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Tuesday, March 11, 2008
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48 comments:
Interesting article in the SF Gate the other day as to why the suburbs & exurbs are falling so much in relation to the minor fall experienced by the urban areas of certain "superstar" cities.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/09/BUNOVFD7J.DTL&feed=rss.business
I hesitate to post this because it plays so much into Lance's view of DC being so important on the world's stage. The guy the author quotes, Richard Florida is an interesting, and somewhat controversial figure - and I certainly dont agree with all of his findings. That said, if he is right about this, we shoulnt expect to see the core area fall in line with the suburban areas any time soon.
Great article. The study just formalizes that which is pretty obvious to anyone looking at what is occuring around us with an open mind. The problem tends to be that a lot of people aren't looking with an open mind ... They come to the table with their minds made and then try to justify that which they already believe. For example, they see prices rises around them faster than they can keep up and they say "If I can't keep up, then no-one must be able to keep up and that MUST be a bubble out there AND it'll have to burst someday".
They'd of course be far better off if they didn't jump to such conclusions and instead just opened their eyes and their minds and observed what was going on around them and THEN based their decisions accordingly.
This is an article that does not have any numbers in it, typical social science bla-bla-bla.
Certainly there may exist an oasis somewhere where only rich people live and their decisions to buy or to sell are not affected by the general state of economy and also there is a steady flow of new buyers in this area who will pay top dollar for the properties there. But is it DC?
My gut feeling is that almost everywhere in DC area people stretch to the limit when they buy a new home at current price levels. In the current economic/political conditions i do not see a lot of new high pay jobs coming to the area, so it will all depend on who are the people who bought their homes in DC during the boom. If they are sitting on the teaser-rate ARMs --- you'll see plenty of bubble bursting there. There were plenty of speculators/flippers in DC condo market. On the other hand folks with enough disposable income and equity will just continue enjoying their lives. All comes to the ratio of people who can afford to live in DC at current prices and people who bought too much of a house.
"My gut feeling is that almost everywhere in DC area people stretch to the limit when they buy a new home at current price levels."
I think this one of the keys to how this all plays out. An argument can be made that wealthy areas (with more disposable income) will naturally do better in a downturn than poorer areas. The problem then is if everyone around here buys to their limit, why did one of the wealthiest areas (Loudon co.) suffer a big hit, while another wealthy area (Arlington) has thus far escaped with only minor damage?
True, it may be at the end of the day Loudon & Arlington will suffer equally because residents in each case bought to their limit. At the same time however, if it was as simple as everyone buying to their limit, it stands to reason that there would not be such a large time gap between when each area fell. Do the people in Arlington really have more disposable income than their Loudon counterparts? Maybe, but on the surface I don’t see why that would be the case.
Lance,
Are you suggesting that you are looking at the issue of housing with an 'open mind'?
Just because you have a different view than everybody else on this forum does not mean that you come to the issue with an open mind and everyone else doesnt.
stealth said:
"Just because you have a different view than everybody else on this forum does not mean that you come to the issue with an open mind and everyone else doesnt."
Ah .. you didn't understand my post. What I am saying is that I don't come to this issue wiht a "different" view. I come to it with an "open mind". By and large those believing in a bubble come to this issue with a predetermined conclusion which they then search out the "facts" to justify.
Lance, I've kept my mouth shut for a long time, but you are either a) an idiot, b) a realtor, or c) a troll.
i think there is nothing wrong with having a position on an issue, especially if it is supported by the investment decision (say, buying a house in lance's case or not buying and waiting like me).
not accepting the obvious truth is a different story. i don't see that many instances of this sin on this blog.
we all understand that there is a lot of stake for the homeowners and wanna-be-buyers. gonna wait and see what happens, watch the data closely and act when the time is right.
Some new listings today:
12451 BRENMILL LN
MANASSAS, VA 20112
asking $524,900
last sale: May 18, 2006 $778,000
5BR/4BA 1.24 acres
bank-owned
9617 LOOKING GLASS CT
BRISTOW, VA 20136
Price: $357,900
last sale: Dec 05, 2001 $360,467
4BR/3.5BA backs to trees 4,000sqft
bank-owned
10568 ANDREW HUMPHREYS CT
BRISTOW, VA 20136
Price: $413,250
last sale: Jan 30, 2006 $637,800
4BR/3.5BA basement drywalled almost 4,000sqft not counting basement
bank-owned?
