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Wednesday, June 25, 2008
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55 comments:
There's been lots of discussion about values not declining in the core areas and how important it is to be near a metro line.
Perhaps, but not to us. I work in the tech industry, so ground zero for me is Reston (where I live). I can't remember the last time I had to go into the District for business reasons. Today I have to go to Columbia, but Metro doesn't help me there!
Fairly close to Tysons which I once heard has more (commercial) office space than all of DC (is that still true??).
This got me thinking -- where are the major work centers in the Washington region and do they tend to be affiliated with any specific industries?
Over the past decade the Navy Yard has become a much larger naval defense area. Prior to that those organizations were scattered, mostly in Arlington (Crsystal City) or Alexandria.
Obviously the Pentagon is also a huge defense location.
joel and sonia: according to Colbert's 'Better know a District', Tyson's is the largest concentration of office space in the U.S.
Joel and Sonia -
I agree with you on this point. I was one of the lucky few that bought in 2004 out in Leesburg. Thank heaven that I have the means to ride it out until things get better (albeit extremely disheartening and painful). I find it hard to believe that all the fuss about this mass "introdus" back into the city because of metro lines, gas prices (pick your crisis of the day) is going to seriously long term change the dynamics of suburban America. I also work in technology (in Reston, actually) and have not a concern in the world about finding another job within 20 minutes of my townhouse in Leesburg.
Fact is that the Dulles corridor (Route 7 and the Greenway) is going to continue to be an engine of growth for years to come. We just have to live with the fact that things overshot on the way up and they will probably overshoot on the way down before things stabilize.
Love the blog, Harriet.
Latest article on the "introdus" shift:
(from June 24 Herald Tribune)
Life on the fringes of U.S. suburbia becomes untenable with rising gas costs
By Peter S. Goodman
Tuesday, June 24, 2008
ELIZABETH, Colorado: Suddenly, the economics of American suburban life are under assault as skyrocketing energy prices inflate the costs of reaching, heating and cooling homes on the outer edges of metropolitan areas.
Just off Singing Hills Road, in one of hundreds of two-story homes dotting a former cattle ranch beyond the southern fringes of Denver, Phil Boyle and his family openly wonder if they will have to move close to town to get some relief.
They still revel in the space and quiet that has drawn a steady exodus from U.S. cities toward places like this for more than half a century. Their living room ceiling soars two stories high. A swing-set sways in the breeze in their backyard. Their wrap-around porch looks out over the flat scrub of the high plains to the snow-capped peaks of the Rocky Mountains.
But life on the distant fringes of suburbia is beginning to feel untenable. Boyle and his wife must drive nearly an hour to their jobs in the high-tech corridor of southern Denver. With gasoline at more than $4 a gallon, Boyle recently paid $121 to fill his pickup truck with diesel. The price of propane to heat their spacious house has more than doubled in recent years.
Though Boyle finds city life unappealing, it's now up for reconsideration.
"Living closer in, in a smaller space, where you don't have that commute," he said. "It's definitely something we talk about. Before it was, 'We spend too much time driving.' Now, it's, 'We spend too much time and money driving."'
As the realization takes hold that rising energy prices are less a momentary blip than a restructuring with lasting consequences, the high cost of fuel is threatening to slow the decades-old migration away from cities, while exacerbating the housing downturn by diminishing the appeal of larger homes set far from urban jobs.
In Atlanta, Philadelphia, San Francisco and Minneapolis, homes beyond the urban core have been falling in value faster than those within, according to analysis by Moody's Economy.com.
In Denver, housing prices in the urban core rose steadily from 2003 until late last year compared with previous years, before dipping nearly 5 percent in the past three months of last year, according to Economy.com. But house prices in the suburbs began falling earlier, in the middle of 2006, and then accelerated, dropping by 7 percent the past three months of the year.
Many factors have propelled the unraveling of U.S. real estate, from the mortgage crisis to a staggering excess of home construction, making it hard to pinpoint the impact of any single force. But economists and real estate agents are growing convinced that the rising cost of energy is a primary factor pushing home prices down in the suburbs - particularly in the outer rings.
More than three-fourths of prospective homebuyers are more inclined to live in an urban area because of fuel prices, according to a recent survey of 903 real estate agents with Coldwell Banker, a national brokerage.
Some proclaim the unfolding demise of suburbia.
"Many low-density suburbs and McMansion subdivisions, including some that are lovely and affluent today, may become what inner cities became in the 1960s and '70s - slums characterized by poverty, crime and decay," said Christopher Leinberger, an urban land use expert, in a recent essay in the Atlantic Monthly.
Most experts do not share such apocalyptic visions, seeing instead a gradual reordering.
"It's like an ebbing of this suburban tide," said Joe Cortright, an economist at the consulting group Impresa in Portland, Oregon. "There's going to be this kind of reversal of desirability. Typically, Americans have felt the periphery was most desirable, and now there's going to be a reversion to the center."
In a recent study, Cortright found that house prices in the urban centers of Chicago, Los Angeles, Pittsburgh, Portland and Tampa have fared significantly better than those in the suburbs. So-called exurbs - communities sprouting on the distant edges of metropolitan areas - have suffered worst of all, Cortright found.
Basic household arithmetic appears to be furthering the trend: In 2003, the average suburban household spent $1,422 a year on gasoline, according to the Bureau of Labor Statistics. By April of this year - when gas prices were about $3.60 a gallon - the same household was buying gas at a rate of $3,196 a year, more than doubling consumption in dollar terms in less than five years.
In March, Americans drove 11 billion fewer miles on public roads than in the same month the previous year, a 4.3 percent decrease. It was the sharpest one-month drop since the Federal Highway Administration began keeping records in 1942.
