isn't true at all. There are still houses selling. Take a look at the most recent update on this blog with sales numbers. Even in some of the worst hit areas like Loudon and PWC there are still hundreds of houses selling per month.
If you price your house right you will be able to sell. The problem is that sellers' psychology hasn't shifted sufficiently yet. There are still huge numbers of sellers that think 10% price cuts are generous and that "nothing" is selling when the reality is that they need to cut their price 30% or more in order to sell.
"Its market psychology and the primary reason people dont buy houses during a housing bust. They wait until the next boom."
This also isn't true. The vast majority of homes are bought by individuals with the intention of living there. Housing market cycles are very long, usually greater than 10 years. Buyers may decide to wait during a bust, but few are going to wait until the next boom.
Small time investors are different of course. They tend to run to whatever is hot at a given time and when the market picks up there is a sudden flood of flippers and speculators.
"You cant force a sale, you need a buyer! If there are no buyers, who do you sell your home to?"
There are buyers, there are just less of them. If you want to sell you need to price your home correctly.
Think back to the bubble years when bidding wars were common. The high bidder got the house and the other would-be buyers stayed on the sidelines.
The reverse is now happening. Now there are many sellers stuck on the sidelines because they are unwilling or unable to cut their price. The competitively priced houses are still selling.
"Countrywide is offering 5.65% 30 year fixed loans to THEIR loan owners who have a resetting ARM. They are also offering an additional 2 year extension to teaser rates.
Other banks will follow. It makes more sense to keep people in their home then kick them out and get pennies on the dollar. "
They are just delaying the inevitable. People who bought homes they couldn't afford will eventually lose them. When those homes come back onto the market it won't be at anything near bubble pricing. The market is not about to turning around. It isn't even near bottom.
Well I disagree on a couple points.
While I do think it will take a decade or longer before housing becomes a worthwhile money making investment, I dont see this massive upsurge of REO properties coming to pass.
There is too much money to be lost if the decline continues to accelerate like you believe.
I just dont think the market will allow it. Somehow, banks will make it affordable for people to continue living in their homes. If not the banks, the Federal government.
If they dont, the entire banking system could collapse because US banks own many times more debt in home loans than they have capital. They will not be able to loan money, or cover defaults.
Look at CitiGroup, they just got an emergency infusion of 7.5B in order to continue operations. They own 30B in subprime loans that havent defaulted. They probably own another 50B in prime ARMs. If most of them go into default like you suggest, they cant continue to exist. All the big investment banks are in this position.
Doug, I have a question(s). Why do you think that when people start buying again, it will be in droves and run up prices with multiple bids?
And until that happens, you say that prices will remain pretty much static, albeit small declines, because homeoweners won't sell at a loss, and/or the federal government will bail out to keep the prices inflated to essentially where they are now?
I am asking.
My reasoning is this.
People with homes cant buy homes in a bust because they cant sell. Once a boom starts, new buyers start competing with current owners searching for their next place. Thus, the boom can only start with a large influx of first time buyers.
I think current owners will not contribute as much to the price declines because they have more invested emotionally than a bank does with a foreclosure.
As I said, I dont see foreclosure rates accelerating, and I dont see price declines from them accelerating either because that would be economic suicide by the banks. Its in their interest to keep money flowing in and properties off their balance sheets.
Like I said, there is too much to lose by too many people to have a complete price collapse.
I think we will see junk REO houses sold at auction, and a lot of nice REO homes stay vacant or be turned into rental units, and be trickled onto the market.
I think prices will fall to 2003 levels next year, and then slowly decline the next couple years before levelling.
The next boom may not happen for 20 years, unless it comes from outside the US. Say the dollar drops 5 fold to the euro or yen, and rates drop to 3%. Investors from outside the country might start buying large amounts of homes.
Doug,
You're very astute. I hope you can convince the BHs (where I haven't been able to) that they are committing economic suicide by waiting for a "complete collapse" in prices. It's not gonna happen. What we're seeing now is no different than what has happened before every 15 - 20 years. It's just a normal down cycle.
"People with homes cant buy homes in a bust because they cant sell. Once a boom starts, new buyers start competing with current owners searching for their next place. Thus, the boom can only start with a large influx of first time buyers."
We have already been over this.
They can sell.
You act like it isn't possible to sell and that there aren't buyers out there.
If they price their house correctly it will sell in a timely manner. The problem is that sellers continue to hold out hope that somehow they will get a price near what they saw at the peak.
