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Tuesday, March 25, 2008
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35 comments:
Any chance we might get some new "On the Market" lists? I know you don't get that many comments in response to them, but I think folks do really like to look at the lists and research the properties to get a feel for what's happening.
Can you please bring them back? Pretty please?
LOL, check out this article...
http://www.hgtv.com/hgtv/ah_real_estate_buying/article/0,1801,HGTV_3159_5430600,00.html
From Feb 2007 about how "everyone" is using 100% financing nowadays.
Listen to this quote...
"Realistically, if a typical house is going for $400,000, just to do a 10 percent payment is $40,000," he says. "How many people are going to scrape together $40,000 in a reasonable amount of time? That's three years of socking away a grand a month and not having anything go wrong. That's just not realistic."
All I gotta say, is if takes you 3 years to save up 40k, you have no business spending 400k on a house! Whats wrong with a 150k starter home?
U.S. home prices fell by a record in January
Standard & Poor’s/Case-Shiller index shows a 11.4 percent decline
NEW YORK - The Standard & Poor’s/Case-Shiller index shows U.S. home prices fell 11.4 percent in January, its steepest drop since S&P started collecting data in 1987.
The decline reported Tuesday means prices have been growing more slowly or dropping for 19 consecutive months. The index tracks the prices of single-family homes in 10 major metropolitan areas in the U.S.
The broader 20-city composite index is also down, falling 10.7 percent in January from a year ago. That is the first time both indexes dropped by double-digit percentages.
http://www.msnbc.msn.com/id/23500987/
Here we agree Doug,
If you can't comfortably save $40k, and relatively quickly, you have no business thinking about buying a $400k house.
I can't read the article you linked to because the link was cut off, but the idea that a 10% downpayment is somehow way too much is just another example of the mentality that lead to the bubble. People wanted everything, right away, and couldn't be bothered to save up even a pocket's worth of change to purchase their "dream house."
The most important thing was to buy right away so they wouldn't miss out on all their appreciation...
As for what is wrong with a $150k starter home? Nothing... except for the fact that they stopped existing in many markets and people somehow took that as normal. It is amazing how quickly many people came to believe that $400k-$500k is what a run down 1000 f^2 1951 rambler should cost...
Leroy said:
"As for what is wrong with a $150k starter home? Nothing... except for the fact that they stopped existing in many markets and people somehow took that as normal. It is amazing how quickly many people came to believe that $400k-$500k is what a run down 1000 f^2 1951 rambler should cost..."
Leroy I agree with you except for your use of the word "should". "Should" doesn't belong in a discussion of prices in a free market system. But since you used the word, can you please justify how the word "should" can be a factor of pricing for real estate in our free market system?
John F,
Any chance we might get some new "On the Market" lists?
Sure thing - I'm working on Loudoun now. It will include data from the past month instead of just a week.
I'm still not sure how to handle short sales. I will probably keep posting them because they're on the MLS, but I hate to think I'm posting "fake" asking prices (i.e., not approved by the bank). On the other hand, if the house were "worth" any more, the sellers would probably try for that amount. It's frustrating that the MLS doesn't stick to "real" asking prices and save the fake ones for the auctions.
Lance's definition of free market capitalism on March 13, 2008 at 4:06 PM:
"An essential element of a transaction (in a capitalist system) is that both buyer and seller leave the table satisified with the transaction and neither feeling cheated."
lance,
word "should" means that there is something like fundamentals underlying any price and the fact that a lot of lemmings and flippers agree to buy temporarily overpriced assets does not justify this price in the long run.
say somebody buying into dotcom stocks circa february 2000 was acting as an agent in the free market, but should he thought a little bit about cash flows, valuation, etc, his net worth won't go down the toilet a year later.
markets can stay irrational for a very long time, your home is not an investment, all this is fair. but buying a shitty home for a lot of bucks on top of the market is not a very good decision (nothing personal here, i hope your own situation is much brighter).
i like lance's definition of free markets.
but we all know that the main driving force behind the market is rational agent.
when two happy people leave the table and one of them is a greedy moron market forces are at rest.