10569 TATTERSALL DR
MANASSAS, VA 20112
asking $400,000
last sale: Jul 05, 2006 $709,620
5BR/3.5BA
short sale
14184 CATBIRD DR
GAINESVILLE, VA 20155
asking $350,000
last sale: May 30, 2006 $596,490
4BR/2.5BA
bank-owned
original owner made $100k profit after five months
14380 SHARPSHINNED DR
GAINESVILLE, VA 20155
Price: $349,900
last sale: $565,105 1/3/2006
5BR/3.5BA almost 4000sqft
bank-owned
12180 TRIPLE FALLS LN
BRISTOW, VA 20136
Price: $499,999
last sale: Sep 30, 2005 $662,880
(refinanced one month later?)
4BR/4BA
short sale
Stealth,
The failing of the bubbleheads is that they don't want to entertain the possibility that things are changing ... i.e., that there are fundamental shifts occurring out there that mean their ‘rent vs own’ ratios and all their other "standards" based on past models of “how things worked in the past” have gone out the window. The don’t want to see how things are now … just how they were … and “should” therefore forever be.
For example, we hear ad infinitum from the bubble heads how it's the banks with their loose lending that have caused prices to jump. If they were coming in to the situation with their minds and eyes open, they'd instead ask the question "Why are the banks offering such low interest rates?" Asking themselves that one question (and seeking true answers to it) would allow them to start to understand what is occurring. Instead they are mistaking symptoms for causes.
So, Stealth, have you ever wondered why there are low interest rates occurring throughout the world … and the high “bubble” prices of housing occurring throughout the “superstar cities” of the world? Do you think it’s coincidental that these are occurring at the same time … and just after the opening of vast labor markets (post Cold War) and a quantum leap in information technology?
More fuel for the fire.
Both DC proper and Arlington counties were approved for the maximum $729,750 'jumbo-conforming' loan limit.
http://www.ofheo.gov/media/
hpi/AREA_LIST.pdf
I do not think that full doc, down payment required, will re-ignite this bubble.
Got Popcorn?
Neil
"their ‘rent vs own’ ratios and all their other "standards" based on past models of “how things worked in the past”"
I disagree.
I don't believe there ever was an accepted rent v own algorithm. It's one of those things that seems so clear to the BHs but does not stand up to critical analysis.
I think it's a mime, like the other bubble-beliefs, 1) it's coming inward, step by step, 2) housing must be affordable or the value will fall, there are others.
I cited the example of the rental unit that was purchased over 30 years ago.
At no time in over 30 years did the rent "justify" the valuation. The landlord was always "subsidizing" the tenant, that's if you considered what the unit would sell for at that moment in time.
Knowing the original purchase price, the steadily increasing rent over the decades, the unit now produces more than half the original purchase price in rent every year.
According to the NVAR, exactly TWO Arlington single family detached homes were in contract in February. (This is reported separately from closed sales).
http://www.nvar.com/market/mktsum.lasso
(you have to download the appropriate .pdf file in the link).
There are a ton of grossly overpriced houses that have been sitting on the market for weeks, months, in some cases more than a year. If the sellers think that this spring (traditionally a good season for selling), or that the summer, with its higher jumbo maximum, is going to bring in buyers willing to pay their ridiculous prices (well over Arlington assessed values) for houses with significant flaws, I'll boldly predict that they will still be sitting there months from now. For those of you who are about to jump in to say assessed values don't match the market, that's true in many communities, but Arlington reassesses yearly at FMV over the year ending 6 months prior to the most recent Jan, with some adjustments (i.e., Jan. 08 assessed values were based mostly on July 06-June 07 sales). Unless a seller has done a lot of smart improvements that aren't taken into account by Arlington (in which case the house may well be worth more than the Co.'s assessment) then his/her house is likely worth LESS than what Arlington says it is. How long will it take these sellers to figure this out?