"Like I said, there is too much to lose by too many people to have a complete price collapse. "
I am not sure how you define a "complete price collapse."
"I think prices will fall to 2003 levels next year, and then slowly decline the next couple years before levelling. "
To me a fall to 2003 pricing would be a big drop, especially if we hit those levels next year and continued to lose some value over the next couple years. We might actually agree as far as the extent of price declines we are expecting but I am not sure that we will see them that fast.
Look at the October sales data tables that show medians going back ten years from a few updates ago.
Arlington 2007 487k
Arlington 2003 356k
Alexandria 2007 430k
Alexandria 2003 262k
Fairfax 2007 425k
Fairfax 2003 312k
PWC 2007 325k
PWC 2003 227k
A return to 2003 pricing would be a pretty huge drop. I think if a would-be seller were to price their house at 2003 levels right now they wouldn't have any trouble selling, even in December.
"It's just a normal down cycle."
here we go again lance...
“Wells Fargo & Co., the second- largest U.S. mortgage lender, will take a $1.4 billion pretax charge tied to increased losses on home equity loans.”
“CEO John Stumpf said this month the bank is ‘not immune’ to the housing market slowdown, which he called the worst since the Great Depression.”
But hey, what does he know?
Certainly not what you do!
I think there is a disconnect here on what people consider a "price collapse". Forget about inflation for a minute and think about what it means to have prices adjust back to 2003. As Leroy posted :
Arlington 2007 487k
Arlington 2003 356k 27% drop
Alexandria 2007 430k
Alexandria 2003 262k 39% drop
Fairfax 2007 425k
Fairfax 2003 312k 26% drop
PWC 2007 325k
PWC 2003 227k 30% drop
(The % signifies the loss if 2007 prices reverted to 2003). Do you think this is not a SIGNIFICANT drop in prices? Remember, if prices go up 100%, it only takes a 50% drop to wipe that out. Example :
2000 : $150K
2005 : $300K (100% up)
2008 : $150K (50% down)
Let's try adjusting this for inflation @ 3% a year :
2000 : $150K (base line)
2005 : $300K/$259K (real/adjusted)
2008 : $150K/$118K (real/adjusted)
That looks like a loss of 21% over 8 years inflation adjusted. If we go by the metric that homes go up at the rate of inflation, the home bought in 2000 for $150K should be worth $190K in 2003 (assuming 3% inflation). Maybe the value of that home WAS $190K in 2003 before speculation took over. :)
I'll use my old TH as an example. Straight from the tax records :
07/2005 $490,500
10/2000 $225,000
10/1992 $190,000
05/1988 $200,085
(Do I spy a LOSS there? Tells the story of the 80s boom.) I don't know what it would sell for now, but sales figures for the area hover around $440K and the site only shows sales up to 12/2006. I can only assume it is worse now. If we assume my number is the peak and it is $440K now, that is a loss of 10% so far...add in another ~6% for inflation. If you use 2000 as the basline, the price "should" be $277K. That would signify a drop of 43.5% from peak to get back on track. Maybe this is how I should price all homes I want to consider buying?? :)
I also think people are forgetting to look at the last two housing booms in the 70's and 80's. If you look at Robert Shiller's history of home values chart, you will see prices in both of these booms basically reverting back to the baseline. Remember, it is inflation adjusted. This boom/bust could be different, I don't discount that possibility.
My biased opinion is an avg drop of 20% - 30% from the peak in NOVA. If recession hits, it could be worse.
Lance,
If it's a normal down cycle, then how are "BH's" committing economic suicide by waiting to buy . . .
Oh never mind.
Ok maybe we were on the same page. It just sounded like many people on this site expect to see a massive crash down to home price levels back in the 80's or early 90s.
Harriet asked ...
"Lance,
If it's a normal down cycle, then how are "BH's" committing economic suicide by waiting to buy . . ."
Because the "complete collapse" will never happen ... and by waiting and waiting they'll end up missing opportunities that come along. Harriet, some of these people have been waiting for this pricing collapse to occur since 2000 when the first talk of a "bubble" surfaced. Can you explain to me please how these folks haven't already done themselves economic harm? I mean, from your postings, I don't believe even you would believe that prices anywhere desireable would fall back to anywhere near yr 2000 levels, do you? And while you personally may be willing to buy when prices drop a reasonable percentage, from what I hear on this and the Bubble Meter blog, there are lots of people out there waiting for an unreasonable 50% - 70% drop.
