"We’re not at all claiming that the housing downturn is mostly done. On the contrary, we’re assuming that house prices have fallen about one-third as far as they’re going to go peak to trough. That may seem pretty cautious or even pessimistic but I think cautious is exactly where you ought to want us to be right now".
Dick Syron – Chairman, CEO, Freddie Mac
Q4 2007 Earnings Call
February 28, 2008
Friday, February 29, 2008
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Posted by Harriet at 10:39 AM
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Wow, thats going to really hurt a lot of people. That will set prices back to 1998 levels.
If thats true expect a complete banking system collapse as 75% of the home owners that bought in the last decade will likely send in their keys.
Get ready for the next great depression.
Good. Some sense from an official.
doug,
They have fallen in DC about 9% I believe from peak. That puts the estimate from this official at 30% in their worst case. The rise since 1998 was over 100%. Prices woud have to fall over 50% to get to 1998 levels.
How are you getting 1998 levels?
I think this would put prices back to 2002/2003 levels. Really, no one should be shocked by this. And a return to 2002/2003 levels is NOT the end of the world.
Assessments in PWC went up 89% 2003-2006. A 16-19% drop this in this year's assessments (as forecast) would only dent that run-up. The additional 20% drop forecast for this year would also not erase those numbers back to pre-2003.
But I think reality is far ahead of assessments/2007 sales data, due to current supply + yet to come foreclosures. The majority of "sales" here are actually bank takeovers, which are actually additional supply, not sales. And those numbers are inflated still, because bank balances are above the actual value of those homes.
When I have the time, I check the charts on NVAR/MRIS websites, but for a short cut, I use Melissadata.com. Here are snapshots from a few local zip codes:
20110 (Manassas City)
2/2008
34 sales/$253,000 ave. purchase price
2/2007
34 sales/$405,000 ave. purchase price
2/2006
76 sales/$386,000 ave. purchase price
2/2005
74 sales/$329,000 ave. purchase price
2/2004
69 sales/$256,000 ave. purchase price
*at about 2/2004 ave. purchase price now
20136 (Bristow)
2/2008
22 sales/$336,000
2/2007
41 sales/$445,000
2/2006
52 sales/$522,000
2/2005
57 sales/$469,000
2/2004
44 sales/$339,000
*at about 2/2004 ave. purchase price now
20111 (Manassas Park)
2/2008
30 sales/$296,000
2/2007
29 sales/$351,000
2/2006
34 sales/$419,000
2/2005
45 sales/$374,000
2/2004
44 sales/$236,000
*at about 2/2004 ave. purchase price now
Again, these averages don't take into account the much higher suuply now, nor how that supply will definitely continue to increase for at least another year or two.
Further, this does not account for all the new neighborhoods that were built 2004-2006, which are still incomplete, and in which 100% of the owners are underwater, sometimes by a quarter of a million dollars or more.
Has this ever happened before?
What?!?
Get that man fresh KoolAid! We cannot have major financial CEO's being housing bears. ;)
Doug said:
That will set prices back to 1998 levels.
Sad... but likely.
Prices in DC have fallen 13.3% so far. Don't forget Case-Shiller is based on resales. New suburbs with few (if any) resales are not weighed in. Ex-urbs with few sales don't count for much either. Case-Shiller is being driven down by the actual re-sales; that should be mostly in the inner area. (Where resales volume is higher than the ex-urbs where builders are still undercutting the resale market.)
Assesments lag by ~18 months. So there is a lot of pain ahead.
Got Popcorn?
Neil
"Case-Shiller is being driven down by the actual re-sales; that should be mostly in the inner area."
Neil - as has been pointed out many times in the past, there are FAR more resales in the suburbs and exurbs than in the inner areas.
Per Jan MRIS
Inner area sales for
Arlington, Alexandria & DC = 248
Innermost suburbs of Fairfax, Montgomery, & PG = 1,066
Also, you cant really discount the exurbs because you fail to see how HUGE an area Case Shiller covers - Jan MRIS sales for the exurbs = 963
Just to recap - Mris sales in the inner areas = 248
suburbs & exurbs = 2,025
Are some of these MRIS resales really new sales from developer to owner via broker? Sure, but not many - definitely not enough to overcome the more than 8 to 1 ratio noted above. Thus, no matter how you slice it Case Shiller is an index that is HEAVILY weighted towards areas other than the urban core of D.C.
Looking at Harriet's "NAHB/Wells Fargo Housing Opportunity Index (HOI)" post from a few days back. The median price during the '90s went up & down a few thousand every year. But between 4th quarter '01 and 1st quarter '02 the median price jumped by $83k. Even the jump from 3rd quarter to 4th quarter '01 was $16k, quite a jump from 1 Q to the next. The HOI dropped in that one quarter from 78.2 to 57.8.
Average incomes between '01 and now have increased from roughly $85k to $92k, so I'd expect the median prices to increase (once this bubble straightens itself out). Quick calc:
($184k med. price) / ($85.6k/yr salary) = 2.15
($92.6k/yr salary) * 2.15
= $199k median house price
Now that $200k house will require a $40k down payment. It's not huge, but it does reduce the number of possible buyers. On the other hand, I'd rather pay $160k back than $260k, $360k, $460k ...
I personally do not believe that you will not be able to get a mortgage unless you have 20 percent.
It will get tougher, yes, but I think you'll still be able to get below-jumbo mortgages with 5 and/or 10 percent down.
I have no proof or data, this is just my opinion.
Yes Neil, 1998 prices are likely.
What an idiot.
Now that $200k house will require a $40k down payment. It's not huge, but it does reduce the number of possible buyers. On the other hand, I'd rather pay $160k back than $260k, $360k, $460k
lol.
It amazes me when I tell the older generation what a big deal it is that 25% down payments are back. They simply don't understand how rare it is to have that today.
Some people haven't even realized what it means for Wells Fargo to declare all of DC, its Virginia and Maryland suburbs as distressed markets...