Long before the recent spike in the price of energy, environmentalists decried suburban sprawl as a waste of land, energy, and tax dollars: Governments from Virginia to California have in recent decades lavished resources on building roads and schools for new subdivisions in the outer rings of development while skimping on maintaining facilities closer in. Many governments now focus on reviving their downtowns.
In Denver - a classic American city with snarling freeway traffic across a vast acreage of strip malls, ranch houses and office parks - the city has seen an urban renaissance over the past decade.
A planned $6.1 billion commuter rail system has been going in over the past four years, drawing people downtown without cars, while crystallizing swift sales of densely clustered condos near stations.
Coors Field, the intimate, brick-fronted baseball stadium for the Colorado Rockies, has transformed the surrounding area from a desolate area into trendy Lower Downtown, a neighborhood of restaurants and microbreweries in restored warehouses. Along the Platte River, new condos set on a park strip offer an arresting tableau of glass, steel, and futuristic geometry, attracting throngs of buyers at rising prices.
"This is a city where it's fun to be in the center," said Tim Burleigh, 56, who sold his house in the suburbs and now walks to Rockies games from his downtown condo.
To Denver's Mayor John Hickenlooper, $4 gasoline offers a useful push forward on such plans.
"It can be an accelerator," he said during an interview inside the imposing, column-fronted City Hall. "It's not going to be the dagger in the heart of suburban sprawl, but there's a certain inclination, a certain momentum back toward downtown."
Elizabeth is the archetype of a once-rural community sucked into the orbit of the expanding metropolis, its ranchlands given over to porches, picket fences and two-car garages.
Megan Werner, 39, a mother of three, moved here five years ago from a suburb closer to Denver, where the houses were packed together. She and her husband bought a home set on a 1.5 acre, or 0.61 hectare, lot in the Deer Creek Farm subdivision. The space justified her husband's 40-minute commute.
"We wanted more than a postage stamp," she said, as her 5-year-old daughter walked barefoot across the driveway.
It used to cost her about $30 to fill her Honda minivan with gas. Now, it's more like $50, and she coordinates her trips - shopping in town, combined with dance lessons for her kids. But she has no thoughts of leaving.
"I can open up my door, and my kids can play," Werner said.
For others, though, new math is altering the choice of where to live. Houses are sitting on the market longer than years past. "The pool of buyers is diminishing," said Jace Glick, a realtor with Re/Max Alliance in Parker, next to Elizabeth.
Juanita Johnson and her husband, both retired Denver school teachers, moved here last August, after three decades in the city and a few years in the mountains. They bought a four-bedroom house for $415,000.
Last winter, they spent $3,000 just on propane to heat the place, she said. Suddenly, this seems like a place to flee.
"We'd sell if we could, but we'd lose our shirt," Johnson said. On a recent walk, she counted 15 "For Sale" signs. A similar home nearby is listed below $400,000.
"I was so glad to get out of the city, the pollution the traffic, the crime," she said. Now, the suburbs seem mean. "I wouldn't do this again."
(from June 24 Herald Tribune)
--------------------------
Hey, learn how to post a link.
People don't want to scroll through hundreds of words to get to the posts they actually want to read.
Calculated risk has a post out today which consolidated many of the recent articles about gas prices leading to the death of the exurban lifestyle
http://calculatedrisk.blogspot.com/2008/06/more-on-decline-of-exurban-lifestyle.html
I still think its way too early to write off the exurbs - there is too much low hanging fruit (increased automobile efficiency) to make them viable again in the long term.
Short term however, (next 1-5 years) I think they are going to continue to suffer. Further, I heard a story today, that renters are really the main ones who are abandoing the exurbs in favor of the core areas. This is depressing rental prices far out, and actually increasing rental prices close in. Thus, while the home prices close in arent directly benefiting from the exurban exodus, they are indirectly benefitting in the form of increasing rents which helps justify the high purchase prices.
I should mention too that high gas prices really do not help prices anywhere. Gas is essentially a tax - it is a use of income that could be allocated to housing on transportation - so it really doesnt make anyone richer or better able to afford housing.
What it does do however, is ensure that the modest declines close in markets are seeing will be even less hard hit (relatively speaking) than their exurban counterparts.
In regards to high gas prices stimulating an "introdus" I wonder if it's completely unrealistic to adjust roads so that there is a lane or lanes dedicated to accomodate only motor scooters or 100MPG/100MPH vehicles like this:
Fly The Road
Even a year ago people would have laughed as such an idea. Now it doesn't seem too far fetched to me. To start with, it wouldn't take much to pave a path in the middle of the toll road (yes, I know the metro will go there but not for a long time).
If I felt safe riding a scooter, I would. I've seen it work in the Netherlands. They have excellent bike/scooter paths next to nearly every road and they are used constantly.
"Contrarian said...
The first baby boomers turned 62 this year and they got here early and purchased homes in Arlington and inside the beltway."
You think so? 30 years ago, gubamint workers would have been about as high on the food chain as this area saw meaning they could shun the small WWII era housing in Arlington & buy those big shiny new homes out in fairfax.
In fact between, 1970 and 1990 the population of Arlington County actually declined (like DC & all cities during that era). During that same time, the population of Fairfax County nearly doubled.
In short, I agree with you about the upcoming brain drain. However, I think this will hurt Fairfax Co more than anywhere else.
All good points. I guess my biggest problem is that everyone assumes that the growth engine of the region is DC proper. Those of us in the hinterlands of Loudoun really are banking on the fact that Dulles Airport, One Loudoun (World Trade Center), Janelia Research Center and the like will drive our area without an insane commute to the District/Maryland/Arlington/Alexandria.
The GMU/CRA center has an interesting graphic on this (Page 16).
http://www.cra-gmu.org/forecastreports/08forecasts/EconomicOutlookJune10-08.pdf
Long term real estate( 10 years), I think we are good. Bubbles (no matter if financial or real estate based) eventually do pop and the consequences of them help drive efficiency and innovation back into the system causing the cycle to start all over again. :-)
I am bullish on the area and am still delighted to be here, despite our obvious problems.