"Ok maybe we were on the same page. It just sounded like many people on this site expect to see a massive crash down to home price levels back in the 80's or early 90s."
No no no, at least I certainly don't.
The only people I see throwing out predictions like that are trying to set up strawman arguments.
I think I have heard more such supposed "bubblehead predictions" from lance than I have from all others combined.
A ~30-40% nominal decline would be about the max I expect to see. Numbers may be higher out west and in bad areas of the District and so forth but area-wide I think about 30-40% off is all we are going to see. Of course things are likely to stagnate for at least several years afterwards and inflation-adjusted declines will be larger.
Lance,
Ben Jones started the "Housing Bubble Blog" in late 2004, not before.
Doug,
I personally haven't seen any reference to "80s-90s" crash pricing on this blog, or on any others for that matter.
I remember in 2005 some strange logic at the Washington Post real estate chat board went, "prices can't fall, because they haven't since the Great Depression". There were those ruling out the notion that real estate prices could even *fall*.
"from what I hear on this and the Bubble Meter blog, there are lots of people out there waiting for an unreasonable 50% - 70% drop."
Like who? You keep referring to these supposed predictions but I am not seeing them. I certainly don't remember seeing anyone make a prediction like that on this blog.
While we are talking about predictions... you have quite a track record yourself.
Are these your predictions lance?
"The window of opportunity for those who have been sitting on the sidelines waiting to purchase is quickly slipping away, however I suspect most bubbleheads will miss it. I just hope they are on here a year from now explaining why they are still "waiting it out." The justifications will be interesting to hear." lance September 25, 2006
"If I were looking to buy, I would accelerate the process. Pressures are going to come to bear to start driving prices higher again very very soon. And of course, if interest rates go anywhere, it will be up."-lance March 1 2007
"Trillions of dollars of ARM reset in the next two years not relevant?"
Again, not relevant because and every one of these lenders was qualified and found to be able to afford their loans even if interest rates happened to rise to the highest allowable under the loan contract terms. So, how many actually hold these ARMs is irrelevant to your argument since ALL of them should be able to afford any resets." - lance
July 06, 2006
"if we have higher than anticipated defaults on the mortgages issued in the last 5 years (and the key is "higher than anticipated" since all other defaults are ALREADY priced in), then the result will just be higher interest rates or initiation fees for NEW mortgage takers. I hope this helps you understand why you shouldn't be expecting the banks (or even current investors) to feel any pain if foreclosures go up."
- Lance Jan 15 2007
Wow, have some good discussion going on here.
Listen, there are going to be ARM resets, on loans that are upside down. There are going to be foreclosures.
What I believe is that there MUST be some additional lender to borrower cooperation going on in the next 12-18 months to keep people in their homes.
Banks do not want to become full time real estate sellers. They want to keep accepting cash payments for these loans. I truly believe more and more of them will follow Countrywide and make deals with borrowers that were unheard of 2 years ago.
Communication will be the key to all this. Borrowers need to contact the bank BEFORE they start missing payments, hopefully BEFORE their ARM resets.
If I was in this position, I would call my bank and be like - "Hey, I need to refinance before this rate changes, what can you do for me?" If that fails "Hey, Im going to sign over the deed if you guys dont help me make this house affordable." They have as much to lose as borrowers do - maybe even more.
I hope this happens, if for no other reason my retirement fund has lost substantial value since this summer!
Doug, thanks very much for your answers. I understand where you are coming from now. Good dicussion too.
Banks do not want to become full time real estate sellers. They want to keep accepting cash payments for these loans. I truly believe more and more of them will follow Countrywide and make deals with borrowers that were unheard of 2 years ago.
Here's the problem. Most banks don't own the loans they made. They packaged the loans and sold them to Wall St. So there is no "one" entity for home-owners to negotiate with.
Justin, your bank still owns the mortgage, they take the loss on their balance sheet. The investments lose value, and dont pay a dividend.
Normally what happens is this -
1.) Joe buys a house from local loan officer - say George Mason.
2.) George Mason sells the loan to HSBC for a fee. George Mason pockets the fee and re-loans the money. HSBC now takes the loan payments.
3.) HSBC Packages the loan with 1000s of others and sells it as a AAA asset backed security that yields 6%. The money they receive from investors they go buy more loans.