We're never had a housing gold rush like the last one...
And my company just opened up a few thousand more transfer jobs in 'affordable areas' at 6pm eastern time. The number of internal applications for transfers is amazing... 3X the number of jobs, by 9pm! (West coast employees had today off too!)
The bulls need to start their own blogs; provide data. Just being able to insult... isn't getting any point across. We're one week away from the lowest inventory of the year. Well... normally. That's not the case this year.
Its not possible for housing to drop fast enough, on a re-sale weighted basis, for Case-Shiller to have the drops we're seeing without the core markets dropping in value.
An interesting week. :)
Got Popcorn?
Neil
I am curious, now that the Northern VA Transportation Authority taxing power has been nixed by the VA Supreme Court, what happens to the people that have already paid the Grantor's tax of $.40 / $100 that was part of their package?
I sold my home in January and got socked with a $2,000 grantor tax that I was none too thrilled by. I wonder if I am entitled to a refund now??
There are *some* cases of 1990's redux already out there.
9435 LAFAYETTE AVE
MANASSAS, VA 20109
List Price: $129,900
Prior Sale: $355,000 3/6/2006
Listing Date: 02/22/08
Prior Sales:
$355,000 3/6/2006
$192,000 2/4/2003
$162,000 6/12/2002
$116,500 9/27/1995
8624 WALCOTT CT
MANASSAS, VA 20111
List Price: $164,900
Prior Sale: $350,000 1/17/2006
Listing Date: 02/27/08
Prior Sales:
$350,000 1/17/2006
$338,000 6/15/2005
$180,000 9/5/2002
$125,900 11/2/1995
I wonder if I am entitled to a refund now??
Sounds like it's time to throw some tea into the harbor.
"I sold my home in January and got socked with a $2,000 grantor tax that I was none too thrilled by. I wonder if I am entitled to a refund now??"
You should try contacting the Northern Virginia Transportation Authority for a refund. Their website is http://www.thenovaauthority.org/. You can read the court opinion here: http://www.courts.state.va.us/opinions/opnscvwp/1071959.pdf
Thanks ZMonet,
The court opinion. (The filename got truncated).
"You should try contacting the Northern Virginia Transportation Authority for a refund."
IMO, you should sue them because they violated your constitutional rights, particularly if you contact them and start getting the run-around.
I just closed on a house for $325K yesterday with only 10% down. I had excellent credit and locked in a month ago when rates were lower. Two years ago, the house probably would have sold for close to $400K.
So, yes you can still get a loan with less that 20% down, but it's not easy.
I'm curious as to the opinion of the people on this board. Lets say you have 2 kids and you've outgrown your apartment/townhouse and want a SFH with a yard in a decent neighborhood. To rent a place like this would be about 2200 - 2500. Now you presented with an offer to buy decent foreclosure with the same specs as the rental. However you need to put 20 k down and your payments will be 2800 (with tax/insurance). Would that make you jump at the deal knowing it's only 500 more than renting? Also consider the tax savings and that you will live in the same house for at least 7 years.
Thoughts....
Also I'm wondering how many people that post in this forum are renting now and if so when do you plan on buying. This year, next year or never.
Steve,
If its only $500 more and in good condition... your call.
I'm renting and I plan to buy in 2010, assuming prices go on a normal post bubble trend.
Got Popcorn?
Neil
Steve,
Good question. Luckily, my kids are small enough that I'm not yet in this position. But with 3 of them, I'll be forced out of the townhouse rental sooner or later.
Regarding your question, I think you need to really look at your budget. $500/month is more than I could afford, but you might swing it. I did a quick calculation on tax savings vs. standard deduction using 28% of gross income and it came out to about $300/yr savings. Not enough to get excited about, but my math may have been off.
How long has it been since you looked at rentals? In the area I'm in houses started at $2000/mo. Well, there was 1 house at that price, the rest started at $2200/mo. Now, they start at ~$1700 or so.
You may find this URL interesting: New York Times Rent vs. Buy Calculator. Be sure to read the assumptions it uses before trusting the results. I'd be interested in hearing from the community what they think of that calculator.
I wish you luck!
We are renting, but our landlord is coming back to his house in June, so we need to move.
We are expecting our seventh, so we hoped to buy this spring, because it is difficult to find a landlord who will rent to us.
However, none of our offers have worked out so far, so we may continue renting after all.
We have seen rent prices fall somewhat recently, and we attribute this to increased supply, but also to another phenomenon:
Rent prices have to be high for the accidental landlords who cannot afford their houses and cannot sell them, who purchased for excessive prices between 2003 and 2006.
But more people who bought before the run-up in prices are finding themselves unable to sell, as well, and their rents can be more reasonable, since their mortgages were not as high.
For example, in a neighborhood a mile away from the VRE in Manassas, only two houses have sold in the past year, and one was a foreclosure that sold for about $350K. Between 1990 and 2000, those houses sold for $300K-$350K, but from 2005-2006, they sold for $575K-$625K. A couple houses that were purchased during the first time frame are for rent at about $1800/month. Houses that are still for sale are asking $415K, $445K, $474K, $495K, and $570K, and all have been on the market for 5-15 months.
If those sellers want to try to fill their houses with renters, they need to compete with the folks who bought before the bubble.
Looking at online rental listings and comparing them with county/city purchase records, I always see a correlation between rent amount and paying too much for the house. The poor owners are trying to cover as much of their mortgage as they can.
But as supply increases, as more and more houses can't sell, rents will be pushed down by those who don't need to charge as much to cover their expenses.
In our case, if we can rent a 4000 sqft house with a big yard within walking distance to the VRE for $1800/month, it makes sense to save $1000/month (as well as maintenance costs) and put it towards the bigger downpayment we will need to buy when we do.
Unless we can find an ahead-of-market deal in the next couple months...
[I apologize for the long post. Brevity isn't my strength.]