Getting a little tired of the open mind, closed mind, bubble, no bubb le arguments. I do come here with an open mind and have learned alot from this site and some of the people who comment here. Granted I don't work in the fields pertaining to real estate and finance but that also doesn't disqualify me either. I think I am fairly good at looking at what is going on in a given situation and putting together what happened and going to happen. I know I can state with certainty that the bubble has burst and it is going to continue to go down even more and will last years. As one has pointed out, the lenders are to blame to some degree. In fact there is plenty of blame to go around from the lenders to real estate agents and there companies. It is a multifaceted problem with many responsible for the problems of today. It had to do with common sense pratices being ignored for the quick buck. I hope the lenders don't exdpect the government to bail them out like the S&L situation of many years ago. In fact, I hope some people go to jail over it. I also blame the government for not doing anything about it too. Now maybe I haven't studied economics but having been trained as an engineer in several disciplines, action and reaction, cause and effect analytical skills still apply. Will the value of real estate go down, yes, and it will continue to go down. I think it will possible go down far enough to bring it back into balance and more realistic values. The county governments won't like that because they were counting on that revenue. Again, they should have been prepared that at some point the bubble was going to burst. I disagree with what Fairfax county did and I sincerely hope they get called on the rug for it. I know the game they are playing is that by raising the value of the real estate and lowering the value of the house is intentional ploy. Very rarely does the value of land go down, but the value of the house can. So by setting the values the way they did, they can be certain to keep that revenue stream constant. And I do hope the residents of Fairfax severely complain and challenge there assesments.
Lance wrote: "(H)ave you ever wondered why there are low interest rates occurring throughout the world … and the high “bubble” prices of housing occurring throughout the “superstar cities” of the world? Do you think it’s coincidental that these are occurring at the same time … and just after the opening of vast labor markets (post Cold War) and a quantum leap in information technology?"
Um, yes, I have thought about it, and my considered conclusion is that interest rates are low because Wall Street has never acknowledged the risks of, in Warren Buffet's words, "long-term derivatives contracts and the massive amount of uncollaterilized receivables." Information technology leading to increases in productivity explained the economy of the nineties, Lance, but the 21st century is all about leveraged debt, borrowing other people's money for speculative investment. Let me put it to you like this: The estimated total of the US money supply is maybe $20 trillion. The estimated value of derivatives -- which you can think of as an unregulated money supply -- is $500 trillion. That's half a... well, numbers after a trillion are pretty much meaningless, so let's just say it's about 35 times the total US Gross Domestic Product. Heck, it's almost ten times the Gross Domestic Product of every nation in the world added together. That's why interest rates are low Lance, because people have been running a Ponzi scheme. And we're all victims. You're a victim too Lance. You're just so abusive toward anybody who disagrees with you that it's hard for me to care.
Do I think Loudon is going to take a bigger hit than Arlington? I would think so; that's part of the reason I bought in Arlington; I can leave my driveway and park near the White House in 15 minutes. Location is, I think, always going to matter, and being in a bedroom community within walking distance of downtown struck me as the safest place to be buying. I could be wrong, but that was my analysis.
But do I think Arlington won't take any kind of significant hit? Hell no. If we escape with a ten percent decline -- say a 20 percent decline moderated by ten percent inflation -- I will consider myself lucky. But those folks further out, man, i would think they're looking at, over the next three years, a 40 percent decline moderated by ten percent inflation. Painful.
"But do I think Arlington won't take any kind of significant hit? Hell no. "
Concur.
I expected my part of Alexandria to take a 5-10% whack.
Although the city's assessments say that prices are up, I "believe" I can see a 5-10% roll off in the current sales. I watch these very closely.
10% is significant, especially considering that higher commuting costs are compressing people inward.
10% is a nit compared to what's already happened in PWC.
So, like you, here I am.
I do wonder what someone who bought large in PWC is thinking. Between already falling assessments and comparables on the market for even less, are they bothered by losing, say, a quarter million dollars?
I do wonder what someone who bought large in PWC is thinking. Between already falling assessments and comparables on the market for even less, are they bothered by losing, say, a quarter million dollars?
I think most are walking away. 50, 60, 70k you can recover over time. 250k your done! Most of the people that gambled at these prices didnt really care about losing the house anyways.
"Most of the people that gambled at these prices didnt really care about losing the house anyways."