If Joe cant pay his mortgage, he calls HSBC. They work something out. Else, HSBC has 2 problems. First, the value of their asset decreased from the purchase price to the current market price, which is undefined. They may need to write down the entire amount of the loan on that quarterly balance sheet. Secondly the fund is no longer yielding 6%, so people start selling it. Its price decreases and now they cant generate new revenue to make new loans. Soon they dont have enough cash to continue operations.
Like I said, Joe may lose his place to live, but the bank stands to lose even more. Thats why Countrywide is offering below market rates to refinance ARMs. They need to keep defaulted loans off the balance sheet, and they need the revenue coming in so that their securities dont get branded junk bonds.
Thats why Countrywide is offering below market rates to refinance ARMs.
Okay. But doesn't that just postpone the problem. The home-owner still isn't paying any principle, and the price of the property is still decreasing which elimiates the secondary market for the loan.
And the secondary market is what allowed a lot of new buyers to buy homes over the past 7 years. Without it, I don't think you're going to see the same amount of liquidty available for home buyers.
Lastly, I think most people will just accept foreclosure rather than continuing to pay a loan they will never pay off.
Justin...
1.) They are offering to refinance ARMs to a fixed rate loan with principal. I understand they are offering 40 year amortization to make payments lower.
2.) Yes there is a credit crunch right now. Less people are able to get loans. Thats another reason why its stupid for banks to take possession of properties and dump them on the market - the market cant absorb them!
3.) I disagree - most people are not quitters, and many have emotional attachments to their homes. Speculators who dont live in their property could care less however.
1.) They are offering to refinance ARMs to a fixed rate loan with principal. I understand they are offering 40 year amortization to make payments lower.
Is a 40 year loan really that much different than a 2/28 ARM? How much principle are you paying in the first three years of a 40 year loan? Not much.
2.) Yes there is a credit crunch right now. Less people are able to get loans. Thats another reason why its stupid for banks to take possession of properties and dump them on the market - the market cant absorb them!
I agree with this. I just don't think there is really all that much banks can do, but I agree it is certainly in there best interest to keep the properties from going into forclosure.
3.) I disagree - most people are not quitters, and many have emotional attachments to their homes. Speculators who dont live in their property could care less however.
I disagree. But we'll find out over the next couple of years.
If financial institution do behave as Doug suggests, does anyone think that will undercut the impetus for more government bail out plans, such as the Governator's in Cali, which is now being also being talked about by the Conference of Mayors? So far, the federal plan passed by the House has been a no go in the Senate.
I know the mayors and governors want to save their bubble funny money tax base rather than being fiscally responsible and cutting their municipal budgets, but is that what voters really want?
notme said:
"I know the mayors and governors want to save their bubble funny money tax base rather than being fiscally responsible and cutting their municipal budgets, but is that what voters really want?"
The mayors and governors don't need to prop up housing prices to retain their tax base ... they can always just raise the rates if values go down. (And incidentally, state governments aren't usually funded by property assessments. Local governments are.) What the voters really want ... and the mayors and governors want ... is a stable populace "invested" in their homes and communities. Homeowners give them that. Renters don't. So, like doing what it takes to make it easier for families, the mayors and govenors will do what they can to make it easier for people (many of which are families incidentally) to stay in their homes. And it doesn't matter if you or I think this is fair. The majority of the voters will think it is not only fair, but an obligation of these mayors and governors.
Thanks doug,
You have some very interesting insights.
My guess is that we've passed the bottom and the upswing will be faster than the last time. That is, it won't take 10 years, 1990-1999. It will be 2005-2010.
Wow. It hurts to read some of these posts. Lance, I will agree with you that this is a "normal swing" in prices. In fact, if you look at the graph Shiller did dating back to 1890, you see that prices have often returned to moderate levels after quick run ups. So by your own admission, this time should be no different.
http://tinyurl.com/zptel
Do you really think that these prices are sustainable for most people? They will come down because people's purchasing power is declining (more stringent lending practices, falling dollar, overstretched with the credit they already have).
When homes are 5-8 times salary, they are unattainable.
chrisb said:
"When homes are 5-8 times salary, they are unattainable."
This rule of thumb is based on double-digit interest rates as have been the historic norm. When you have interest rates of 5% or 6%, the 5 - 8 times salary rule of thumb doesn't work. We had discussions about this on Bubble Meter and it was shown that when you consider what it costs monthly when all is said and done, people paid a far higher percentage of their income for a mortgage payment in the early 80s than they do now with these incredibly low interest rates. The bottom line is what it costs you a month out of what you earn a month. And based on that, prices are now a little higher than average but historically not nearly as high as they have been in past periods.