Steve,
I realize my situation is drastic, but my wife and I took the added step of selling our townhouse in this market so that we could enter the rental market. In a normal market, we'd be looking to about double our housing exposure (i.e., upgrade to house about twice the size and price). We've seen some great "deals" on some very nice SFHs (nearly 25% under peak) but have decided to rent.
My reasoned opinion is that housing will continue to slump and be priced down another 10%+ over the next year. I have to ask, how would you feel if you purchase a $450K - $500K place this year and next year the same place is selling for $400K - $450K? Wouldn't it be better to just sit tight, wait out at least the volatility and then make a purchase? If I, and others, are wrong then you're buying into a stable market instead of a volatile one. Take a look at historical charts of bounce backs after much smaller bubbles and you will realize that even if things were to turn around, housing would only level out for a long time.
I'm so convinced of this fact, my wife and I are going to likely rent a place for $1000+ over what our mortgage would be on our next home. This doesn't even include the tax benefit. My math is that if we bought a $600K house right now and SQUEEZED ourselves into a 30 year conventional mortgage we'd be paying around $2000/month interest. Deduct out around $650 tax benefit and you're down to $1350. Add in property taxes and you're up to $1800. Factor in 1% yearly maintenance on the property (pretty standard) and you're up to about $2300. Now, I could rent a comparable to MUCH better property for $2500 - $3500 and not have to take on the risk in this market. I also get the benefit of the equity from my old house earning me 3%-4% interest. If the $600K house depreciates 5% over the next year, it would be a loss of $30,000; depreciation of 10% would be a loss of $60,000. What do I lose by renting? The joy of home ownership (owning something, being able to modify it, not worrying about damaging someone else's property, knowing I don't need to move, etc).
Again, this is drastic, and the rental price is steep but my wife and I want to make sure that we get into a rental where we're very comfortable because I see us "losing" a lot more money if we buy prematurely into this crazy market. Our plan is to revisit in a year (2009) but find a rental that would allow us the flexibility of renting for another year (2010) if we stick our head out and don't see our shadow.
I keep asking myself, "When did housing become such a potentially poisonous pill?"
Neil, any thoughts on my plan? I follow your posts here and on CR and value your opinion.
Steve,
I neglected to factor in your two kids -- which is a huge factor. We have no children (although we're planning) so I think it would alter our decision if we thought that there was added benefit to the children having more stability. Obviously everything isn't about money.
Ralph,
I like the calculator as it is the first one I've seen that lets me depreciate the house. The issue is trying to guess what depreciation might be in total over the next 1-15 years. To throw out some numbers, I'll say over 2 years, 15% net depreciation; 5 years years, 10% net depreciation; 10 years - 3% depreciation and 15 years - 5% appreciation. Anyone else have some guestimates?
Thanks for the replies. I'm still wondering why people say when there equity goes down "they loose money" First you only loose money when you sell, and if that day isn't coming around for another 7-10 years than don't worry. It's like the stock market, if your stock goes down no one is taking money out of your bank account to cover the loss, again you only loose money/gain money when you sell that stock. I know there is a psychological impact to seeing decreasing value. It's similar to the saying "you are throwing your money away when you rent", that is not true either, you HAVE TO LIVE SOMEWHERE.
I actually bought last May, after selling my 170 k townhouse for 350 k. I found a house that was vacant and sitting for one year. They were asking 600k a year ago, and were down to 500k, the owner just put it in a finished basement to try and move it. They took my 480 k offer, which if they didn't we were going to rent a house. At the time I bought, the same model house was still being built in the development at a cost of 550 k with the options that I currently had. So I figured I did pretty good, considering I put 100 k down from my last house which would give me over 170 k in aparent equity. Within 2 months after my purchase, the builder dropped the model 50 k. Within another 6 months the builder dropped the model another 50 k. I have no ideal what my equity is, and have no idea how anyone knows theirs in this market.
Time will tell if my decision was right, but just like the stock market you really have no idea when is the perfect time to buy and sell.
Do I wish I rented and put 100k into a low risk mutal fund and then rented for 2 years? Sure but I didn't know this forum existed back then.
lol.
Steve,
I view it as "losing money" because if I just sit on the sidelines for a year or two and let things play out, it is my best guess that I can get a 10% reduction in cost. You're right though, it is all a paper loss until you sell.
For both examples say I plan to move on the same date. For purposes of discussion throw out transaction costs (6% realtor, etc).
Example #1: Buy home now for $600K, depreciate 10% over first two years (home is worth $540K after 2 years), home continues to depreciate (nobody can time the market perfect) but home appreciates 10% overall over 15 years (sell for $660K) - add $60K equity to property.
Example #2: Buy same home for $540K two years from now and sell home in 13 years for $660K -- add $120K equity to property.
Also, if I buy the home for $540K instead of $600K, I'll have more ability to do renovations to the place sooner because I'll have freed up some money that I otherwise wouldn't have.
I realize all these appreciation/depreciation numbers are just guesses, but they are my best educated guess. People will arrive at their own decisions based on what they think real estate will do over the next number of years.
Ralph said:
"Regarding your question, I think you need to really look at your budget. $500/month is more than I could afford, but you might swing it. I did a quick calculation on tax savings vs. standard deduction using 28% of gross income and it came out to about $300/yr savings. Not enough to get excited about, but my math may have been off."
Yes, your math is off ... Way off! The tax savings are on top of what you'd normally get from a standard deduction (i.e., 28% fed tax times total mortgage interest per month PLUS 8 - 9 % state/District tax times total mortgage interest per month.)
The standard deduction is intended to estimate what your non-housing related deductions are. When you itemize you get to itemize these non-housing deductions PLUS take the deduction interest for your mortgage interest and property taxes.
Zmonet:
My reasoned opinion is that housing will continue to slump and be priced down another 10%+ over the next year.
10%+ is a start. The downward slope is faster now; in the true spring selling season, we should have an uptick in sales, but the 'plus' side is more likely than not.
As to the rent... there are better deals out there. Negotiate. I would wait.