Quote from one of the links:
"Nationwide, home prices in neighborhoods with long commutes and no public transportation are falling faster than prices in communities closer to cities, according to a study by Joseph Cortright, an economist at Impresa Consulting. For example, his study found that prices in distant suburbs of Tampa fell 14 percent in the last 12 months, versus a 9 percent drop in areas nearer the city.
``The decline in almost every case is worse in the suburbs and exurbs than it is in close-in neighborhoods because transportation costs are so much more of a factor,'' says Cortright, whose Portland, Oregon, firm studies regional economies."
Yep, that's exactly what we're seeing in the Washington area too. I also hope the Tyson's Corner/Dulles area continues to be a strong growth center, and I expect it will be. But the core of this region -- Washington DC and its inner suburbs -- will continue to be the main driver of the economy in terms of jobs, much as Manhattan is in the greater NYC area. And unlike any other major industry in the US, the federal government isn't going to go out of business or move. DC will remain a jobs powerhouse.
As for federal employees retiring and moving away, sure, a lot of that will happen. But many will retire from the federal government and stay right where they are, working full or part-time for the government or contractors. Even when they stop working altogether, many will continue to live here because the lifestyle is good, with lots of interesting things to do and generally excellent services.
Contrarian - FWIW, I was recently reading a book about the history of DC. Did you know that the depression was the cause of perhaps the biggest housing boom this area ever saw?
The reason was simple, FDR hugely expanded the size & role of the federal government with all his new deal policies. In 10 years, DC's population swelled by an unfathomable 200,000 people. At that time, houses in far out, distant areas like Arlington were built at an increcible pace. Long forgotten, Old Town Alexandria was suddenly "residcovered" as a source of cheap housing.
Sarah Hoofe described as Alexandria's first "preservationist" was really its first flipper. Houses in old town that were going for $300 at the beginning of the 1930s, were selling for the unseemly price of $2000 by the end of the decade!
Im certainly not saying this area is "depression proof". Were a depression actually come it would lower everyone's standard of living across the board. That said, relative to everyplace else in the country, if history is any guide, this area is probably the best place to be to ride out a depression!
Many people don't realize that universities are among the largest private sector employers of people in the area (plus GMU, U MD, and branch campuses of some other state schools are pretty big as well). For example, here's a top ten list for DC proper (scroll down a bit):
http://tinyurl.com/6o732z
While a lot of the staff, especially clerical level, are hired from the area, most regular (non-adjunct) faculty are not, and of course, many students come from out of town.
This should be factored into projections about the future of the local economy.
ace: I know GMU has had trouble hiring people during the housing bubble. I know for a fact that several candidates (some senior) have turned them down because housing was unaffordable here.
novawatcher, thanks. I am not surprised to hear that. Many employers are probably running into the same problems.
Contrarian said:
"I say that because unlike all past recessions for the last 75 years, I believe this one is going to be worse, much worse."
Too bad the Fed doesn't agree with you. But of course, what do they know? ...
www.washingtonpost.com/wp-dyn/content/article/2008/06/25/AR2008062500274.html?hpid=topnews
"Meanwhile, the economy, while weak, is not as weak as many Fed leaders feared it would be by this time. And because interest rate cuts stimulate the economy with a lag, the spring rate cuts are only now starting to have an impact. "
Well if we do actually have a depression, I think we will have more to worry about than home appreciation, no?
I should probably queue up for the bread line now. :-)
When a dirty bomb goes off in Arlington/DC and drops nuke dust all over, everyone will see their property values drop like a rock.
bas: with the prevailing winds blowing from west to east, Manassas will be spared!
"NoVAwatcher said...
bas: with the prevailing winds blowing from west to east, Manassas will be spared!"
Plus it will be an easy commte to your work for the shadow government operating inside Mount Weather!
It's clear that declines started soonest in the farthest out areas and have gradually moved inward. Montgomery County didn't start down until this last September. It's now been down for 9 consecutive months. Unless something changes radically, next month the declines will reach double digits. Alexandria City has now been down for 5 consecutive months. Although Arlington has not been down consistently, 7 out of the last 12 months have been down-- and in the last 7 months it has been up only once.
Sales -- both dollar volumes and units sold-- have been steeply down in Arlington in the last six months. For those who are sanguine about the future of DC and Arlington, recall that it's less than a year since people were equally convinced that only the farther out suburbs would experience any decline. And that two years ago, many people thought that the entire DC area would escape unscathed. The fact that decline begins later the closer in you go does not tell us anything about how severe or mild those declines might turn out to be.
Sarah:
And don't forget, you only have to do a simple Google search to find "reputable experts" who ridiculed anyone who claimed that there was any housing bubble whatsoever in 2004-2005. I'll be convinced of the "immunity theory" for close in areas when sales increase again and rents spike up such that they approximate historic price/rent ratios. I'm not optimistic; I see the white collar sector getting hit hard by layoffs over the next year.
>I say that because unlike all past recessions for the last 75 years, I believe this one is going to be worse, much worse<
Turn this thinking around and it suffers from the same infection that fueled the bubble. Excessive optimism replaced with excessive pessimism. Both are the same.
Turn this thinking around and it suffers from the same infection that fueled the bubble. Excessive optimism replaced with excessive pessimism. Both are the same.
What's wrong with that? Let it deflate.
I'm waiting for more problems.
alexandria still needs to come down 30% more
kob said...Turn this thinking around and it suffers from the same infection that fueled the bubble.
I agree that people are beginning to be as unrealistic in their pessimism now as they were in their optimism a few years ago. However it wasn't optimism that fueled the bubble -- it was an enormous credit bubble that allowed things like NINJA (no-assets, no income, no job) loans. That kind of lending hasn't occurred since the 'Roaring Twenties'.