If history is any indication, what will happen is that some prices will go down (in "edge" areas such as new developments or transitional areas being re-developed) and stagnate in most others. (As we've been seeing over the last year). Eventually inflation will bring the effective price of homes down and raise rents ... making a home purchase more attractive to people waiting it out. Current mortgage holders will of course be the big winners as they pay back their mortgages with inflated dollars as salaries rise to meet other inflated prices. History always repeats itself. Why should we think things are different this time?
Interesting theory lance.
I will go ahead and file that along with your other interesting theories such as...
Foreclosures won't rise because everyone with an ARM was qualified at the maximum possible payment.
If foreclosures do rise it won't hurt banks or investors because the "risk models" are accurate.
Price are going to start moving higher again "very very soon" and interest rates are going up...
"Eventually inflation will bring the effective price of homes down and raise rents .... "
We're close to it now.
Money is flying around this town like I've never seen it before.
I've been priced out of the Stafford Market for 6 years now. Prices escalated very quickly -- but are definitely sticking. Builder incentives (other than Hovnanian) are laughable. One builder has 3 homes that are on the market a stone's throw away from 6 foreclosures/short sales.
Many of the lots have a wonderful view of power lines.
Yet, they still want to sell homes for well over $130/square foot.
Another builder -- charging $150/square foot on a .25 acre lot (don't forget the lot premium!) for vinyl and laminate.
Yet another builder $519, couldn't sell it for $488 -- and is still vacant.
The only homes in our area that are selling quickly are selling for $100/square foot or less (main square footage, NOT including basement).
Retail businesses in the area are hurting -- I know numerous stores whose sales are down 40% YOY for the month of November!
We're actually contemplating owner-building, because materials and labor have come down so far.
We have a couple of REOs we're interested in -- but we don't think the bank will actually take our highest offer (which would be close to 2003 pricing). Unless we can find a home that is truly "marked to market" we'll in all liklihood, build on one of these gorgeous, excavated, site-work completed pre-construction sites that the builders are trying to sell off for roughly 50% of what they were selling them for in 2006.
Lisa,
Yes, there are several finished lots for sale in Northeastern Prince William County as well.
Before it closed, Pulte had a large factory in PW County where it assembled basically modular homes -- structural insulated panels that were attached to steel frames.
A modular home might be worth exploring -- they are energy-efficient and quick to assemble. They'll blend in just fine on the outside because they are adaptable.
I think there's a model home center here for Clayton Homes.
CLAYTON HOMES-FREDERICKSBURG
8433 JEFFERSON DAVIS HWY
FREDERICKSBURG, VA 22407
(540) 898-4955
NDI homes also has new homes for under $100 a square foot.
Lance said :
"If history is any indication, what will happen is that some prices will go down (in "edge" areas such as new developments or transitional areas being re-developed) and stagnate in most others. (As we've been seeing over the last year). Eventually inflation will bring the effective price of homes down and raise rents ... making a home purchase more attractive to people waiting it out. Current mortgage holders will of course be the big winners as they pay back their mortgages with inflated dollars as salaries rise to meet other inflated prices. History always repeats itself. Why should we think things are different this time?"
Considering the frightful speed of appreciation from 2000-2005 (~15% a year), prices will have to be stagnant for quite a number of years to come back to normal ratios. Numbers time...according to housingtracker.net :
Asking median price
11/2006 11/2007
25th% - $339,917 $295,975
50th% - $447,750 $386,332
75th% - $601,708 $534,475
25th% - 12.9% decline
50th% - 13.7% decline
75th% - 11.2% decline
And we all know selling prices are *at least* 5% less than asking prices now but *not* before.
Now, unless inflation is ~12% this year - how does this work with your argument of mostly stagnant pricing bringing things back via inflation? The numbers show a nominal decline in prices which are only exacerbated by inflation. If inflation is 3%, then maybe we are right on target to wipe 15% a year until we hit the "right" asking price. Hah, didn't see that until I did these calcs just now! If you see a flaw here, please point it out. I usually use this site http://www.mris.com/reports/stats , but housingtracker was easier.
BTW, want to see an interesting chart?
http://tinyurl.com/2lep8f
According to this chart, prices of homes adjusted for inflation at year 2000 have quadrupled! I don't consider the current housing boom until after 2000, so it makes me wonder about the inflation adjustments the gov is using considering everywhere I have read, real estate historically goes up at or slightly above the rate of inflation.