But you bring up a good point, at some time the tax savings outweigh the downside risk. Hence why I say 2010 will be a good year to jump back in. That won't be the price bottom, but by then the downside risk, for someone who can afford to be geographically locked, will be minimal.
But that is the last question, how certain are you that you will be OK to be geographically locked down? For that is one part of home ownership that isn't often discussed. The historical advice is buy when you know you'll be in one place for 5 years or more.
But something isn't adding up on the rent/purchase equation. There are very few areas with high rents right now. I'm saving a bundle renting, but I admit to renting about six blocks from where I really wanted to for a savings of 20%/month. With kids, its worth paying a premium to be near a park/school.
I'm absolutely amazed how much the asking price for some homes have dropped. Apparently the down payment requirements are already stinging in most areas. We went into three ~$1Million homes that were sold 12 to 18 months ago and are back on the market for ~22% less each.
Not the one where the buyers paid cash. They listed for 107%. ;) No, I won't buy a $1 Million dollar home. But with a return to sane lending, the homes that sold in 2005/2006/2007 for $700k to $2.5 million market will be the hardest hit.
So save your money and get a lot more home in two years. : ) The final price bottom? Probably 2012 to 2014. We have a few years to debate exactly when. ;)
Got Popcorn?
Neil
Manassas City has updated their website with 2008 assessments. Very, very interesting numbers for some houses...about a 20% drop across the board, as predicted. Interesting to see if another 20% drop happens this year.
Ralph do not listen to the "DUNCE". If you have enough deductions, like you usually get from taxes on a house, then you may be able to itemize your deductions and get more than the standard deduction. But you cannot have both.
I love a good thread. Harriet, thanks for letting us play with your toys!
Steve, I didn't answer your second question. I'm renting. I'll buy when when the price is right. I have no predictions of my own of when that might be, so I'll reuse others': in a year or three. There's no hurry. I feel for Tabitha, who must find another residence else. I'm not in that situation.
Zmonet, I like the calculator too. It shows there's a price range above which it's simply not financially worth buying. I typically use house appreciation=0 and rent increase=0. Both of which are false in the real world, but accurate predictions about both are difficult to make.
I think that the calculator underscores the point that the real value of a house is having a paid-off place to live in retirement and not being at the mercy of market rates while living on a fixed income.
Lance/John, I need to educate myself a lot about the tax implications of a house purchase, such as what costs in addition to mortgage interest, state taxes, & local taxes are deductible. I'm suspicious of maximizing mortgage just to save on taxes though. First, supporting a family makes me risk adverse. Second, I need to make sure I'm not just spending an extra $1 to save $0.28. There's lots of time to figure this out though.
Again, much of what y'all are talking about is simply inapplicable to the nicer areas of DC. For example, to rent a nice, livable, updated 3/2.5 SFH in orange line Arlington will cost you at least 3500/month now, where that house will sell for somewhere around 800K, maybe a little more. There are of course group homes that you can rent for less (and that many hill and NGO staffers do) but nothing suitable for a family.
It's funny but there actually don't appear to be ANY single family homes for rent along the Orange Line in Arlington (Ballston to Courthouse).
Tabitha,
Wow! That's a find. Thank you.
Down 20% in a year. So much for real estate always goes up. ;)
Neil
Gruntled--there are some homes--I've generally seen that Metro-walkable (.5 miles or less) homes that are total POS go for a shade under 3K mostly to Hill staffers or grad students; there are some really nice homes above 4K/month, usually with at least 4BRs, and there are a couple of re-done 3/2s good for families between 3500 and 4K. But not that many.
Kob,
(1) the real estate market can be timed much better than the stock market. To say that it can't, doesn't look at the historical trends and how long it generally takes for prices to drop and then start to rise again;
(2) interest rates were high back in the 80s because the inflation monster (is this a friend of the "bubblehead"?) needed to be held in check. I'm not confident that inflation can still be held in check, but I think the Fed is aware and is most likely going to try harder to fight inflation than anything else. As a result, I'd be shocked to see interest rates rise above 8%. If they did, you'd see the "bubblehead" predictions come true as less and less people could afford home ownership. If I'm renting, I wouldn't mind seeing higher interest rates. I'd watch home prices come down, buy a place and then refinance in the future. Would I time the bottom. Of course not. But I would have saved myself a couple years worth of depreciation.;
(3) I don't know about your "bubblehead" rant, but I don't think we need to return to 1998 price levels to see real gains in sitting on the fence and renting. Look at the fundamentals -- look at rent to purchase prices and tell me how those levels can be sustained. They can't...and as more people figure out that renting is cost effective, they will rent -- tax advantage or no tax advantage.
(4) Why do the people who say, "Well, North Arlington, Bethesda, Old Town, etc won't see a price impact" sound so much like those people who said, "Real estate always goes up"? Believe me, as the outer ring starts to drop, it is only a matter of time before the inner ring sees downward pressure too. Will it see as much? No. But to think of this as only a suburbs or X-burbs issue is missing the boat.
The outer ring has already dropped, heavily, and prices in choice neighborhoods in the inner ring have not been affected.
Hey Steve,
Rent, like asking prices, is negotiable. I renewed my lease a few months back (with no increase) and just for the grins of it, went around looking at rentals that were on the MLS. I was able to negotiate anywhere from $300 to $500 off asking rent on quite a few places. I told the landlords “no thanks anyway” and went on my merry way.
Thing is, I think I may keep this routine up. It’s a great gauge of the market, and it sets up the next fella (if he’s not a lemming) to negotiate a better rate.
Ralph,
I filed our taxes a few weeks ago using TurboTax. Since we're renting, we don't itemize as the standard deduction is high for us.
For fun I went back and pretended that I had $20,000 in mortgage interest and $4,000 in property taxes.
My savings would have added $2,500 to my refund, which is miniscule compared to the amounts property is declining in price at present. It's a savings of about $200 a month, which is also not a lot. Houses here that rent for $2,000 a month would easily start with an asking price of $500K.