I don't think we're likely to go into a depression anytime soon. I put the chance of that at no more than 15%-- and that's on my bad days.
What I do think is that if we don't stop financing consumption with foreign dollars-- and right smartly too-- in 20 years the US will no longer be a major world power. And what incentive will any other country have at that point to continue financing our deficits? At that point we will be allowed to collapse into bankruptcy like Argentina did.
Housing prices coming back down in line with incomes won't fix anything overnight-- and it's going to cause some major pain. But it will allow us to begin to save again-- and redirect investment back into our own production-- instead of China's.
Contrarian: In fact, I believe we are in the beginning stages of a depression. And, by the time this depression has ended we will see unemployment go from the previous low of 5% to the current 6.5% to 10% and eventually more than 20% unemployment.
Ah, a fellow doomer. I am one with your pessimism.
My 15 year strategy, which other doom and gloomers have raged against, was choosing the lowest priced, smallest, modest SFH, in the best neighborhood that I could afford, close to jobs, goods, and services, near public transportion.
Way out thar? The pricing whims of desperate landlords? $4/gallon gas?
My fair share of everyone else's heating bill in the condo?
I know two condo dwellers who leave their windows open in mid-winter, "I need my fresh air to sleep".
Yeah, like you need water with trace plasticizers in a bottle from the grocery store.
"Sarah said...
The fact that decline begins later the closer in you go does not tell us anything about how severe or mild those declines might turn out to be."
I disagree. I think Ive laid out a decent case in the past few months as to why the severity close in will be far less:
1. Speculation. Sales records indicate speculators tended to focuse more on outer counties than inner ones, even when population changes are accounted for. Even when you look at condos which should have been a haven for speculators close in, its pretty clear that they went in greater numbers for the cheaper condos farther out.
2. Junk Loans. Toxic loans as a general rule tended to run with the speculators. The scant evidence we were able to see from the federal reserve (before they switched from county by county to state by state views) indicated the toxic loans were 2-3X more concentrated in the outer counties.
3. Inventory. Inventory spiked for this whole area in summer 2006. That spike was, the speculators headed for the door. Close in, it looks like they got out. Not so in the outer counties. Since then, we have had a leveling out of inventory, and now we are seeing a slight decline even though it normally rises during the summer. Again this is for every county. If you compare the charts for Arl, Alex, FFx & Lou (PWC is another story). The tend to move in lockstep. Translation - whatever "hit" far out has "hit" close in - it just wasnt as exciting.
4. No holding out. The theory of close in people holding out for a better day doesnt seem to hold water. Howard and Montgomery Counties, are wealthier than Arl & Alex and didnt have 2 years of a constant beating from their county neighbors to "soften them up". Yet if you look at supply and demand, these wealthier counties have quickly deteriorated to where they now look far worse than Arl & Alex. How can this be? How can Arl & Alex people hold out while their wealthier MD neighbors cant? The answer it seems is that they arent holding out or at least not in big numbers - and the county by county evidence seems to support this.
5. Supply and Demand. Good ole econ 101. Back in 05 everywhere had scathing absorbtion rates - generally about 1-2 months of inventory. In 06, inner counties were running 4-5 months of inventory but outer coutnies slipped to the high single digits. Then in 07, outer counties slipped even more to low double digits of months of inventory. Incredibly, inner counties IMPROVED slightly on their 06 numbers and were now running 3-5 months of inventory. Early 08 it looked like inner county absorbtion rates would fall sharply like the outer county rates, but they recovered and are now running right about where they were in 06 (4-5 months). Since the beginning of the year, every county has recovered signinficantly, but even after the tremendous price drops the outer counties have seen, the inner counties are still doing better in absorbtion rates!
6. Prices have fallen! Unlike some inner county pumpers, I readily admit inner county prices have fallen and are continuing to fall. While Alexandria's prices have continued to rise, if you look at median prices for the whole year, vaunted Arlington has fallen from 499K in 2005 to 482K in 2006 to 475K in 2007. These declines have been subtle, and not as much as some people here would like but they have fallen.
In sum, I am really coming round to the conclusion that this is it folks. I really cant see anything "out there" that still needs to work its way "close in". It seems to me that its just a matter of degree from here on out. If PWC falls another 20%, Fairfax will fall a corresponding 10% and Arlington a corresponding 5%. These declines will continue for who knows how long. All will be hit, but the severity will always be greater the farther out you go.
Again, I am not saying the inner counties are immune, or that they cannot fall - I just dont see any cogent reason why the trend we have been watching for really almost 3 years now will reverse itself. Feel free to disagree with me if you like, but you will have to come up with a decent argument as to why it will reverse to convince me otherwise.
I agree with CRT.
Been predicting 5-10% fall from peak in Arlington forever, we are about half way there.
And once again - substitution effect is total BS!
CRT
The option arm "pick a payment" wave. It hasn't started yet, but it will start. The prices at the peak were unsustainable by wages or rental equivalence, and still generally are (there's a new feature on hotpads that lets you plot rent versus own ratios). This is reflected in the fact that nationally, pick a payment payers are choosing the minimum interest-only payment at a rate of like 80% (from calculated risk, sorry I don't remember the exact figure). The commonly held wisdom in the past few years was that it was fine to get an option-ARM if that's what you needed to get into the house you "needed". This will come back to bite a lot of people. And it doesn't have to be everyone, it just has to be enough to alter the market dynamics. While in Arlington and other sought-after zip codes things are going reasonably well for now, this is partially because people think things will continue to go well there. This is the hangover from the kool-aid. All that has to happen to create a cliff drop that will start us on our way back to the affordability levels of the late 90's is for there to be significantly more REO's than the market can absorb. This may be averted, if there are enough buyers who've been sidelined long enough to have the downpayments needed to qualify for the current prices. But. Truly, we are on the knife's edge and only time will tell. If those buyers all buy prematurely this year, under the assumption that these areas will be immune, where will the buyers for the truly distressed sales come from in the next few years?