I actually disagree with that assessment, in part because there is one aspect of Washington that does make it a completely unique market in the United States. While many people across the country might do the financial calculation and decide that it's worth the hit on the credit report to walk away from from a mortgage that's underwater, that's not really an option if you have a security clearance. Buddy, if you have a ding like that in your finances, you risk losing your clearance and your career (significant financial pressures are thought to drive even otherwise honest people to entertain thoughts that would make them a security risk). Given the relatively large number of people in this area with a security clearance, I suspect the jingle-mail phenomenon will be somewhat less prevalent here.
I also have a lot of sympathy for people who simply believed that housing was a safe place to park your money, and that you could keep draining equity out of your house on an annual basis to pay for your kid's tuition. I know a *ton* of people like that; they all thought I was crazy four years ago when I started saying, "You know, you should consider selling your house and renting until the market tanks..." But all they saw in the newspapers was "balanced" stories that always included some sunny quote from some real estate industry maven. I just feel terrible for these people.
gruntled said...
"While many people across the country might do the financial calculation and decide that it's worth the hit on the credit report to walk away from from a mortgage that's underwater, that's not really an option if you have a security clearance."
Interesting point Gruntled. Do you think that most people who have a clearance realize what happens to their clearance if they do walk away? (I dont have one so its hard for me to say).
Oh yes. The credit history is almost always something that somebody who's being investigated will have to deal with, since nearly everybody has something trivial noted on their credit report that has to be addressed (this will include things like the $34.00 in late fees Blockbuster claims you owe).
I have a friend who is a lawyer in a real estate practice which has, naturally, shifted from closing sales to foreclosures, and she says she gets frantic calls several times a week from people holding a clearance who are freaked out because a lendor has filed a notice of default if they miss a couple of payments. This is the sort of thing that will show up when your clearance is up for its regular renewal, and while it's not always a career killer (there's a process for offering an explanation for negative events) it certainly *can* be under the right circumstances.
I have a friend who is a lawyer in a real estate practice which has, naturally, shifted from closing sales to foreclosures, and she says she gets frantic calls several times a week from people holding a clearance who are freaked out because a lendor has filed a notice of default if they miss a couple of payments. This is the sort of thing that will show up when your clearance is up for its regular renewal, and while it's not always a career killer (there's a process for offering an explanation for negative events) it certainly *can* be under the right circumstances.
It depends on the level of clearence. For secret, the security offices are already prepared for a large number of cases. As long as individuals self report, it is a non-issue a la a single speeding ticket. The processes are already in place. If in doubt, talk to your security office.
For "the tickets"... I don't know. A foreclosure could be like drunk driving, the kiss of death.
I've seen upper middle class areas plunge 40% before. Alexandria is not looking at a 10% drop, but much greater. Slow sales are an indicator that only the bargains , and maybe a few suckers, are selling.
As others have already noted, the substitution principle is very common in real estate. Heck, real estate is the example they use in business school to teach the concept!
Got Popcorn?
Neil
Given the relatively large number of people in this area with a security clearance, I suspect the jingle-mail phenomenon will be somewhat less prevalent here.
I suspect the ESPIONAGE FOR CASH phenomenon to be somewhat MORE prevalent here, in the near future.
There are probably spies searching the foreclosure listings RIGHT now and lining up potential recruits.
Perhaps the Pentagon should orchestrate its own DC-focused housing BAILOUT?? Hmmm, I wouldn't want the federal government to be my landlord--it would take 2 years to get a toilet fixed (although, they probably WOULD put in one of those $23000 toilets...
As for the potential of a big drop in downtown DC--let me say, on a FACTUAL, not speculative, basis:
I bought in DC in 2002, IN GEORGETOWN, at $300/sqft. A year or two before that an identical unit sold for more like $200/sqft.
Sold in early 2007 for $500/sqft. And it was under contract TWO DAYS after my open house. Perhaps I should have asked for more--certainly a year before that I probably could have gotten $520 or $530/sqft. Hadn't really done any renovation to the place, by the way.
Question: Do you think that's in line with wage trends?
There's currently a similar sized unit in my former building available for about $400/sqft. And that's a LISTING price, and it's not selling. And it's renovated.
And there are MANY listings in that building.
And two of the listings are BANK OWNED.
And a contact I have says there are FIVE more under threat of foreclosure and at least ONE that is expected to go all the way to being bank owned. Did I mention this is in the middle of GEORGETOWN?
There are new units available in the new Columbia Heights complex I just looked at this weekend, that just had a price reduction, toward $300/sqft. And there's 50 units still unsold to choose from.