Lance said...
“"Should" doesn't belong in a discussion of prices in a free market system.”
Then again, we don’t live in a free market system.
"But since you used the word, can you please justify how the word "should" can be a factor of pricing for real estate in our free market system?"
Lance, the answer is complicated and for that reason I am not going to burden you with the details.
The short version is that perceptions of value play a large role in how a free market functions. Over the long term fundamentals will drive value, but over the short term market mentality can result in large swings in price.
konstantin: many errors have been made in economics by assuming that each agent is rational. Kahneman and Tversky have shown that people can be systematically irrational.
novawatcher --- there is always uncertainty in the markets, different treatment of risk, different utility, but in the end it is very difficult to sustain the prices at certain level by pure irrational behavior (i.e. no aversion to risk and overestimation of possible return).
but the fact that people get used to very high prices real fast is somewhat strange --- if you consider your home as an expense.
nobody gets used to the high gas prices, everybody whines. but a thought of growing equity in your home makes everybody happy --- even though it means higher taxes, eventually higher prices for services in the area, etc.
i personally do not believe that speculation helps economy in any way, so prefer to see the environment where housing prices go up by inflation rate steadily (makes a great return given usage of leverage).
Konstantin said:
"i personally do not believe that speculation helps economy in any way, so prefer to see the environment where housing prices go up by inflation rate steadily (makes a great return given usage of leverage)."
Konstantin, I like (and agree) with what you're saying in general. And I too "prefer to see the environment where housing prices go up by inflation rate steadily". However, I think where we part ways is that I believe that that is precisely what is occuring. I think we are (and have been) heading down the same exact road we went down in the '70s. It's eerie how similar things are including the war spending effect (e.g., Johnson's argument that you could have both more guns and more butter (i.e., spend more on the military and not have it crush out consumer goods without borrowing on the future and causing inflation)which was proven wrong once the debt caught up with us.) My argument from the start has been "don't count on a housing price bust to get you a cheaper house. In the environment where heading into, the safest thing is to lock in your costs at today's dollars and pay that mortgage back with tomorrow's dollars which will be so much cheaper in real value than todays. Yes, with hindsight one can always say "I'm glad I waited another year", but the fact of the matter is that no one knows when the high inflation that is already here will start to be reflected in high mortgage rates.
Hey where is the best place online to find recent home sales?
Most places dont have them for months after closing.
"Yes, with hindsight one can always say "I'm glad I waited another year", but the fact of the matter is that no one knows when the high inflation that is already here will start to be reflected in high mortgage rates."
Ah yes, more global lance-onmics.
What happened to your pan-global nodes theory? You know, the one where RE prices just magically rise because of the effects of vague buzzwords?
"My thoughts on the matter are that lots of people are misinterpreting the signs of shifting wealth on a global scale with what would have been a depression if economies were still at the national level. It's simply a matter of misreading the tea leaves because one hasn't realized that they should be reading the leaves in the entire pot ... and not just those that happened to land in the cup.
Sorry, no, there's no depression on its way. On the contrary, we're on the verge of a world economy with an efficiency and scale of economics well beyond the dreams of anyone until just recently. It's what is being referred to as the Pan-Global economy. And rising real estate prices are but one sign of its emergence." -Lance Oct 29, 2006
http://tinyurl.com/ywmjfm
"My argument from the start has been "don't count on a housing price bust to get you a cheaper house. In the environment where heading into, the safest thing is to lock in your costs at today's dollars and pay that mortgage back with tomorrow's dollars which will be so much cheaper in real value than todays"
Lance - im not trying to pick on you as I generally agree with you on a lot of matters, but I do have a question about the statement above.
Hypothetically speaking, say you were looking to buy in some far off exurban county. Assume further that the months of inventory was currently standing at say 24-30 months (i.e. tremendous downward pressure on prices going forward). Would you still recommend buying in this situation?