I remember reading that the No.VA area has seen an historic increase of about 7% a year for housing, etc.
In Stafford County, from 2001-2005 we saw prices jump 20-25% a year.
A 15% decline is nowhere close to bringing things back in line. I think Forbes and Goldman Sachs are more on target (with declines of 26% of June 2007 prices -- to over 30% decline in pricing in the area).
This may not be true for every area of the No.VA market, but for PWC, Louden, Stafford... Spotsy, Faquier, Orange, King George -- where land is abundant and housing USED to be affordable, we have a long way to go before things balance out.
Only two builders I know of have dropped their pricing to 2003 or earlier.
I honestly think that many of the area builders, developers, etc. really believe that because of the USFG we're fairly "immune" to market forces.
When they ask me what it will take to move me into one of their homes, I tell them -- it's about the price. Forget making my payments lower -- that's what got people into this mess to begin with. Over-inflated house prices with affordable payments -- then needing to sell and not being able to.
I'm ready and willing to buy (or build), but the price has to be there.
Lisa,
I'm not sure if what are you saying here is in partial response to me :
"A 15% decline is nowhere close to bringing things back in line."
but if you look carefully, I wrote:
"If inflation is 3%, then maybe we are right on target to wipe 15% a year until we hit the "right" asking price."
Meaning that a 15% decline in prices PER YEAR could (should?) occur. Would make sense to lose each year what was gained each year until we hit a balance.
"I remember reading that the No.VA area has seen an historic increase of about 7% a year for housing, etc."
That is way high.
7% per year means prices would double roughly every ten years.
Generally housing tracks inflation. Some areas can beat inflation slightly but you are not going to sustain anything near 7% over the long term.
"A 15% decline is nowhere close to bringing things back in line. "
Not exactly true.
It is true if you start counting in 2000 or 2001. If you go back to 1989, 1990, and include the 10 years of no appreciation in this area, the last 7 years still have not raised prices much beyond that 7% average.
In that sense, places are undervalued. If the Fed lowers interest rates, prices may begin climbing again.
"Against stupidity the gods themselves contend in vain."-Isaac Asimov
KH, you are saying that 2000-2005 rise is prices is "making up" for stagnant years of 1990-2000? Interesting comment. :)
If this is the case, prices shouldn't fall and rent should be going up in sync with the increased mortgage payments. I am not seeing either of those.
What I see is a rent/mortgage ratio that is out of line with historical averages by 20%-30%. It's simple, either rents go up or mortgage payments go down (or some combination of the two). I'm going to make a wild guess and say rental rates have gone up with inflation and that the imbalance is mortgage rates have gone up beyond inflation.
Actually, based on the mortgage/rent ratio from 1990-2000, rents must have stayed mostly level since most assessments I've seen from this area show stagnant housing costs. It's hard to say, the data conflicts in different places depending on who is doing the inflation calculations, etc.
I've not seen anyone do convincing calculations to show where prices should be taking into account the last 50 years. I mean in NOVA, not nationally.
"KH, you are saying that 2000-2005 rise is prices is "making up" for stagnant years of 1990-2000? Interesting comment. :)"
I don't know if you were reading this blog when kh explained the reasoning behind that 7% number...
...basically what he/she did was calculate what the average appreciation between the late 80s and the peak of the bubble would have to be to justify peak pricing.
The answer was 7%... therefor 7% is "normal" and the 90's were "below normal" and the bubble was just catching up to "normal."
Her theory is self proving. As long as you just calculate the rate of return necessary to reach the present price level and designate that return as "normal" you will never conclude that present prices are out of line.
As a predictive model it is absolutely useless.
(and of course there is the overwhelming body of data available that shows the bubble was not sustainable or simply "catching up" to anything.)
Leroy, I remember it. :) It can be used to support his argument, but I don't think it predicts future value. The question is "what is the historical average" and which parameter do you like? I like to use mortgage/rent ratio and affordability. This are clearly out of whack if you look at housingtracker.net. Take a look some time...
"Leroy, I remember it. :) It can be used to support his argument, but I don't think it predicts future value. The question is "what is the historical average" and which parameter do you like?"
If someone were really interested in asking the question "are current price levels in line with historical trends?" they would exclude the most recent several years of data from their calculation.
If you look at the last 30 or so years, excluding the last five, where do the last five years fall on the trend line?