Question: There are a NUMBER of other big condo projects coming on line over the next year or two. What do you think the $/sqft will have to be to sell them?
Okay, now my opinion:
I've often thought there will be properties in the high-society sections of DC that will be "above the fray" due to pure upscale buying power and immunity from the need for a mortgage. But if you think DC in general won't be STRONGLY touched by this NATIONAL trend, especially in the condo market and especially with the economy slowing and the building projects still going on and the possible change of government away from the spend-and-debt warmongers, YOU'RE NUTS!!!!!
Mike, I wonder the same thing, about how people could stand to lose a quarter of a million dollars or more. One of the reasons we felt OK making an offer on our most recent possible house was that most of the people on the street were original owners, so we could see some stability--though the 4 or 5 on the street who bought a year or two ago are down about $100-$150K now, it is nothing compared to other neighborshoods. The house we put an offer on in New Bristow Village, for example, is on a street of homes that sold for mid- to upper- $700s 2005-2006. A couple foreclosures are about to close in the $400s, and asking prices are all over the map in the neighborhood. We hated to think of living next door to people who paid almost double what we paid...and how many would stay? Four of the houses are obvious multi-family situations. How long can they hold out?
Seriously, what do you do under those circumstances? How do you decide?
The security clearance thing is huge--I know what we went through to protect my husband's when our house in Indiana didn't sell for over two years. Military personnel can also suffer career repercussions when their personal finances are a mess...and lawyers, too, right?
I think the nature of PWC's population has a lot to do with the dramatic number of foreclosures/vacant houses. Population growth was due in large part to a fundamentally transient group of immigrants who have stronger ties outside the county than inside the county. It is easier for them to walk away, and they do, sometimes in dramatic overnight fashion.
Then there are people like some friends of ours, who have little kids and family close by and a good job, but whose ARM reset before they thought it would and are having to borrow from family to pay an outrageous interest rate to a bank for a house that is already worth 50% less than they originally paid for it, AND which they borrowed against a couple years ago to pay down student loans. What do they do?
"I've seen upper middle class areas plunge 40% before. Alexandria is not looking at a 10% drop, but much greater."
Neil - I am curious, what do you base this on? Is there something specific about Alexandria that makes you believe this? Is the area new and much of the prices based on speculation on where the area was headed? Was there alot of new development that attracted a different class of buyers who now perhaps are having second thoughts? Did the area routinely have speculators lined up outside the sales office overnight waiting to buy? Did the area have a large population of hispanic buyers who, got in on liar loans and are now in trouble because the construction jobs dried up?
I am not saying any of the above things are true or not true in Alexandria. It seems to me though that alot of these things could cause some areas to suffer more than others. Also given that you are a few thousand miles away, what do you know about Alexandria that makes you believe what you do?
In sum is your opinion about the drops Alexandria will experience based on something specifc, or is your opinion based upon what you believe could happen to any random high end area (say Great Falls for instance)?
CRT asked:
"In sum is your opinion about the drops Alexandria will experience based on something specifc, or is your opinion based upon what you believe could happen to any random high end area (say Great Falls for instance)?"
Neil has never revealed his motives for posting on a blog about an area a continent away from where he lives and works. It's possible he has a legitimate reason ... For example, I occasionally post on the Marin log ... I used to live there and recently was working near there. But what is Neil's reason to post on our Washington blog ... and always with doom and gloom messages. It's gotta make you wonder if he has some reason in seeing this area's real estate do badly. Some anon earlier posted that it could be that Neil works for a government contractor headquartered here and that Neil would like to move here, but can't really afford to be "a big fish" here like he is in SoCal. I guess that could be a reason to be wishing us bad. The opportunist motive, again.
I believe Neil stated he wanted to move to DC in a year or two. So, that bias is there.
I have a bias as well, I sold at peak and am hoping to move up. Funny thing is, I have 2 condos as well that I don't really want to go down. I'm smart enough to have put 20% down on each of those though, and they are fixed rate.
And of course, you have your bias too Lance - you mortgage a home in DC with renters to help supplement your pay. You have a vested interest to have the place keep its value.
I still don't buy into this "pan-global" theory. London could be considered a "pan-global" city as well and prices are falling sharply there. I'm also not certain why you believe it's OK for home values to climb MUCH faster than wages/rental rates, but I guess you have a different belief system.