Steve,
It sounds like comparing the rent on an apartment/townhouse to a SFH with a yard is a bit like apples and oranges. You'll always expect that the latter will be a bit more expensive to rent or to buy. So the $500 more a month might make sense in that case. The question would be how much the SFH would be to rent, I think.
In our area, which is exurban DC, mortgages are still way above rents, except for perhaps foreclosure pricing, and prices don't have any logical reason to not keep falling. We have a lot of inventory, and a lot of too-high asking prices as Tabitha has patiently been researching and pointing out.
I think the whole argument still boils down to individual circumstances. Buying in your case doesn't sound like it's left you in dire straits, unless you were forced to sell and the losses would be more than the $100K. With the large amount of cash you put in from a prior residence, you're in much better shape than most.
@Harriet,
You only have a 10% tax rate? For many people, I think $24,000 in deductions for most would yield a greater reduction in tax liability.
@Lance,
Local taxes are not deductible under the AMT. So you might not get the full "benefit" of paying taxes. Last year, I couldn't deduct my personal property taxes once my deductions got to the point I was in AMT land. I was lucky, AMT only affected my tax liability by about $500.
Bill,
Good pts about both the AMT and te tax rate. Fortunately, the AMT isn't yet affecting a large amount of people, and from what I've read Congress is recognizing this as a potential problem and will hopefully adjust it higher ... as they've done many times in the past. As for the interest deduction, you are correct that Harriet should be saving far more than she has estimated. It is possible though that she doesn't have the typical non-housing related deductions that serve as the estimation basis for the standard deduction. And consequently that the standard deduction is a "freebie" for her. Of course this wouldn't be the case for most taxpayers, but on an individual basis it is possible.
"The outer ring has already dropped, heavily, and prices in choice neighborhoods in the inner ring have not been affected."
My point isn't that choice inner-ring properties would go down overnight or quickly, but that they will go down. The movement from the outer ring to the inner ring meets resistance as people in North Arlington are more likely to have more equity in their property (10% - 20% down), have been living in their homes longer, make a substantially higher income and have less exotic loan products. When they go to sell their homes, they are going to ask for top dollar and be willing to be firm on their price. However, as the outer ring deteriorates more and more and the allure of a North Arlington address is overcome by the desire to live in a 3 year old home on half an acre, it will get harder and harder for these people to sell their homes. Inventory will rise; prices will fall. It will happen. I've read many blogs where people in California were saying the same things about choice markets and then finally price won out. Sure, there will always be a good market for a top of the line steak house, but if you price the food low enough, people will start eating at Chilis (maybe not the greatest analogy, but I think you get my point).
I'm obviously not going to convince you and you're not going to convince me. I have no personal stake in N. Arlington/Bethesda falling in price anyway as I have no desire to live there. My wife and I are doing our rental experiment -- we haven't rented in 8 years previously -- because we're looking for a house in the Southern Maryland ex-burbs and think that market is particularly volatile.
Someone asked about how would 25% down ever be required? Go look at Wells Fargos new lending standard for severely distressed areas. You think banks are going to continually get burned and not ask for more collateral? Not if they ever want to have investors back them.
Hey Robert -
way to go with the rent negotiations!
I reported several Months back about getting our current rental (SFH in Gainsville in a gated Golf community) for 300 less than they wanted for the rent Monthly
plus made them pay the $150.00 monthly HOA fee to boot.
I am excited to see how much of a deal we can get when we find a newer, closer "in" rental next summer
I think we'll have plenty of unsold beauties to choose from...
Zmonet--appreciate your reasonable post. One thing I would note is that if folks in North Arlington are looking to move within NoVa, it is almost uniformally to McLean, which has had similar price strengths. No one moves from Country Club Hills to Loudon unless their job does.
Thanks FD, I'm glad we can have discussions in this forum to resorting to name calling. No one wants to see an economic blowout because it isn't in th best interest of the the vast majority of people.
In relation to your comment about people moving out of N. Arlington, I don't know for a fact what the statistics are but I know that generally DC is a transient metro area. People move because there jobs bring them elsewhere, be it because of politics, company structural changes or military commitments. Moreover, there are lots of people who are moving into the area, who are looking at their options. At some point I think, again just my opinion, that when they see that they can get a twice as nice place in Alexandria as in N. Arlington, they will choose Alexandria. Those that live in Alexandria or previously could only afford Alexandria, will look to move to Springfield, or some place similarly outside the beltway. It will happen slowly, but I think it will happen, especially if the housing downturn goes on for a long period of time. Just my opinion...
zmonet, I think the major difference is commuting times and schools. Living in North Arlington has always had trade-offs--smaller, older houses, smaller lots, more expensive. But many think the upsides of great schools and the best suburban commute outweigh those. Not that someone couldn't choose to live in Alexandria, or Oakton, or Manassas, over Arlington, but nothing has happened in the past few years to change the equation. Unlike many cities the nicer suburbs in DC are generally the inner suburbs; no one would really move to Lorton if he could afford Mt. Vernon, and so on.
@Bill,
Dependents make a *huge* difference. It's $1,000 off your tax bill for each one.
@Lance,
I can think of charity, but what other non-housing related deductions do you have in mind? We owned a house for 11 years and itemized all that time, so I'm speaking from my own experience -- there weren't any biggies.
(I know there's medical, but we never had anything insurance didn't mostly cover). We never owned our own business. What are they for you?
This area is fortunate to have some of the best high schools in the US. According to the US News and World Reports Top 100 High Schools here are the best in the DC metro.