Of course in this case the last few years are completely out of line with historical averages.
You have to ask yourself... if it were 2000 and I were predicting what was to come... what would trends suggest 2005 pricing would look like. Using data from 1950-2000 you couldn't make an argument for anything near what we have recently seen.
It is only by effectively designating bubble pricing as "correct" and working his way backwards that KH can "show" that bubble pricing is "normal".(and conversely that all of the last several decades were undervalued...
)
"What I see is a rent/mortgage ratio that is out of line with historical averages by 20%-30%. "
Yes and that is your interpretation. It is not the "gods speaking".
I have actuals/numbers going back to the 1970s for this area and the 7% is consistent.
Perhaps Lance has clouded everyone's minds but unfortunately this has led to BH's cherry picking the data and making wild claims of infallibility, desperately trying to be right by flinging insults.
What you write is "true" but the interpretation might not be.
Some BHs are saying that just because I used the longest time periods available on line (in the Alexandria database) and it is not consistent with their 2000-2007 church-of-Schiller beliefs, my assumptions are flawed.
Both Alexandria and my records (which go back to the 1970's) are consistent.
You can find 2 and 3 year price falls, 1991-1993 in Alexandria is one example. About 1980, during the oil shock, was another.
This one? My guesses are down 5% maybe? Perhaps down 10%. Milder than 1993 or 1980, hardly worth noting in the grand scheme of things.
There are also price jumps. The early 1970's, just before the inflation, and the mid 1980's when the S&Ls went ballistic.
The records are there and trump the BH religious visions.
As for your point, prices are too high because rents are too low.
Possible futures:
1) Significantly lower prices (down 25%) is one interpretation.
2) Higher rents (+25%) can resolve this also.
Moderately higher rents (+12%) and moderately lower prices (-12%) are another possibility.
Don't believe the BH bull. They cannot see the future with any clarity. If they could, real estate would have crated out in 2002.
lol
What else is there to say?
I hope you publish your "research" the economists of the world would enjoy reading it.
What about Price to Income ratios?
In my area, the median income is $76,250. The median home price is $381,600. Making our Price to income ration a "5" (this number has come down, from closer to 6.5). It's no longer affordable to live an hour outside of DC (and hasn't been since about 2001).
If "affordability" for price/income ratio is 3.8 or lower, than prices in Stafford County need to fall about 24% -- meaning that $381,600 house should be priced closer to $290k (or less)
This formulation seems to reflect what people here are saying about price/rent ratios.
As far as rents going up... they can only go up IF people can afford to pay the increased prices. Income is NOT going up dramatically in the area, which means at best, rents will have to remain flat...or simply pace to inflation (which they seem to have been doing).
We have all sorts of vacant homes in the area -- rentals and sales (although the vacant homes are usually REOs or RELOs). Only the agressively priced homes move quickly (3mos or less). One area here has a 36 month supply, another area has 30 month supply... these are mostly "newer builds." They also have the highest percentage of REOs, Short Sales and RELOs.
This tells me that prices and rents will probably BOTH have to fall in order to get these homes lived in again.
I think we're still early on in this process. Especially with builders in our area holding onto lots for 2+ years thinking they are still going to build 3,000 sf $650k luxury homes (when down the street Lennar is having to sell their 4,300 sf tricked out versions for over $100k below that price.)
I have said before it is amazing all the financial experts on this blog. I wonder why the "think tanks" have not recruited some of these people who are so much smarter/wiser than Shiller, MarketWatch, the Federal Reserve, Wall Street, the entire banking industry, econ professors in pretigious private universities, leading market analysts, and just about anyone who has any finance credentials or is respected by the worldwide financial community. We are in such astute company I am awestruck. Maybe I should forward some of the RE financial advice to MarketWatch and Sec. Paulson. Both should be up on the truth which apparently neither is at this time.
kcwood...I know I'm not claiming to be any wizard at it, but what I think we are trying to do here is get numbers that work for OUR area (NOVA), not the national average.
I still stand by my argument that affordability is a problem and rent/income is not historically correct. I have already shown data from housingtracker.net, though it only goes back to 1987. I'll post a short version for clarity :
Year %Income Price/Income
2007-2Q 28.40% 4.7
2007-1Q 28.00% 4.8
2006-1Q 28.80% 4.9
2005-1Q 24.80% 4.4
2004-1Q 22.60% 4.1
2003-1Q 19.70% 3.5
2002-1Q 18.50% 2.9
2001-1Q 17.90% 2.8
2000-1Q 18.70% 2.6
1999-1Q 16.10% 2.6
1998-1Q 17.40% 2.7
1997-1Q 18.70% 2.7
I haven't looked it for before 1987, but I'm willing to bet it has never gone above 20% or 3 unless it was during another boom or some sort of economic shock. If someone can find this data, please post it.