I'm guessing your answer is yes - if so, that is fine, but I would disagree with you. In my mind the tremendous downward pressure on prices tips the scales against buying, far more than does the uncertainty of inflation going forward.
crt,
lance has been repeating his mantra starting in 2005 when he bought.
As prices continued to fall in man y areas, he has been changing his rationales much like the shifting rationales for the war in Iraq by the Bush admin.
In some sought-after areas of Fairfax, just a couple of miles from the Vienna Metro and the Beltway, I see SFHs that sold for $750K in 2005 being listed at $600K. That is 20% off in about 2 years. Also, it is about $100K below the county assessment. These are not foreclosures or short sales, but normal sales and the homes are in excellent conditions.
Now he dismisses the well-reasoned calls by those who saw a clear bubble and sat out, as 'getting lucky' in hindsight. Lucky are those who bought without any analysis or bought into 'housing prices always go up' myths and then cashed out when they found prices soaring during the bubble.
I will say this about Lance's larger point - the uncertainty of the future is always something you have to consider.
Case in point - I bought in Alexandria in mid 2002. I knew there was a bubble then - it was as clear as the nose on my face. However, I figured I was in for at least 10 years so any drop would be overcome in that time so I went for it. Thus, I saw the risk and deemed it acceptable to take.
Had I not bought in 2002 the incessant nagging from my wife would have eventually worn me down and when the pop didnt come in 03-04 or 05, there is a good chance I would have gone in at a much higher price point for the same type of house.
When the market turned in 05, I waited with morbid curiosity to see how much my area would fall (as I was so certain it would when I bought in 02). In Alexandria it didnt come in 05, it didnt come in 06 and it didnt come in 07.
I still maintain that it will come, but where I was 100% certain of that in 05, I am not as nearly as confident in that prediction today as I was 3 years ago. Also, it is now near an absolute certainty (absent a dirty bomb) that I will not fall below my 2002 buy in price - and I likely will not come within hundreds of thousands of dollars of it. Moreover, had I not bought in 2002 there is a good chance I would still be here 6 YEARS later waiting for the early 2000 "pre bubble" prices to come back.
That said, now that the market has turned, I certainly would not buy today anywhere outside the beltway. Also I almost certainly would not buy inside the beltway given the fresh evidence (high inventory) that the much anticipated fall might finally be coming home to roost.
But lets say that I did wait for the bottom (or close to it) which may come in 2012 - now we are talking 10 YEARS - 1/6th of an adult lifespan - that I would have been waiting! Besides the benefit of not having to hear "I told you we should have bought in 2002" for 10 years from my wife, I would have missed out on 10 years of pure enjoyment (monetary gain aside) I had living in this neighborhood (I can assure you that respectable rentals in this neighborhood are non existent). In fact we love it so much I could see myself easily staying in this same place for another 25 years. In my mind the value of this enjoyment factor far exceeds the monetary gain, and was certainly worth the monetary risk.
My situation is clearly unique so I dont wish for this to incite or agitate those who have stayed on the sidelines. I respect those who made that choice - it hindsight it is clear I was lucky to get in when I did - no more no less. However I believe if you know what the risks are and are willing to accept them going into the situation - at some point you just have to say F'it and go for it.
2002 isn't really "the bubble." That may have been where a normal up cycle would have stopped had other factors not come into play but the really crazy valuations didn't start appearing until 2004-2005. I think you will find few here predicting a fall to below 2003 prices. (Outside of perhaps certain specific areas.)
Or is there someone I am missing? If you think prices will fall below 2003 levels you are of course welcome to speak up and say why but so far as I can tell the only people that throw out predictions like that are the real estate pumpers trying to set up a straw-man to argue with.