Thomas Jefferson High School (Top 100, #1)
Fairfax County Public Schools School District
Fairfax County
Thomas S. Wootton High (Top 100, #34)
Montgomery County Public Schools School District
Montgomery County
Oakton High (Top 100, #88)
Fairfax County Public Schools School District
Fairfax County
Langley High (Top 100, #37)
Fairfax County Public Schools School District
Fairfax County
Walt Whitman High (Top 100, #40)
Montgomery County Public Schools School District
Montgomery County
Winston Churchill High (Top 100, #42)
Montgomery County Public Schools School District
Montgomery County
fd said "to rent a nice, livable, updated 3/2.5 SFH in orange line Arlington will cost you at least 3500/month now, where that house will sell for somewhere around 800K, maybe a little more."
That is absolutely untrue. I rent a 4/2 SFH on a great lot in Clarendon and pay less than $3,000 a month. I see plenty of other SFH's listed for rent along the orange line in Arlington for $3,000 or less too.
My rental house would have sold for about $850,000 when things were at their craziest and it would probably sell for about $725,000 today.
So yes, there are plenty of reasonably priced rentals (relative to the cost to buy) and yes, prices are dropping in the so-called "oasis areas" that some claim are immune to correcting.
As I said, there are many older, un-updated SFHs renting for under 3K, but none of them would be suitable for an upscale family with kids (i.e. master bedroom with master bath, second full bath on the second floor, half bath on the main floor, finished basement). That your house would go for 725 now is evidence that it is not one of the upgraded houses. Also you said "Clarendon" but did not say where the house is--south of 10th street? big different. South of Pershing? Even bigger difference. All of these things are not the same.
Some current Orange Line SFH listings. You be the judge of whether you can get a nice, spacious 3/2.5 for under 3500:
http://washingtondc.craigslist.org/nva/apa/593619300.html
http://washingtondc.craigslist.org/nva/apa/593274701.html
http://washingtondc.craigslist.org/nva/apa/592319268.html
http://washingtondc.craigslist.org/nva/apa/592873570.html
http://washingtondc.craigslist.org/nva/apa/587893322.html
fd, when you said a "nice, livable" SFH along the orange line, i didn't realize that "nice, livable" meant it had to have a "master bedroom with master bath," a "second full bath on the second floor," etc. I guess most of the 40 to 80 year old housing stock along the orange line in Arlington isn't "nice" or "livable." maybe it should all be condemned since it isn't livable.
nice job moving the goal lines as it suits your needs.
"nice, livable" = a place an upscale family with kids would want. obviously there are plenty of crappy capes for under 3K that are "livable" for those without high standards. I lived in one of them when I was a hill staffer at age 23, nothing wrong with them; but not what I am talking about.
@Harriet
I don't get the $1000 credit for dependents, it gets phased out at $110K AGI. I don't know if that credit is AMT proof. Many of the non-homeowners I work with wish they could pay the AMT. They get crushed with 38% tax rates and they can't deduct their student loans. A house is about the only way that we can avoid the tax-man. The medical one is hard to meet because you have to incur 7.50% of your AGI in expenses before you can start deducting.
@Lance
"the AMT isn't yet affecting a large amount of people"
Are you sure about that, especially in this area? High home prices and wages is a recipe to be smacked with the AMT. I'm pretty sure DC is one of the areas that gets hit the hardest. Didn't the WaPo do a big article on the AMT last year?
"Not that someone couldn't choose to live in Alexandria, or Oakton, or Manassas, over Arlington, but nothing has happened in the past few years to change the equation. Unlike many cities the nicer suburbs in DC are generally the inner suburbs; no one would really move to Lorton if he could afford Mt. Vernon, and so on."
Something has happened. The price of a home in Lorton or Woodbridge, etc. has dropped substantially. This has to cause some people who are living in townhouses in Alexandria to want to move to SFHs in Lorton. This will take time for it to impact the inner circle, but it will happen. Mark it.
RE: AMT
Our family got socked with the AMT last year, based solely on the number of dependents we have (we'll have seven children this year). My husband is an officer for the USMC, so he makes a rather modest taxable income.
I wonder if Congress intended to tax people for having large families when they did not exclude dependents from the calculations for the AMT?
Harriet asked:
"I can think of charity, but what other non-housing related deductions do you have in mind? We owned a house for 11 years and itemized all that time, so I'm speaking from my own experience -- there weren't any biggies."
Your state income taxes is a biggie that comes to mind. For many individuals/married couples, the standard deduction doesn't make up for this deduction that is lost if you don't itemize.
Many people misunderstand how deductions work because they see the instructions that say something to the effect that "you may use the standard deduction or itemize your deductions". Unfortunately, the instructions don't inform the reader that the standard deduction is meant to estimate what the average person without housing-related expenses would otherwise be deducting if they itemized. Of course, everyone's circumstances are different and for some it might be better to take the standard deduction (e.g., if you lived in a state without income tax.)
Bill asked:
"Are you sure about that, especially in this area? High home prices and wages is a recipe to be smacked with the AMT."
I think I read somewhere that mortgage-related deductions don't negatively impact you in the ATM calcs unless you have a fairly high income ... And as a friend pointed out to me the other day, the "income" usually used by the government in determining eligibility is your Adjusted Gross Income (i.e., your after mortgage interest, property taxes, and other deductible expenses income.)
interesting read:
www.cbpp.org/2-14-07tax.htm
February 14, 2007
MYTHS AND REALITIES ABOUT
THE ALTERNATIVE MINIMUM TAX
by Aviva Aron-Dine
@Lance
AGI does not include deductions for property taxes or mortgage interest (i.e. itemized deductions). Apparently it is you who does not understand these deductions. AGI does not include itemized deductions. See lines 23-37 on a 1040, you know the section called ADJUSTED GROSS INCOME!
I remember you talking about renting out parts of your home to others. Do you report the income? You can only deduct the interst against your rental income. Do you have passive losses as result? Can't deduct those under the AMT, you'll have to save those against other income or capital gains, like when you sell your place.
By the way, I think about 4 million taxpayers got hit with AMT. As I said, many people in this area wished they paid AMT (like my $160K earning, no-house owning colleagues), but they don't have the deductions to get there. Only if they owned a $700,000 2BR Condo in Columbia Heights, now we're talking.