Lance – while I am curious too about Neil’s motives, that is not what I am questioning here. I think he has every right to post about the DC metro area, even if it is based on nothing more than curiosity. What I am questioning is how fact specific his posts are about certain areas.
For example, Gruntled stated that while both will fall, he thinks Arlington will do better than Loudon, because its 15 minutes from the White House. Then KH stated that while he thinks both will fall, Alexandria will do better than PWC because of quality of life issues (a subject he has posted on extensively). Then Neil comes along to state that Alexandria’s fall will be much more than 10% (he hints at it being up to 40%), but offers no explanation other than slack sales and substitution effect – both of which could apply just as easily to anywhere in the entire metro area, or Palos Verdes, CA for that matter.
My point being, if someone is commenting about trends for the entire metro area that is fine. Problem is, if you are going to offer county (or smaller) level analysis and comments, I think it helps if you can offer something more specific than say it is a "upper middle class" area.
I tend to think that Arl. and Alex. are going to be beneficiaries of two recent negative developments re: transportation to areas further out: (a) the Dulles metro plans' being stymied and (b) the VA Supreme Court's ruling that the NoVA transportation body has no taxing authority. As long as prospective buyers thought some relief might be in sight in the next X years for the horrid traffic, they might consider living further out. But now that those prospects have become more bleak, I think more of them will either stay where they are, if they can, or find a way to shoehorn themselves into a smaller house closer in. I still think Arlington will drop in value but, given that the local economy and jobs picture remains relatively strong, I don't think I'd predict more than 5-10% more.
I tend to think that Arl. and Alex. are going to be beneficiaries of two recent negative developments re: transportation to areas further out: (a) the Dulles metro plans' being stymied and (b) the VA Supreme Court's ruling that the NoVA transportation body has no taxing authority.
That's an interesting theory. I think it will benefit poorer areas of D.C. more than it will benefit Arl. and Alex. Because prices are going to come down to historical norms, and people will be more likely to buy a home they can afford in a bad neighborhood, than they will be able to get creative financing for a home they can't really afford.
But still interesting theory.
Just noticed PWC 2008 assessments are on their website finally. Very interesting stuff.
AlexA said:
"I'm also not certain why you believe it's OK for home values to climb MUCH faster than wages/rental rates, but I guess you have a different belief system."
I didn't say "it's okay" for home values to climb faster than wages/rental rates. What I said was it's a fact that home values are climbing much faster than wages/rental rates ... now deal with it. The whole premise on which the bubble theory is built is that "there's something bad happening out there and it'll stop happening when everyone cries out loud enough that it's wrong". My cry in the wilderness of these blogs is that you gotta accept what is, quit whinning, and deal with things. The fact that the economy has pushed up home prices faster than wages and rental rates isn't something to pass judgement on ... It's something to use as a reality to check ... and act on.
I guess your belief system is that someone will bail you out if you simply point out that something isn't "fair".
What I said was it's a fact that home values are climbing much faster than wages/rental rates ... now deal with it
That's not true anymore. Now home values are falling in relation to wages and rental rates.
ok, lance, i was kinda thinking that people on this board are too harsh on you. my bad.
to think that home prices can ALWAYS increase faster than wages/inflation (or stock market returns for that matter)is rather naive.
Lance, when are dealing with people's homes, one of the most basic needs in life, I BELIEVE that home prices should not move up faster than wages. It seems strange to hear that people who bought before 2003 can no longer afford to buy their own house. Housing isn't suppose to be a "game" to make more money. It can be used to store value and drop down roots in a community, not intentionally flip for $50K+ worth of profit.
I don't have to "deal with it", BTW - it is dealing with itself. I'm not sure if you are ignoring the data - did you see the Feb 2007 vs 2008 stats Harriet put up? The median price is down ACROSS THE BOARD in VA.
yes, popcorn neil has stated before he has an interest in the dc area and moving here in the next couple of years.
but i guess lance's argument is not only- DC is different and the innerds are differenter; but that if you dont currently live here it's none of your business and you cant understand it's differentness
No bail out needed. The system doesn't need to be fair either. Bubbles have happened before, they correct.