Secondly, the continuing release of brand-new "luxury" condos onto the D.C. market. These were speculatively built during the bubble's end, and now need to be absorbed as well. With the tax breaks on previously paid taxes available to builders, they can afford to undercut the market to get out of their construction loans because Uncle Sam will pay them even if you don't. This will drive other prices down as well.
For me, this is optimism, since I'll be in the market with my 20% saved up starting next spring. And I really don't want to get my hopes up out of proportion. So I greatly appreciate the more moderate tone of this blog compared to the start of group-think over at the Irvine Housing Blog (as well as the greater relevance). Much thanks to Harriet for the fabulous statistics she's posted recently, and to you all, now that I've found this one.
"Doug said...
I agree with CRT.
Been predicting 5-10% fall from peak in Arlington forever, we are about half way there.
And once again - substitution effect is total BS!"
Doug - ironically I cant agree with you on that. Ive been doing a decent amount of reading on the 6 months of inventory rule. It really seems pretty damn good and holds up well in real life situations.
That said, close in has spent most of the last 3 years under that mark, yet prices have NOT risen as would otherwise be expected. How? Why?
In my mind, the only reason prices have defied the laws of supply and demand is because of the substitution effect! Its real, and it is powerful, (just not powerful enough to cause severe declines without the corresponding lack of demand).
>Feel free to disagree with me if you like, but you will have to come up with a decent argument as to why it will reverse to convince me otherwise.<
I'm willing to bet that in the next six months the data will show a bottoming or significant slowing in the decline of prices in outer areas -- even if inventory remains high. Why? I think buyers are getting a whole lot smarter thanks to blogs like this.
During the last shake out in the early-mid-1990s, buyers did not have easy access to listings or analysis of micro-trends. Now they do and can easily locate those areas and properties offering maximum value.
I think the buyers who are shopping (And there are buyers, let's not overlook that) are cherry picking -- they may be seeing this as an optimum time to to get the best properties in terms of location and condition at what may be their best, or close-to, best price. (Don't dismiss these buyers. Are they somehow less informed?)
For this class of buyers, the large inventory isn't a liability, it's an opportunity. And they won't shop for the cheapest thing on the market -- they are shopping for what they think is the best value.
How do I know this? Of course, like everyone else on this list, I don't.
But there has been a pick-up in sales in PW, in particular, and I think the trend will stick.
CRT (and anyone else interested), I think there is some substitution going on too, but I think there is a "pent-up supply" factor going on. Homeowners who might like to sell and move, but don't have to, are reading the web and heeding the advice others have offered, that this is not a good time to put your home on the market. They are seeing that comps in their neighborhood are selling at low prices or not selling at all, yet the move-up houses they might want are still not coming down much in price (at least listed price) despite their sitting for a long time (especially in the higher, move up price ranges). So why lose on both ends - and take the falling knife risk as well? And, as interest rates have been climbing, exchanging homes now becomes a little less desirable. This (combined with other factors you've identified) could account for lower sales, low inventory, and not much movement on prices.
We know that #s of sales are WAY down in most of Arl. and Alex. City, compared to recent years. I think this is due to sellers' "sticky prices" (alluded to above) but that these can't continue indefinitely, e.g., builders eventually need to unload their spec houses, some people eventually must move, etc., and it just may take some sellers longer to give up on the idea that the bubble prices are coming back or that Arlington/Alex. is immune. However, I suspect that their eventual "hit" won't be nearly as bad as with the outer areas for the same reasons that many of you have noted. There is also the "there goes the neighborhood" factor that is differentially affecting some outer areas - if you buy in most neighborhoods in Arl./Alex., you likely won't have to fear that your neighbors' homes will be boarded up soon due to foreclosures or unrealized short sales.
If sales were near "normal" levels (factoring in population increases) I would interpret the current median prices differently and think differently about what is to come. I also think it's hard to interpret what is happening without yet seeing whether the YOY results from April and May continue (pretty large price drops for most of Arlington, as Harriet posted recently).
This is not nearly as coherent as your analysis but I hope some of the observations are valid!
kob, I think those are excellent points about the availability of info on the web now, and the use of it. This is a huge difference from 10, or even 5, years ago.
Cara - welcome and I appreciate your thought out comments. I do have a few comments base on what you said.
As to the Alt A, option arm, pick a pay wave, I honestly think it is overblown. Again, I wish I had access to it still but when the fed was publishing county by county stats on these "less than prime" loans, they indicated there were perhaps only 2,000 of them that were still outstanding in arlington & alexandria combined (04-06 vintages). Of these, 30% have already reset, and only another 10% will reset in the next 2 years (that includes accelerated recasts). Between now and then, how many of that remaining 70% will (a) refinance (they are still possible because values havent fallen much), (b) will sell clearly these guys have alot of incentive to get out while they can (c) will enter into a deferral agreement with their lenders (who are getting better at this month by month) or (d) not default? Again, 30% have already recast and havent sunk this market. After (a)(b)(c)and (d) above, will the few hundred that remain be able to sink it?
Secondly, as to these mortgages cauing more pain close in. When we were able to look at the county by county stats, they revealed these less than prime loans were 2-3 times more concentrated in the outer counties than they were close in. It makes sense if you think about it. Sure refi's happen everywhere, but what about new purchases in new communities? Out there, for any community built in the last few years, its likely a huge % of them used those loans and nearly all homeowners are underwater. Close in, for everyone who bought in the last 3 years using a junk loan, there are 1 or 2 or 10 homeowners who never got intoxicated with the funny money loans and dont have that to worry about. Thus to the extent this area feels more pain from the Alt-A's it will again be felt more severely the farther out you go.
