Continuing to examine and hold a lively discussion of the Northern Virginia Real Estate market.
Please post off-topic ideas, your local house search updates, MLS finds, and links here.
Hopefully not violating the rules, but I'm reposting a question i asked towards the end of the previous bit bucket, as I expect most people won't have seen it and I'm really interested in getting feedback (did get some excellent analysis from people including, to my surprise, Lance...)I have a question for the group (I know I'm posting late in this thread so I may repeat in the next bit bucket if people don't notice this): If inflation really takes off like it did in the Seventies -- I'm talking double digit inflation for a couple of years -- can we inflate our way out of the housing decline? That is, if housing prices would otherwise be falling, but inflation is driving up prices, would housing prices appear to be "stable," or, to put it another way, could inflationary pressures push up housing prices that would otherwise be in decline?Now, obviously, if you've got an adjustable rate you are totally hosed under this scenario. Likewise if your wages don't keep up with inflation at all, you're in bad shape. But suppose you have income that generally keeps pace inflation and you have a fixed rate mortgage; I'm thinking you do okay in this scenario. Opinions?(Addition to my orgininal question: Inflation is generally thought to harm lenders, and hurt borrowers. But does that hold true in an age where most debts have variable interest rates? That is, until relatively recently, you'd always know what the rate was on any kind of loan you took out because the interest rate was fixed; if inflation fired up, lenders would get pounded because their debt would be repaid with "cheaper" money, and debtors would get a break because they'd pay off that debt with "cheaper" money. But do lenders care about inflation if the interest rate applied to debtors rises with the inflation rate? Does this new paradigm suggest that the Fed might be more tolerant of inflation than it has been in the past? And do the recent changes in bankruptcy law affect this calculation? Lets play what if...)
REPOSTING on this thread.Gruntled asked:"But suppose you have income that general paces inflation and you have a fixed rate mortgage; I'm thinking you do okay in this scenario. Opinions?"The scenario you lay out is exactly what happened in the '70s. (And coincidentally ... or not ... we were in similar circumstances vis-a-vis with war debt mounting and the "guns and butter" argument coming in to play.) And yes most mortgageholders made out very very well as the real value of their debts sank at rates far in excess of the rate of their mortgage. (I.e., they were maybe paying between 5 and 7% interest on a fixed 30 yr mortgage, but inflation was in the double digits.) And JUST LIKE you say, after the initial high home price rises of the early 70s, prices seemed to stabilize in the mid to later 70s, but inflation at double-digits were really making them more affordable for new buyers. (Of course, the mortgage holders were still far better off since they were repaying pre-inflationary balances with post-inflationary salaries.) You observation about adjustable rate mortgagees being in less good a position is also correct. But they're not as bad off as it seems as first. For one thing, most of these people will most likely be refinancing to a fixed rate within the next couple of years (i.e., right before the really high inflation hits us ... and it will since the Fed is doing exactly now as it did in the 70s ... real low rate at first to try and contain things via stimulating business ... and then real high rates once stagflation has set in.) Additionally, even those that do stay with the adjustable rate still have a capped rate that is something like 5 pts over whatever the initial rate was. So they might be paying 9% interest when inflation is at 20%. They're still making out.
Lets just use the thread below...Otherwise we are going to end up with a really difficult discussion to follow.On a blog like this one scrolling down one posting isn't really an issue.
The problem in looking at the past to predict the future is that we have entered in to very different times. I can't find another instance that home prices went up two three times in a four year period. Use to be that a company announced layoffs and their stock tanked. Now a company announces layoffs and their stock goes up. The reason I am looking at buying right now is that some of the home values out there have come back to a point that I now can afford - not being priced out as I was back in 2005. If/when I buy, it will be for the long term. But for that to happen the interest rate and the value of the home will have to meet my needs and outlook for the future.
Sometimes justice finds a way...Checking new listings today, I saw yet another house that is NOT a new listing represented as such, but the funny thing is, the realtor didn't bother getting a new picture, and the old picture has the old asking price in bold graphics across the picture. So the "new listing" at $395,000 has a picture loudly proclaiming it a steal at $417,000:9560 ALLEGRO DRMANASSAS, VA 20112PW6691976But anyway...I am so focused on my corner of PWC, I rarely pay much attention to other markets, though I understand California and Florida are particularly hard-hit areas. But I noticed a headline yesterday that led to me wondering if PWC could possibly be one of the worst-hit markets in the entire country. The article was about falling home prices in California, and it cited a 17.9% drop in Southern California overall, with an example of six counties that saw a median price drop of "19.2 percent below the region's peak price of $505,000 last summer, and it's 1.7 percent below January's median."But for the zip codes I've been watching in PWC, median price drops have been 30-40% YOY the past several months, and 2007 prices were down from 2006, so the median price drop from peak must be even greater.The article also cited sales volume drops of 39% and 36.7% in some counties for Feb. 2008 vs Feb. 2007. But the areas I have been watching have had sales volume down by 50% YOY.So are those benchmarks not actually so bad in California, or are things really that terribly bad here?(Not to mention the numbers for Fauquier and Culpepper counties...)