From the IRS. In an area where 1,000,000 person counties have average household incomes of $90K, I say the AMT is pretty relevant in DC.
Alternative Minimum Tax
The following changes to the AMT went into effect for 2007.
AMT exemption amount increased.
The AMT exemption amount has increased to $44,350 ($66,250 if married filing jointly or qualifying widow(er); $33,125 if married filing separately).
Exemption amount for a child. The minimum exemption amount for a child under age 18 has increased to $6,300.
I wrote up something earlier, but then deleted it b/c I didn't want to feed the troll, but here goes.
Lance you are either a crooked realtor, crooked broker, or just plain stupid when it comes to taxes.
Now you can surely cheat on your income taxes, I'm sure lots of people do it all the time without getting caught. However when you itemize you don't get the standard + whatever you itemize.
For married couples standard is 10k. Say you pay 4k in state income taxes, and 2k in charity during the year. Now say you have mortgage interest payments, of 15k a year. You're total deduction if you itemize is (4+2+15), or 21k vs. 10k if you don't itemize and take the standard. So if you itemize in this instance you take advantage of (15-4) 11k of the total 15k of the interest payments. The other 4k in interest payments is pretty much lost in deductions b/c you can't take advantage of it.
If you already itemize b/c you have over 10k in deductions before the mortgage interest then sure you take full advantage of the interest.
So sometimes it is advantages, sometimes its not, it just depends on the personal situation. But making a blanket statement that you get to use the 10k + the interest in deduction is completely false.
Of course, I highly doubt that you report income from rent . . I would surmise that most landlords don't .. . why b/c in my experience most longterm landlords are scum. Out of 8+ places I've rented, I've had 1 good landlord, 2 horrendous and the rest just wanted to make a buck. Only one of those landlords was a decent enough person that I believe they would report the income from the rent. It's especially true if the income is cash or check since its exceptionally hard to trace. Or if they do report it, they ensure they are incorporated and that they took a loss that year. But hey I guess if your conscience is clear with it . . .
gte,
you're amazing. First if you actually read what I wrote you'd see I said it wasn't a clear "you add the mortgage interest and property tax to the standard deduction". I clearly said the standard deduction is meant to approximate what the average non-house-owning person would itemize if there was no such thing as a "standard" deduction. (It's the IRS's way of reducing paperwork for people.)
Oh, and btw, I DO report my rental income.
lance you said . . .
"The tax savings are on top of what you'd normally get from a standard deduction."
This is not true . . . if your mortgage + other deductibles is greater than 10k . . . you get more than the standard, if not you don't.
It's not "on top" of anything.
Now if you said you "may" be able to take more of a deduction based upon your particular situation you are 100% correct. You didn't . . . you blindly proclaimed that it is "on top" of the standard.
gte said:
"Now if you said you "may" be able to take more of a deduction based upon your particular situation you are 100% correct. You didn't . . . you blindly proclaimed that it is "on top" of the standard."
The standard deduction for a single person in 2007 is $5,350. With state/district tax rates hovering between 8% and 9%, that means an individual earning in the high $60,000s is basically just getting his/her state/district tax deducted when they use the standard deduction instead of itemizing. (I.e., they aren't even getting deductions for their chartible contributions (e.g. church donations), non-reimbursed employment expenses, etc.)
Similarly, the married filing jointly standard deduction at $10,700 gives similar results for 2 individuals each earning in the high $60,000s.
Now, if you're earning something like $30,000 you are much better off taking the standard deduction. I just don't know too many people earning 30,000 who are out buying homes.
(Television Screen Goes Dark)
*announcer with deep, forboding voice*
"Lance: Wrong on housing. Wrong on taxes. Wrong for America."
You are a realtor!!!
Line 1) "Similarly, the married filing jointly standard deduction at $10,700 gives similar results for 2 individuals each earning in the high $60,000s."
Okay let's look at this statement. This means that the household income is ~120-140k. 1st, 120-140k household income is WAAAAY above the median household income . . . meaning more than 50% (and prob. like 75%) of the population make less than this.
Line 2)"Now, if you're earning something like $30,000 you are much better off taking the standard deduction. I just don't know too many people earning 30,000 who are out buying homes."
Okay, we went from a household making 120k, to a household making 30k buying a house. Now if both people make 30k, a person should be able to buy something making 60k combined-which would prob. not put you over the standard deduction.
Alright lance, whatever you win.
Keep thinking that every household is dual-income with both making 60k a year (or 120k with one person working), housing prices do not fall, and your house is secure.
I'm married make over well over 60k and the only reason I was able to itemize last year is b/c I give over 10% of my take-home to charity -which I highly doubt most people do-. . . but whatever.
I learn again by sad experience. Don't feed the freaking trolls!!
Lance can't you just say something like
"depending on your tax situation you MAY be able to deduct all of your mortgage interest payments-and more likely so if you ALREADY itemize (b/c if you do, you likely take more than the standard already) this however is not given and each person's tax situation is different, and you MAY only be able to deduct PART of the interest"
Instead of blatant lies, and half-truths.
gte said:
"I'm married make over well over 60k".
You may be near the median of ALL households out there (including retirees, unemployed, and students), but you are far from being near the medium of people looking to buy. Yes, you wouldn't benefit from the entire house-related deductions. Most buyers would.
You may be near the median of ALL households out there (including retirees, unemployed, and students), but you are far from being near the medium of people looking to buy. Yes, you wouldn't benefit from the entire house-related deductions. Most buyers would.
Interesting.
1. Median of all households don't make enough to be "looking to buy."
2. Median of all households wouldn't benefit from housing-related deductions.
3. Housing-related deductions are only for high-income earners.
I wonder if this has become the "law of unintended consequences" re: Congress and the tax code.
Harriet said:
"3. Housing-related deductions are only for high-income earners.
Harriet, are you calling a single person earning over high $60s a high-income earner? (Or a couple earning over $120k?)
Harriet said:
"1. Median of all households don't make enough to be "looking to buy."