Finally, when we see guys like "Mr. Mortgage" out in CA and the infamous Credit Suisse chart we need to ask, where geographically are these loans located? In California some counties used these things at something like 3 times the rate that even our worst performer PWC did. Thus, they have every right to scream when it comes to the effects on already hard hit CA. However, those loans are a much smaller fraction of the market in this area, and smaller still the closer in you go. Make no mistake, I do think they will have an impact here, but the idea that it will cause a palpable "wave" (which it will in California) I think is a bit overblown.
crt-- I don't question that there is some premium for closer-in places. But there has been for some time. When we bought in 2000, for instance, for the same price we could have gotten a) a new condo around U Street a few blocks from the metro b) an older townhouse in Del Ray, or c) a good-sized, new family home in some place like Stafford.
The ratios may have shifted a bit in favor of core areas, but until price declines began, you would have found a pretty similar equivalence between these three possibilities. If you are positing that prices will decline far less in the inner areas you are essentially saying that the premium is going to increase dramatically. Why? Gas prices? Okay, let's take that off the table and only compare the close-in suburbs with metro access.
Unlike Doug, most people, at some price are eventually going to be willing to add an extra 15 or 20 minutes metro commute if the premium for closer in becomes too steep. Let's use your example and say metro-accessible Fairfax drops a total of 20% and Arlington drops a total of only 10%. So a condo in Arlington and a townhouse in Fairfax which both cost, say $400,000 before prices declined now cost $360,000 in Arlington and $320,000 in Fairfax. So you are saying, essentially, that people are now willing to pay $40,000 more than they were a few years ago for the privilege of living in Arlington.
That's using your example-- but in fact, in many metro accessible areas, prices have already fallen 20% and are continuing to fall. So even if we grant that people have suddenly become willing to pay more-- how much more remains a question. $50,000? $100,000? $150,000? What would account for such a dramatic and sudden change in preferences? And do comparable rentals in the two areas show equal signs of such a shift? If not (and I contend that we have not seen rents rising at dramatically faster rate in the core than in these metro-accessible areas farther out) why are only buyers willing to pay this increased premium?
I'm afraid I can't really agree with your inventory argument either. I haven't been following most of the areas of NoVA where the steepest declines have been-- but I have been following the Twinbrook area in Montgomery Co. Inventory as measured by Ziprealty remained very modest until the fall when the first dramatic reductions appeared. It appears to be rising now, but only after many months of fairly steep price declines. It doesn't take many short sales and foreclosures to bring about a price decline when sales volume is low. And with the exception of a few outer areas those volumes-- both in dollars and units sold-- remains very low for the whole DC metro area.
Kob (and Ace) FWIW, the inventory chart that Harriet uses was just updated (first time in 20+ days). In a time where inventory should be rising, it is (at worst) flat, or in some cases actually falling!
Not only are we far below our 06 peak, we are below 07 (yoy) everywhere, and if the trend holds, places like Loudon could even fall below the 2005 inventory line torwars the end of the year!
http://www.recharts.com/nova/nova.html
Second, Ace as to the idea of a "pent up supply" and "sticky prices" while your logic makes sense, there is a decent amout of evidence running against it.
I dont want to restate the whole thing here, but I invite you to refer to my ranting and ravings on the Bits Bucket 6/12/2008.
http://novabubblefallout.blogspot.com/2008/06/northern-virginia-bits-bucket-6122008.html
You will note that I go over the ideas ad nauseum (comparing close in to wealthier and much later hit MD counties). Again, as far as the stats show us, there is really no evidence of pent up supply or sticky prices - at least for the expensive stuff. Again, if the close in sellers put it up there, the buyers are buing it as can be seen by the approximate 4 month absorbtion rates even ultra high end stuff is moving decently. This isnt happening in MD though - why? If you see something there that I missed, I would be curious to hear it.
CRT, there is a lot of evidence to the contrary, despite the fact that we really do not have access to all relevant data. For example, go to franklymls.com and check out the number of properties that have been sitting unsold at the higher end of the range. For example, at the current time, only 2 of the highest priced 40 SFH in Arlington are under contract. IIRC, only about 3 of the next highest priced 40 SFH are under contract. That would be 73 unsold:7 contracts, quite a few more months of inventory than is frequently cited here. This does not show houses removed from the market after not selling, or those that go under contract but don't close.
sorry, 73: 5, not 73: 7.
Should have left well enough alone. I just searched franklymls for "arlington detached" (all prices) and on the first 2 returned pages (of 40 houses each), there are 3 and 4 contracts, respectively.
So the 73:7 is correct. But that is still pretty lopsided, and suggests sticky prices accounting for low solds and modest changes on the median prices.
I did see your earlier excellent post, thanks.
As for evidence of reluctant sellers, I am not aware of any data collected on would-be sellers. So I will stick with my hypothesis until I see data to the contrary.
crt,
>>the only reason prices have defied the laws of supply and demand is because of the substitution effect! Its real, and it is powerful.>>
I think something is not right here.
When you say "demand," doesn't that already include the effects of substitution?
I am with the camp that says substitution is a very powerful thing, that many people are not appreciating its impact, but I am not sure the noncomformity with the 6-month inventory expectation in ARL can be explained by it.
The full impact of substitution in ARL will become clear only when FFX has seen its full share of declines. And every sign is that FFX still has a long way to go.
When Vienna and Falls Church are listed among potentially high foreclosure locales, discussions about susbstitution's impact on ARL at this juncture is premature. Further declines of 20--30 % are likely in FFX. When that stage is reached, we will see what happens in ARL.
Sarah - excellent points. As you noted, as much as I dont want to say this is the case, the logical conclusion my argument comes to is that there is a new paradigm (God I hope lance isnt reading).