Florida real estate from 1925 through 1926 lost 90% of its 'value' in that famous bubble. Areas of SoCal dropped 40%, in nominal dollars, in the nicest neighborhoods during the 1990's downturn.
Who is going to loan money? The sales rate is slow for a reason. Buyers aren't excited about buying. That thought is spreading. Everywhere I'm lookiing buyers can get 20% more for the money than 18 months ago.
We're only 1/3rd of the way through the correction. If DC was immune, why did Wells Fargo put it on its distressed market list?
For the record, I happen to subscribe to 'Mega-Urbanization.' This is the long term trend of the world's population congregating in major urban centers. This is for work force skill concentration, airport access, proximity to customers, and a dozen other reasons.
But it is not a steady trend; it happens in waves. We're past one crest and heading down. Some cities will continue to grow quickly due to their housing costs being aligned close enough to wages: Houston, Denver, and a few others. (Note: they're so overbuilt that they can grow in a declining house market...) Some... are out of alignment (DC, LA, almost all of Florida, Phoenix, Sacramento, San Deigo...) We've seen this before and we'll see it again.
And we're just at the start of this recession. Its not over. Most of the bears can realize what has to be delt with. A housing cycle? We've seen them before.
Full doc loans are the enemy of any asset bubble. There here... that's what has to be delt with.
Got Popcorn?
Neil
People are still buying houses, amazingly in DC. Distressed? Parts of it sure. But I think most will bet that desirable areas will recover first. That's been true of prior bubbles, especially the one I lived through in New England after the 87 market crash.
konstatin said:
"to think that home prices can ALWAYS increase faster than wages/inflation (or stock market returns for that matter)is rather naive."
And I never said that! Can't people read!? AlexA said that prices were going up faster than wages/inflation ... and inferring I thought that was a good thing. I simply told him that if that is the case (as it was until recently) than people need to deal with it ... and quit whinning. It's not like any one individual has any control over it. The only control people have is over what they themselves do. Whining isn't going to help.
"I guess your belief system is that someone will bail you out if you simply point out that something isn't "fair".'
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Your belief system of what is "fair" is, apparently, that the government should bail out those who paid too much and those who made bad loans in order the keep the bubble inflated (except that you try to get away with replacing the word "bubble" with "economy," as if inflated house values were the entire U.S. economy).
dominic,
before making accusations, you should read what people have said. I've said many a time that the government shouldn't financially bail out anyone. These loans are business transactions between the borrowers and the lenders. Yes, the government has an interest in seeing that things are facilitated between the lenders and the borrowers, but in the end the "bail out" will come from the two ... and not from us taxpayers. (And by definition it will then not be a bail out ...)
Lance, I apologize if I'm putting words in your mouth, but your indifference is frustrating. Sounds like a snobbish rich person telling a poor person to "get a better job".
I still don't even understand your view thus far. Sometimes you'll write something rather intelligent, but then you'll say other things that go against the facts. Are you saying that affordability in this area *is* out of whack and *will continue* to stay that way for the foreseeable future? That it will not revert to past ratios? Does this imply the the folks that can't afford will simply leave? Please clarify if you can because I really do want to hear it.
I am open to other people's ideas, especially when they don't align with mine!
AlexA asked:
"Are you saying that affordability in this area *is* out of whack and *will continue* to stay that way for the foreseeable future?"
Not at all. What I am saying is that things change, and rather than having regret over what was, one has to adapt. You wouldn't move to Manhattan and expect to buy a rowhouse would you? But you might very well buy a great co-op there and have a lifestyle far better than anywhere else in the country ... even in those places were you could afford a house.
Well, DC (including its burbs) is changing quickly. You need to accept that and adapt accordingly.
For example, the average home a generation ago might have been that split-level in Bethesda. Not anymore ... that's now "high-end" and the shopping center down the street from that split-level that used to be a regular shopping center now offers a lot more. Nowadays that condo going up over the new Bethesda row might be the "average" home for someone in the area. And in terms of amenities it definitely offers a lot more than that split-level did a generation ago. It's just doing it with less land ... since the value of land has gone up around here as more of us have moved in.
So, no affordability isn't "out of wack" ... you are if you don't recognize and adapt to change. Believing a bubble is going to come along and rescue us all is a cop out in my book.
"to think that home prices can ALWAYS increase faster than wages/inflation (or stock market returns for that matter)is rather naive."