Foreclosures drop in DC area instead of accelerating like rest of nation...http://www.examiner.com/a-1278087~Foreclosures_drop_in_D_C__and_Northern_Virginia.html
Here's my two cents.1) Not to be brutal-but lance is a housing shill. I can't remember one time where he has mentioned that buying a house (for the general public) is a bad idea. He is in complete denial of housing cycles, and always pumps that no matter what it is always a good time to buy. Just like the stupid idiots on cnn.money, or some junk, that always say the following. Scenario 1) Stocks are down. . . buy now b/c stocks are "cheap'-Lance "buy house now b/c you'll do better in inflation"Scenario 2) Stocks are up . . . buy now b/c they will keep going up and if you don't you'll miss out-Lance "buy house now or you'll be left behind"He is a housing pimp!(Sigh) now that is out.I've read and studied a lot on this and after reading some good books by Ludwig Von Mises, Murray Rothbard (Austrian Econ), good blogs, and lots of research. I've come to multiple conclusions.1st, laying down a couple of principle. (Be advised, I'm glossing over a lot of details) 1) Inflation is an increase in the money supply (either bills or credit-which acts like money)-not an increase in prices (which is the effect of inflation).2) Multiple ways to increase the money supply exist. a) lower interest rates- this encourages banks, and governments to borrow money, thus creating more credit, and more money supply b) Government deficit spending-when the government runs a deficit it actually spends that deficit money (i.e. contractors, companies, people, get paid with that deficit money). The government essentially takes out a loan from the federal reserve. Thus lower interest rates encourages more deficit b/c money is cheap. c) Fractional Reserve Banking- when the banks get money, they only have to keep on hand 10% (i.e. they loan out 90% of it). So the banks take loans from the Fed, and then loan out 90% % of the money to J6P. 3) The EFFECTS of inflation are NOT uniform. When banks lend money to investors, funds, etc, the money will flow to the path of least resistance, i.e. where it can make the most profit. Banks want to make more money and thus if stocks are booming, they will throw any borrowed money in stocks b/c they can make a lot more than say in bonds.4) So essentially, the dollar bills we have are debt, IOUs to the Federal Reserve (really freaking sad). With so much excess debt and credit eventually things go up too far and come crashing down, and we have a credit collapse.5) (This is were I disagree w/ a lot of people) That credit collapse DOES bring destruction of money or deflation. This deflation is NECESSARY and is not deflationary over all. 5a) Using a baseline 100, if say in 5 years credit baloons to 200, but then collapses 30% over then next 2 . . . it's still gone from 100-140 over 7 years. 5b) In the Deflationary collapse, LOTS and LOTS of big power brokers will go under (necessary) . . . unless the government steps in.6) Unless the government has some REAL cojones, they will almost ALWAYS try to re-inflate to make the deflationary collapse less painful for the power brokers.7) From 6 . . . another boom cycle is created in another area. The four main boom areas are i) stocks, ii) real estate, iii) bonds, iv) commodities8) This whole cycle is a MALINVESTMENT of money, caused by government intervention of economies.9) This system leads to only one inevitable outcome. A new currency . This come by one of two ways . . . hyperinflation like the Weimar Republic or debt default like Argentina.10) Depending on how much restraint the government has the game can go on for quite a while. We are going on 30+ years of the current iteration. (I argue that we did have a new currency after Nixon closed the gold window).So in order to look at where we are at. In 2001 stocks were on the downturn (before 911-they were already dropping rates, 911 just exacerbated the problem). The government fearing a recession (a necessary part of economies) dropped interest rates to 1%. The housing market was already booming before 2001 . . .it had started in ~98-99. Lowering interest rates to 1% just exacerbated the problem. Banks/investors looking for a way to make money with cheap money (read inflation) invested it in RE.Housing goes like gang busters. Coupled with a Fed Chairman who advised people it was smart to take out ARMS (idiots!). This of course boosts the economy and we avert a serious recession. Of course this added inflation causes a malinvestment in housing and it skyrockets up. Eventually that credit increase collapses and we are now dealing with the effects of that. We are having massive credit destruction in housing, however the overall effects after 10 years will still be inflation. This is while I still believe housing prices have a ways to drop . . . I don't believe 2001 prices will be coming back, early-mid 2003 prices-which still means a substancial drop from where we are. And besides when it does bottom, it will be a multi-year bottom, 3-4 years with -2 to +2% growth. And don't spout of . . "well interest will be high", maybe so, maybe not, I can't worry about what interest will be, I can only worry if it makes financial sense now to do it. . . and it doesn't! The government is trying to prevent this massive deflation . . . i.e. they are trying to solve the problem of inflation with MORE inflation . . . idiots. Lowering interest rates bailing out banks, etc.Of course the more they do this and provide a stimulus to the economy, the more that banks and investors will throw money to where they can make more money. And that is of course commodities. You ain't seen nothing yet in commodities. I'm calling another 4-5 year boom in commodities. Luckily, I noticed this cycle in 2004 and I've done quite well. Eventually, commodities will bust . . . rise lather repeat.Interestingly enough . . . the only time the public really complains about inflation is when the effects show up in commodities . . . everyone thinks housing and stocks going up isn't inflation, but to a large degree the effects of inflation are in stocks and housing.Where do wages fall into this whole cycle. Wages are the absolute LAST thing to rise in the cycle.So as to lance's people who buy now will be better off. There is a small part of me who feels for lance. Think about it . . . he bought at the peak of the bubble, and now he will be squeezed by high prices in the CPI. Anyone who thinks inflation truly is the ~3.5 that the CPI reports is an idiot. Using the CPI used in the 70s (they have changed the CPI multiple times) we are at ~8% inflation right now. Using the CPI before 1990 (Clinton changed it again) it is running at about 5-6%. Anyone who thinks this isn't enough . . . take a freaking look at the dollar!!! Down 38% over the past 3 years.So in effect, housing prices will still drop (any new money the Fed prints, ain't going to housing), we will have higher CPI, and unless a rabbit is pulled out of the hat a serious recession.Which brings another point . . . if a recession gets bad and lots of people lose their jobs, with no savings they will lose their homes too. Considering that we've had NEGATIVE savings for 3+ years, a 6 months layoff means you are screwed. Hmm, now we know why people are dipping into 401ks.The sad thing is . . . it's so simple how to avoid this mess. Live within your means, always save 10% (save, not invest), don't go into debt, etc. In general people are stupid with money-like lance.So by all this you'd think, I'm a pessimist, I'm actually an optimist . . but I do believe in being prepared. Come what may . . . sure I don't own a house . . . but man . . I'm completely financially secure for 2 years (I lose my job . . my wife, child, and me are just fine for 2 years). That is peace of mind. Don't get me wrong, I want to buy a house, and I will, but not just yet, maybe in a year.Sorry for the long post.
Tabitha, I noticed this same thing in looking at my old neighborhood in Herndon. The "drive-by" pic that is shown for the property next to mine is like 5 years old in the least! Have to say that given the articles in the WP in the past few days; I wish that other counties in Virginia will follow PWC in cracking down on illegal immigrants. Maybe then over crowding of properties, and use of of public spaces for profit making will end. Last weekend the REDC auction had a property that was listed as a 2 BR unit with under 700sf!!!
Gruntled said... “If inflation really takes off like it did in the Seventies -- I'm talking double digit inflation for a couple of years –“Depending on how inflation is calculated, were already there:http://money.cnn.com/video/#/video/news/2008/03/12/news.hunter.shadowstats.bank.cnnmoneyhttp://tinyurl.com/27rzejUsing current government standards, inflation is at 4%, 1990 standards-7%, 1980 standards-11%. Don’t like the results? Simply change the standard. Much like the way CPI is calculated, which by current government standards, it’s fine. Of course, they leave out fuel, food, and housing…
Tabitha,I think overall the concentration of bad loans is high in PW and that is why the drops are larger. ALso, no offense or anything, but PW county has very few "Rich" neighborhoods to hold up pricing. Lots of marginal housing stock that was way over priced and has a good way to fall.My neighborhood in Fairfax has the first house in year up for sale. It was sold in 2005 for $500k and is listed at $389k. Pretty big drop. Thanks for that neighbor. They tried selling it last year but couldn't so I am not sure what exactly happened to get to this price but it is painful to us for sure.
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