2002 certainly was the bubble -- I remember that when I moved here, I seriously considered renting, as it was the same, or slightly less, than buying (20% down, 30-yr fixed, etc.). Although I didn't know about the formal method of valuing houses using rent at that point, that [rent < PITI] wasn't something I was used to: at every place I had lived up to that point, it was always cheaper to own than to rent.
I also remember that prices moved so fast in 2002, that within a few months I went from being able to afford a house (when I first signed my employment contract) to being nearly priced out a few months later.
If I dig back through property tax databases, I can see that townhouses that sold for $185k in 2000 were selling for $250k in 2002. By my measure, they were 20% overpriced in 2002. I also fine similar things in Fairfax: homes that went for $330k in 1999 going for $475k in 2002.
If I use affordability (using both income and interest rates) or rent, I can see that housing had diverged from fundamentals by 2002. Whether it started in 1998 or 2000, I dunno, but it was very apparent by 2002. Of course, without the silly lending, it might have ended there: I never thought prices would keep climbing all the way through 2005.
CRT asked:
"Hypothetically speaking, say you were looking to buy in some far off exurban county. Assume further that the months of inventory was currently standing at say 24-30 months (i.e. tremendous downward pressure on prices going forward). Would you still recommend buying in this situation?"
No. Not unless I got a real bargain ... and was prepared to accept "come what may" in regards to these areas. In my opinion, the "suburbs are nicer than the downtown" era was an anomoly. It was a "transition phase" needed to "grow" our cities. In most places around the world the higher priced housing is in the center ... with the housing getting less nice the further you go out of town. And when you get very far out of town you end up with the shanties of the large cities of South America and the projects of places like north of Paris. Historically, the center being the more desireable area was also true here in the US. And I believe we're heading back to that standard. My guess is that many of these new exurban neighborhoods end up changing dramatically in character from what they were marketed to represent. (And this too has happened before here. The homes that were built in Dupont as mansions in the 1890s became the group houses and tenaments of the 1920s and 30s. ... Of course, by the 70s things started to turn around ... and these homes started to be re-converted to single family use.)
I think we may be using terms differently. Housing may have been somewhat overpriced by 2002 depending on the specific area we are talking about, but I don't thing that necessarily means bubble conditions existed.
Don't forget in a normal housing cycle the up cycle ends in stagnation or slight price declines over a relatively long period of time until inflation restores affordability.
When I say "bubble" I mean a complete or almost complete disconnect from the fundamentals. If 2002 prices were high... 2003-2006 prices were just nuts.
I think if the funny money hadn't appeared the market likely would have stalled out in 2003 rather than suddenly racing ahead faster than ever.
crt,
I'm glad you bought in 2002, it seems like it was the right move for you.
I unfortunately was not blessed to have been born 4-5 years earlier. You see, I graduated in '05. After 3 years of working, I have enough saved up for a down payment and then some. I still won't buy at todays ridiculously high prices. It's insane. Adjusting backwards for inflation, what I can buy today is ridiculous small compared to my salary vs. what I would have made 2000-2002.
If I had been born 5 years earlier, I would have graduated in 2000, given my saving habits and cheaper housing I would have been able to buy in 2002, and I would have done so.
Congratulations . . . the timing of your birth made all difference.
On a different note, people seem to forget it only takes -50% in a bust to wipe out 100% gains in a boom.
Everyone hates to see gas prices go up... but when it is housing prices people like lance think they have struck it rich and want to brag about their "equity." High housing prices are a problem for the community in the same way high food prices or high fuel prices are problem.
For the people who moved to the area in 2003-2006 the housing bubble has been a huge obstacle. The ones that were informed enough to avoid wasting huge amounts of money will be able to continue with their lives once the bubble has finished bursting, but the ones that bought high may suffer the consequences for a long time to come.
Everyone, good comments.
I disagree with one aspect of Lance's thesis.
Beyond a ring of shanty towns, world cities transition to country estates with real mansions.
Harriet and others have mentioned those in horse country. They have nothing to do with anything any of us can afford.