Konstantin and Alexa,
I'm not looking at home prices in general. My focus is the tip of Alexandria nearest DC and to the west of Del Ray, this area is called Northridge or Beverly Hills.
Overall what you say is true but only because the general population can cope by pushing out further each year or fitting themselves into highrises.
Those who cannot afford a new condo will rent or buy an older one. Those who cannot afford Arlington will live in Fairfax. If Fairfax is too pricey, there's PWC.
At no time will PWC compete with Arlington on a dollar per dollar basis. There will always be a premium for close in, convenient, 10 minutes to the office.
There will be a premium tariff for SFH compared to TH compared to garden apartments and units in high rises. (Although sales-droids will hype the premium condo's as better than SFH, they are not.)
Little by little, SFH in better neighborhoods have become unobtainable. This is not about to change.
I'm seeing soft prices on REED AV, which is the worse street in Alexandria. The new THs of 0 WEST GLEBE are selling slow and those prices are down from the pre-sales ads in 2006.
I can point to a few other indicators, mostly TH, that "suggest" prices are off but I doubt that SFH in Northridge any of the better Alexandria neighborhoods will fall more than 5-10%.
10% would take a hypothetical $550K 2/1 SFH (about the lowest price in Northridge) down to $499K. Here's a 2/2.5 that sold in 5 weeks. $609K asking. Check out those 7 year old white appliances.
Neil - glad to see you came back and answered some questions people had about your posting. Now if you wouldnt mind indulging me, and my question about your earier comment:
"I've seen upper middle class areas plunge 40% before. Alexandria is not looking at a 10% drop, but much greater."
I ask again, why Alexandria specifically? What do you know about Alexandria specically that makes you state this? Alternatively is your comment just about upper middle class areas in D.C. in general?
"Those who cannot afford a new condo will rent or buy an older one. Those who cannot afford Arlington will live in Fairfax. If Fairfax is too pricey, there's PWC."
Right right... because everyone's first choice would be Arlington or Alexandria right?
The innermost areas have been fortunate to have been shielded from the worst effects of the bursting bubble to date but it is only a matter of time before they travel down the same road as the rest of the region.
They rode the wave on the way up with prices doubling in only a few years... now you expect them to magically levitate while the rest of the region falls.
Will Arlington or Alexandria become as cheap as PWC? Nope...
but that doesn't mean they won't lose a good chunk of their value.
Your continued assertions that this is a "normal cycle" and that prices won't fall more than 10% in Alexandria are just silly emotional wishing.
I've been watching this blog for quite a while. First comments for me.
I agree (per Lance and KH) that inner areas will do better than outlying ones, but to think that they won't get seriously affected price-wise by this bubble is head-in-the-sand IMHO.
There was a serious housing bubble. If I had only saw the price increases in DC I could think that it was a regional market catching up, but the increases were throughout most of the nation and we will not immune to the hangover. For those wanting a real bear look at housing I suggest patrick.net
The ending of cheap money (Alt-A, subprime) loans is going to impact the number of buyers as has been previously commented on. Housing is a supply-demand dynamic. Fewer buyers will drive the prices down. Freddie/Fannie have serious problems getting worse (per recent article in Barrons) and may actually get to the point of our finding out whether that implicit government backing for them really exists. If the plunge in the dollar requires the Fed to reverse course and raise rates (I expect this) this will further reduce the pool.
This all said, I bought a place in Reston in 1996 (I'm in the tech industry, and for me, Reston works better than DC) and I'm still here. But I expect declining values through 2010 at least. I think we'll still got a lot of workthrough in bad loans to go through -- for the better areas in DC the subprime mess was the fat lady warming up. Alt-A will be the song there IMO.
Oh -- and if I believe all this why didn't I sell at the top? I gave it *really* serious consideration, but I'm happy in this place, and my wife likes to slap a new coat of paint on the walls without permission. The price for domestic tranquility. :-) And yes, for people who want (and can still afford) that they will still buy houses, but as I said before, and we've seen in the sales charts, it's a much smaller pool now...
joel and sonia,
Thanks for your input. Buying in Reston in 1996 was easy on the budget. Selling at the top was certainly not necessary. For a long-time homeowner, simply realizing that it might not work to spend imaginary equity via a cash-out would be a way to 'beat the bubble'.
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