Median includes students living at home, retirees living off their savings, non-working individuals living off of welfare. In brief, the median includes a whole host of people who either don't need to buy (they already own a home ... maybe even "free and clear") or can't (i.e., they don't qualify.)
I understand what you're saying about the tax code and unintended consequences, but why would you want (for a example) a retired couple living in a paid off home (and off their savings) to get the same deductions as a working individual (or couple) struggling to make their payments?
Lance:
The median includes NONE of those. No one living off of welfare is *earning* the median income, nor is a retiree living off of savings. I suppose that the median household could include students living at home (no students should live at home, but that's another rant). But the median will never include welfare recipients (unless they are breaking the law).
Another way to put it is that their income, or lack there of, does not affect the median directly. The median is simply the middle value in an ordered list.
{edited to fix several spelling errors}
dang it . . .bad idea feeding the troll again!!
Lance, you must be confusing a couple of things, 1) median is not average, it means half the households make above, and half households make below that #. Couple that with the stat. that 67-69% of all household "own" a home.
So just looking at the #s something is really screwy, if ~70% of households "own" their home, yet only 50% of the population according to you should/can afford to buy. That leaves ~20% of households that "own" yet can't afford to according to you. Hmm, recipe for a housing burst, check!
In addition, I said I make WELL above 60k, and I did mean WELL above that, I won't say on a public blog how much, but I make more than the median in ANY area in DC.
And actually I would benefit from ALL of a mortgage interest, I did itemize last year. You are just being disingenuous and shift the argument from "full 100% deductions on interest aren't automatic", to "you wouldn't qualify but most buyers would".
change population->households
In addition, there should be no way on earth that in order to buy a house you need a dual-income.
If that's the case then we as a country have become a lot poorer over the past 30 years, when a single income would do just fine. What's next we send our 16-18 year old kids out to earn money for the family so we can pay the mortgage. Hmm, you would think the "richest" country on earth, households would work less, not more!!
Bill,
I just revisited TurboTax and tried out a few more deductions (out of the 350 possible) So yes, I think my previous estimate was a little low. In this present environment, though, saving an extra $3,000-$5,000 a year doesn't seem as drastic as seeing house prices fall by $60,000 in a year.
I know someone who takes gobs of deductions and gets enough back to send her kids to private school (she told me she even deducts gas to work, which is really not allowed, but I'm sure she pretends it's gas for something else).
I was looking through the possible deductions and saw some like "deducting the cost of your home computer if you use it to track your stocks". Good grief. (Does that include both MarketWatch and Yahoo Finance?) Oh, and public school teachers can deduct $250 on school supplies. (Private and homeschool not included). It wouldn't surprise me to see a deduction for "if you like looking at the full moon in a blue shirt on Wednesdays and have red hair and a dog named Jet, take an extra $300".
gte,
I think affordability will return to pre-bubble numbers. Up until about 2001, it was very doable to afford to buy a dwelling of some kind on one wage, even in Northern VA.
GTE said:
"Hmm, you would think the "richest" country on earth, households would work less, not more!!"
Personally, I find myself working more and not less ... And I think that holds true for most Americans. We're now in a global marketplace where we're competing with countries that DO send the children off to work to help support the household. And these children are often far younger than 16 - 18 ...
Also you said:
"So just looking at the #s something is really screwy, if ~70% of households "own" their home, yet only 50% of the population according to you should/can afford to buy. That leaves ~20% of households that "own" yet can't afford to according to you. Hmm, recipe for a housing burst, check!"
Your "calculations" are based on the false assumption that everyone buys a house/condo with 20% down TODAY and makes payments based on that. As we've discussed before, at a minimum 30% of all owner-occupied homes out there are paid off. This 30% needs to come out of your calculation. These people may have bought their houses back when house prices were a lot lower. In either case, they need to come out of your calculation of who can and who can't afford based on "median income vs. median price." (Incidentally, these folks help lower the median income since the savings they draw out and the Social Security they get don't get counted toward their "income" when they file their taxes. Only their stock dividends and bonds and certificate interest count toward that income ... and end up bringing down the "median" family income.
Similarly, a large percentage of people have the means to put a much larger than 20% downpayment on their house purchases. Putting (for example) 50% down drastically changes the final payment ... and thus qualifies folks for house prices which their income alone might not justify. These downpayments can come from stock, family inheritance or gifts, or even from the equity in a prior home or rental property.
One last thought ... Why do you take it as a given that people in general are "entitled" to own? I.e., that the averages and medians must be such that everyone who wants buy a house/condo can do so? The homeownership rate in this country is amazing. No other country anywhere now or in any other period has the level of homeownership we have. Historically (and in many places around the world) few people have been landowners. Historically here (and today in most places around the world) people rent. And we're now competing against these people in a global market place. Don't you think that can affect what we can expect to have here?
I know personally that I must work harder than ever just to keep pace. Would I prefer that things were as you think they should be? Of course. But I don't think it is possible.
Ummmm, last time I checked I'm pretty sure Britain has a higher homeownership rate than the US. But they're not a real country.
"the possible deductions "
Yes, and I'll pick a quarter off the sidewalk too.
The fact is, other than the mortgage deduction, IRA, RE tax, charities, depreciation, real business expenses, and a few other big ones, it's not worth the time.
Your friend is kidding herself. That pack of Bic Pens I bought last year for my business isn't going to make a difference.
People buy a $3,000 laptop and talk about their big deduction but they never figure out that a used $250 laptop will work as well for their needs.
That's how they end up poor.
Lance,
Hopefully this will cheer you up:
Homeownership rates, 2002:
Austria 56%
Belgium 71%
Denmark 51%
France 55%
Germany 42%
Ireland 77%
Norway 77%
Spain 85%
Portugal 64%
UK 69%
US 69%
Slovenia 82%
Israel 71%
Canada 67%
kh,
Totally agree with you. I'd rather not spend my life worrying about receipts, either.
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