My situation is very close to CRT's except I bought over 10 years earlier. For those years, other than a couple years where prices rose and one where they fell, nothing much happened.
The talk of a housing bubble definitely started in 2002. I've been discussing this with a BH pal since then. The price pull back for SFH in 22305 simply has not happened and turning and twisting the BH mantra does not change that fact.
CRT and Novawatcher expected a fall some time after 2002 and are honest in saying that they have not seen it.
I'll put my cards on the table and admit that the price fall outside the beltway is more intense than I expected. I was wrong about that.
The price fall of the commodity THs and the lower end garden apartments in 22035 is a drop of about 10%. SFHs are flat to rising. I have no idea how to assess the fantasy pre-sale prices for 0 W GLEBE (800K 2005) and the current price ($499K). E REED is another mystery.
There is not a huge backlog of homes in 22305. As interest rates fall, I expect prices to rise. If that doesn't happen, makes no difference to me. I'll be out there mowing my little lawn.
""Beyond a ring of shanty towns, world cities transition to country estates with real mansions."
Why don't you list some "world cities" you have spent some time in?
To put it mildly your "knowledge" of "world cities" seems extremely vague and limited.
"There is not a huge backlog of homes in 22305. As interest rates fall, I expect prices to rise."
There were 15 months of inventory in 22305 as of Feb. Now that is potentially a volatile number considering just how few sales are occurring in your zip,(down >33% from last year) but it is certainly not suggestive of impending price increases...
Of course you think prices are going to rise... lol.
"If that doesn't happen, makes no difference to me. I'll be out there mowing my little lawn."
Right right, explains your presence here.
Lance - thanks for your response to my question.
Leroy - just out of curiousity, were you looking for real estate in 2002? I ask because (from my perspective) for those that were interested in real estate at that point it seemed that there was a palpable sense that this cant sustain itself. I remember distinctly talking to other RE attorneys I respect and their near unanimous opinion was "wait - prices are unsustainable - they will come down". That said, I agree with you that things really got out of control in 03. I do think the 01-02 bubble sentiment was not nearly as intense or widespread as the 03-04-05 bubble sentiment.
GTE - like I said it was just luck that things worked out for me. I wasnt "smart" or able to "beat the market" - the timing of my birth (and graduation) was a big part of it no doubt. My point was, if the time is right for someone and they know the risks, who am I to say dont do it.
Case in point, a friend who knew nothing about real estate had me help her buy in early 07. I explained to her ad nauseum all of the risks involved (in my opinion its highly likely your house will be worth less a year from now and probably 5 years from now - if you get married or change jobs or want to move its highly likely you will be underwater - how will you feel if 10 years from now you have to present a 10K check to the bank just to get out of the house?!?! For her this risk was acceptable - she knew the house was overpriced - the risk of her getting married, changing jobs etc was highly unlikely. She could easily afford the house on a 30 year fixed, plus she really loved this house and it really was a one of a kind. Thus in her mind the happiness she woud gain made the risk of financial loss still "worth it" for her. Sure, it wasnt worth it for me, but who am I to begrudge someone who really seems to have a handle on the risk, can afford it, and wants to go for it?
Leroy - I just re-read your post - you are right the funny money really didnt get into the market until 2003. Now that I think about it, I think you are right without the funny money we very well could have seen a reversal in 2003.
I didn't begin to seriously look at RE until 2005. At that point the bubble was so obvious you would have had to be blind not to see it.
I spent a lot of time in the area prior to 05 but I didn't live here full time until 2004.
This bubble is something of a perfect storm. The funny money was dumped into the market right at what should have been the top. If things had stagnated in 2003 it really would have been a "normal cycle."
I didn't begin to seriously look at RE until 2005. At that point the bubble was so obvious you would have had to be blind not to see it.
Gotcha - thanks. My experience was kinda reverse as I quit paying attention after 2002 only to look again at it once the fallout finally started in 2005. To be honest, during the interval, I had no idea how prevalent the (residential) loose lending practices had become.