I have no hard facts to support it but anecdotally it makes sense. Gas is part of it sure, but what about the rest? Traffic? I have no stats, but I think you would agree there has been a widespread PERCEPTION it has gotten worse. Cleaning up the city? Again, no hard stats, but I think there is the PERCEPTION that it is improving. Demographics? Well we know that people are having less kids today than they did even 10 years ago (the term DINKS) really only recently entered the american lexicon. The big (and understandable) problem that many have with living close in is that while they love the atmosphere, it isnt a great place to raise kids.
Stats on income dont support prices? Well, think of it this way. You have 2 households each earning 130K. The one in Loudon has 3 mouths to feed, soccer practices, school equipment, clothing, tutors, the works. The other couple, close in, only has a dog! Of the 2 couples who really is more wealthy and has more income to spend on housing?
Again, I really dont have anything concrete to prove this, and you have rightly hit on the soft underbelly of what I am essentially stating. However, prices and sales in this whole area really started to take of in 2001 - here we are 7 years later in 2008. In those past 7 years, has there been a perceptible shift in housing preferences which (a) support prices close in and (b) dont support them farther out? I really dont know the answer but the way this has fallen out thus far indicates that a decent amount of that price increase was due to a true increase in demand.
"Sarah said...
I'm afraid I can't really agree with your inventory argument either. I haven't been following most of the areas of NoVA where the steepest declines have been-- but I have been following the Twinbrook area in Montgomery Co. Inventory as measured by Ziprealty remained very modest until the fall when the first dramatic reductions appeared. It appears to be rising now, but only after many months of fairly steep price declines."
Sarah - perhaps you should look more closely at VA inventories.
http://www.recharts.com/nova/nova.html
(I dont have access to Ziprealty at work sorry)
Lets compare hard hit, far out, wealthy loudon, and close in, not hard hit, wealthy Alexandria. (look at the 3rd & 8th charts at the link). Ill use these because I know you have records of median prices for both.
For starters, you will note that in BOTH places inventory started rising dramatically in fall 05 and absolutely EXPLODED in summer 06. As I have noted many times, this is almost certainly the speculators headed for the door. Thus, as is the case with Twinbrook that you have been wathing, inventory in both Loudon and Alexandria has really gone through the roof. Its just in those cases it happened alot earlier than it did in Twinbrook.
As you know fully well with your pricing chart, in Loudoun, median prices started going consistently negative, and really nonsop in summer 06 (again after it hit peak inventory). Something tells me this is similar to Twinbrooks story, albeit at much an earlier date.
By contrast, as you know from your chart, Alexandria did start showing declines in fall 2006, but there have been lots of increases since, and no consistent pattern has hit until Jan 2008. Again, in both Loudon and Alex, inventory behaved exactly the same way and in exactly the same time frame all throughout 2006. Why didnt the prices?
In 2007 the similarity in loudon and alexandria inventory did not stop. In 2007, both of them started higher YOY but then flattened out. Again an identical pattern. In both places, Sellers behaved exactly the same. Prices? Not identical. As you know, in loudon for 2007, you had 12 straight months of declining YOY prices. In identical inventory Alexandria, you had 1 month of declining prices and 11 months of increasing prices. Again, inventory was identical, it moved in lockstep, Sellers behaved exactly the same way, why didnt the prices?
Now in 2008 Loudon inventory is finally starting to decline. It is now well below where it was in June 2006 and June 2007 and could get down towards 2005 levels towards the end of this year. Since around April 2008 inventory in Loudoun has been on the decline. Normally it rises through June so perhaps it is finally really coming down for good. Perhaps 24 straight gutwrenching, pounding months of declining YOY sales prices is enough to start bringing down inventory to healthier levels. Time will tell.
Now, if you believe hardly hit Alexandria, is more like Twinbrook, it stands to reason that its inventory should be increasing as well. However, look at Alexandria's inventory and what do we see? Thats right, unlike Twinbrook, Alexandria inventory is still behaving exactly like Loudoun! And just like Loudoun, it started declining since April, even though it should be rising until at least July. So even though it has gotten off lightly in terms of price declines its sellers are behaving exactly like hard hit Loudon sellers!
In sum, when comparing Alexandria, Loudon and Twinbrook you have 2 possible theories as to what is going to happen. It could be that its like Twinbrook in that it is just now experiencing real price declines. If so you would have to explain why Alexandria inventory peaked 2 years ago, and Twinbrook inventory is peaking now. Personally, I see no reasonable explanation for a 2 year lag.
Instead, it seems to me that Alexandria, which its inventory has been moving EXACTLY like Loudons for 3 years now, is pretty much in the same place in this downturn as Loudon is. The only difference is it took loudon terrible price drops to get there, whereas in Alexandria it only took mild, sporadic price drops to get there.
Again, Alexandria's sellers are behaving exactly like Loudoun sellers every step of the way from March of 2005 until June of 2008. One goes up, the other goes up, one goes down, so does the other, one flattens, the other does too. Their sellers act identically. I see no reason that prices would still be lagging given that their sellers behaved the same way. Thus, I conclude they are in the same point in time on their price declines - its just one is bigger than the other.
CRT, Sarah,
One possibility is that the desirable Arlington neighborhoods are still commanding a premium because current buyers (or knifecatchers if you wish) believe the areas to be safer in terms of holding their price.
Remember, market psychology is a powerful force. I know I feel more comfortable with the prospect of spending 600K on a small fixer upper if other homes in my area are being sold as tear downs or a 150K addition will put me in the 800K range of a home.
So this makes me think of 2 points. The first is Aces' point, that the high end stuff is not selling. That inventory will have to work through so that a potential buyer of a 600K place knows what the ceiling will be of a McMansion. If that McMansion sinks to 900K-1.1Million, then a regular larger home sinks to 700-900K and suddenly my 600K, I can upgrade it if I have to, investment is no longer as safe. So then, right now, demand is holding but you can see how market psychology can continue to sink.