From HUD.GOV :
"The generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing. Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care."
Interesting that we basically capped at 28.4%. Another place to look :
http://www.ofheo.gov/hpi.aspx
Alexa,
I have no disagreement with you, nor would most of the professionals I referred to. My remarks were intended for some know-it-alls who continue to go against every professional (not realtor) assessment of the current situation. Some of these folks could lecture Einstein on physics. Believe me, go with Einstein unless you are a renowned nuclear physicist. Most of the know-it-alls see the world only as they want to and wouldn't have believed Galileo either.
I agree totally with the 30% rule. I have never, never paid more than 30% of my income for a house including tax and insurance. HUD is correct.
I am older than most on this blog and have owned many homes since 1977. My ex and I were never house poor. Our values for education, travel, privacy and raising a family in a good neighborhood superseded buying a mansion or an over-priced dwelling in a trendy neighborhood.
No, Alexa, you seem to be reporting facts NOT gleaned from realtor sites. We should never, ever listen to the president of any industry association. They have a obligated bias to say what benefits their industry.
We should read articles and news releases of respected groups and professionals whose jobs are to monitor an industries. Though all real estate is local, the experts have already had their say about DC and some can't or won't believe it. Thus far the world-respected professionals are ahead by 14 laps.
Didn't Karl Rove say something like if you say it 4 times it is truth? We know where Karl Rover is now. Unemployed. Saying something over and over doesn't make it true. I chose go with the real seasoned proven professionals, not someone sitting at their computer every night discounting every expert in a field because they chose not to.
Would NASA ask the milkman to design to an IT system for the shuttle mission? He programs his computer at home. NO, I think I will stay with a proven professional specialist. They make mistakes at times, but they wouldn't be respected professionals if they weren't right most of the time. People on this blog wouldn't get paid a dime for their analysis. Though Harriet has been noted elsewhere for the presentation of information. As she should.
A fair question is do BH's believe their mantra?
Could Lance be right, they are afraid that they are priced out of the market for all time?
There is so much fear and anger in their prose, name calling, snide remarks, and faux bravado.
As Lance says, no one who owns cares, unless you bought a distant McMansion at the peak, you are so far in the black that by any standard you are wealthy.
If you make a good salary, like many in NOVA do, you should not be "priced out of the market for all time". You would think the median home price would be 3 times the median household income. Take another look, kh.
Thanks for the clarification kcwood.
BTW, in case anyone is unsure, "alexa" really means "Alex A".
Did a quick lookup of fairfax county:
Median household income
2003 $80,800
2004 $88,100
2005 $94,600
2006 $100,300
Median Market Value for 2006
Single Family Detached $642,730
Single Family Attached $420,757
Multifamily Units $306,010
Total Units $538,940
Here is a link to Alexandria county if you want to look there too :
http://tinyurl.com/2f59z4
$100,300 / 12 * 30% = $2,500. 30% is the MAX recommended. I won't do the math...
"Could Lance be right, they are afraid that they are priced out of the market for all time?"
Of course not... anyone with some basic reasoning abilities can see that that isn't going to happen.
The whole idea of being "priced out forever" is just a scare tactic cooked up by real estate pumpers designed to try to pressure people into overpaying.
"You had better hurry up and buy now! Otherwise you might NEVER be able to buy!!"
Real estate tracks inflation... if real estate out-paced inflation it would quickly become the case that new buyers could not enter the market. That is exactly what happened in this bubble.
"There is so much fear and anger in their prose, name calling, snide remarks, and faux bravado. "
Maybe people just get tired of ignorant internet "experts" who try to hold up their obviously fundamentally flawed, sophomoric finger-painting analysis as an alternative to work done by widely respected economists who have spent much of their careers studying RE...
"As Lance says, no one who owns cares, unless you bought a distant McMansion at the peak, you are so far in the black that by any standard you are wealthy."
That is funny... because lance obviously cares a great deal. Otherwise why does he spend all day trolling bubble blogs that he is SOOO convinced are all wrong?
I think we all know lance's story.
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