I knew some clients who were casual "flippers" but it was always in some far out suburb I had never been to before - I never saw a flipper near where I lived so I assumed these clients were in the minority. Then when I realized how prevalent loose lending and flipping was - I realized we are all probably in serious trouble!
crt,leroy,
Your comments are all valid. But living under capitalism is all about 'managing uncertainty' rationally to the extent possible.
When I look at the price charts of many homes (Ziprealty) in Fairfax, I see a steep rise in 2002 and then again in 2004.
So, yes, 2002 must have felt like bubble as well, but the cut in interest rates can partly explain it. If you look at the interest rate cuts side by side, the Fed's action post 9/11 and then again in 2003/2004 played a major role in this. It was not always funny money.
There was also some uncertainty about the war in Iraq, etc. between late 2002 and mid 2003 and there was no steep rise during that time.
One of the more theoretically grounded bubble-deniers was Professor James Hamilton of UCSD (econbrowser.com). He tried to show using mathematical equations that sharp drops in interest rates can in fact explain steep rise in home prices. The problem with academic economists like him is that they are usually hesitant to accept there can indeed be irrational behavior. And unlike some others like Shiller or Roubini, Hamilton maintained that he could not use market psychology as a guide. So no matter how many people, including other economists, countered his arguments using P/R, psychology, etc., he failed to see that prices had gone way above the amount of rise (though steep) that could be justified by low interest rates.
By 2007, Hamilton came to agree that there was a massive amount of funny money that distorted the market; he also changed his mind and agreed that the Fed kept interest rates too low for too long, causing the crisis (asset bubble)-- the same view that Stephen Roach of Morgan Stanley had articulated way back in 2002, and with which he and many others had disagreed. In other words, even those rooted in rigorous theory have thrown-in the towel and all but agreed there was indeed a bubble. I still have a lot of respect for Hamilton because he has a strict focus on the data; he is very good at explaining Macroeconomics to lay people and was once a researcher at the Fed.
Still, a few odd people like Lance, with little knowledge of economics, would come to this forum day after day and ridicule those who claimed there was a bubble.
"Still, a few odd people like Lance, with little knowledge of economics, would come to this forum day after day and ridicule those who claimed there was a bubble."
I think this is largely a case where you are dealing with people who don't understand economics and therefor can't believe that anyone can understand economics.
It is an almost cargo-cult like mentality.
They know that economists analyze data, design models and try to describe trends etc, but they lack the ability to perform that type of analysis themselves so instead they just copy the form and language of economists without any of the substance.
They state what they want to believe, and then try to pretend their opinion is based on real analysis by decorating their posts with buzz words or extremely simplistic math. (lance's "pan-global nodes" or KH's "calculations")
They may not be able to discriminate their "theory" from the work of someone trained in the field but anyone with actual experience will instantly be able to tell the two apart.
The same thing happens in politics as well... real experts conduct in depth studies of what is taking place while countless individuals will say things like "Obama[or substitute any other candidate] will likely win because his message is really resonating with key demographics."
The overwhelming majority of the time what they are really saying is "I like Obama and hope he wins," but they want to sound like an expert so they try to spice up their opinion to make it seem like the product of some sort of actual analysis, which it isn't.
So all the time lance or KH spend talking about pan-global nodes, or "comparisons of DC to elite cities worldwide" or whatever else the theory of the day is, all they are really saying is "I hope prices stay high but I want to sound like there is more to it than that."
It isn't that different from a sports fan trying to explain why he/she thinks their favorite team will beat a heavily favored opponent. They are picking the conclusion and THEN trying to justify it.
"It is an almost cargo-cult like mentality."
Oh that is funny! I suddenly had this mental image of Lance in a basement with stacks and stacks of data and a chalkboard filled with equasions - except all the pages were blank and the stuff on the chalkboard was jibberish. (sorry Lance I dont mean to pick on you but I have to hand it to Leroy - "cargo-cult" is not something you see every day)
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