The second point is a secondary substitution effect. Again, if suddenly my 600K that I can afford is no longer well spent in Arlington, then maybe I move west ever so slightly along lee highway, route 7, or columbia pike. For a modest 350K I can get a small fixer upper, still invest my 150K in making it nice, and I've still spent 17% less total than I would have in Arlington.
One other point to bolster Sarah's comparison of 3 houses in 3 locations that were all similarly priced in 2000. I think you also have to show how demographics have changed in the last 8 years to help justify/show why a premium for those locations has changed. DINKs versus a couple with children is fine, but have the ratios changed?
My $0.02
I wouldn't assume that families tend to automatically default to the outer suburbs as opposed to the inner ones. In my area (N. Arlington, 22207), the elementary schools are now at 100% or more of capacity -- a phenomenon that has appeared only in the past few years. For whatever reasons, more and more families have located here. When we bought our house in 2001, there were virtually no children under the age of 14 on our street; now there are more than a dozen!
A few other clean up comments before I get back to work : )
Cara - you have a good point on DC's glut of luxury condos. The ones that broke ground at the bubble's peak are only now hitting the market. Sure enough, if you look at the 9th chart on this link (new construction) there is alot of new condos on the market right now (Alexandria & Arlington dont have this problem - their new construction inventory is at reaonable levels).
http://www.recharts.com/mris/mris_5.html
In my mind, DC is the weakest of the 3 close in jurisdictions and could really go either way on this. I do think however, this is pretty much peak inventory in DC as far as new construction goes. Other cities like Miami and Tampa have so much left in the pipeline and now on the market they really are doomed for years to come.
Ted K - not sure I understand what you are getting, but I do agree with your larger point. You have stated that close in prices will (a) be hit harder than any time in the past, (b) could continue to fall for a while even after the outer counties prices are rising, and (c) despite this, the total price decline will be worse farther out.
I agree with you on all these points, and I pretty much have adopted that as my own. In fact, I think nearly everyone on this blog has come to a consensus that at the end of the day, the close in areas will not be as hard hit. (Save for down 40% - crying on their couches Neil).
Sarah, who is a recent addition to this board, does not seem to agree on that point, so I am attempting to persuade her using my dazzling skills of "stream of conscious logic" and "semi-coherent ramblings" to build an air tight circumstantial case : ) If she doesnt agree with me well then clearly there is something wrong with her : )
Finally with regard to the issue of sellers holding out
"Ace said...
So I will stick with my hypothesis until I see data to the contrary."
What - so you too? You dare think my shoot from the hip, throw stuff to the wall & see what sticks style is wrong : ) OK - you read it so fair enough, we will just have to agree to disagree.
Regards
Tom,
To be fair, a lot of DC'ers consider Arlington a far out suburb.
Just saying...
:)
My $0.02
Hey guys and gals, Harriet's Bits Bucket thread for today looks lonely, with 0 posts, while this thread is getting verrrry long. Should we continue this discussion at that location?
(Yes, I'm the one person who felt sad for the ugly lamp being thrown out in that old Ikea commercial, too.)
Tom,
"To be fair, a lot of DC'ers consider Arlington a far out suburb."
yup. And I think Franconia Springfield is a close in suburb because it has a metro and is convenient for my personal commute.
As an area renter, I see such similar rental prices across such supposedly disparate places that I find it hard to believe that any given area will be truly immune from what happens to neighboring areas. I mean as long as you're at a good metro stop, what do you care which one it is, Arlington or Capital Hill?
That said, I'm looking at the low end of an area that's falling like a rock and has prices that differ by 50-100% for comparable places none of which are moving, that I just throw my hands up and say, let some one else do the price discovery, I'll wait. I'll post my bizarro-world searches when I get the chance.
I wouldn't assume that families tend to automatically default to the outer suburbs as opposed to the inner ones. In my area (N. Arlington, 22207), the elementary schools are now at 100% or more of capacity -- a phenomenon that has appeared only in the past few years. For whatever reasons, more and more families have located here. When we bought our house in 2001, there were virtually no children under the age of 14 on our street; now there are more than a dozen!
"In fact, I think nearly everyone on this blog has come to a consensus that at the end of the day, the close in areas will not be as hard hit. (Save for down 40% - crying on their couches Neil)."
I agree that the inner areas are likely to see smaller declines than the outter areas, but I wouldn't go so far as to assign a specific upper bound to the decline. Portions of the inner areas may well see 40% declines. We will just have to see how the next year or so play out.
"Leroy Said...
I agree that the inner areas are likely to see smaller declines than the outter areas, but I wouldn't go so far as to assign a specific upper bound to the decline. Portions of the inner areas may well see 40% declines. We will just have to see how the next year or so play out."
I will - I'll bet you a dollar that neither arlington nor alexandria, nor any particular zip within will show median prices -40% or more on MRIS in the next year (measurement will be YOY or YOYOY if necessary).
Of course, neither of us know who the other are, & there is no way to collect so the dollar will have to be of the fictitious, unpaid variety. Agreed?
Incidentally, glad to see you are back. The dynamic of this blog is not the same when you arent around.
"I will - I'll bet you a dollar that neither arlington nor alexandria, nor any particular zip within will show median prices -40% or more on MRIS in the next year (measurement will be YOY or YOYOY if necessary)."
I don't expect to see that kind of drop, personally I think we will be closer to a 30% decline than a 40% decline when all is said and done.
...but that doesn't mean portions of the "close in" areasn't won't see declines in that range. It is overly simplistic to treat all of DC, Alexandria and Arlington as if they were some kind of single entity. Thus far the inner areas have been relatively shielded but portions of those areas are marginal.(and in some cases marginal is generous)
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