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Saturday, June 28, 2008
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39 comments:
A thought spurred by yesterday's conversation: What has really happened in lending during the bubble build up?
CRT pointed out that before the 30's the only available home loans were 5-7 year balloon loans before the invention and widespread use of the 30 year loan. What also emerged at that time? The invention and proliferation of the middle class. The 30 year loan was perfectly designed for a new housing affordability utilizing your future steady income to buy a good place now rather than continue to fritter it away with no equity renting. And in those days, after the first mass-built middle class planned communities built a stock of affordable houses to buy, buying a place in your mid twenties, you'd have it payed off well before retirement and be able to survive on your small yet generous pension.
What's happened this time? Hmm? Sure the ARMs and piggy-backs existed before but they were a limited product with a limited market. The explosion of sub-prime and neg-AM, and interest only loans I think (though don't actually know) is a more recent invention. If the 30 year loan enabled the middle class, what have these enabled? A new home-debtor class, or as Irvine housing blog puts it the american debtors prisons. If you're putting no equity down, no equity added (or even prolonging your debt with neg-am) you are a renter. But, instead of just having maintanence come by and fix your sink when you put asparagus stalks down the disposal, you have to take a vacation day yourself and pay the plumber. And the banks? I guess they felt there were too many slum-lords out there making individual killings off their tenants. Big business wanted a slice of that, too! And heck lets let them bid up the price of their rent into the stratosphere to feel richer. Too bad they didn't calculate into their profit margin that renters walk-away, that some renters trash the place before they leave, too bad they didn't factor in the carrying costs during vacancy. I'm sorry but the realtors, brokers and banks still made a killing on inflated interest and fees driven up to twice what they should have been by housing inflation, and another factor of 2 by the increased turnover rate due to promoting moving up the housing ladder.
In the future? Is this home-debtor class here to stay? Hard to know. But the banks will hopefully have a bad enough taste in their mouths, and perhaps more importantly the international money pool will have a sour stomach over the housing market. So I think soon you will have to prove that yours is an appropriate use of the exotic product, like your Uncle just died and you can show that his will will cover your 20% down payment but it's in probate for a year, so you need essentially a long bridge loan so that you can go ahead and buy the house now.
The cover story of the latest issue of Business Week is titled, "The Home Price Abyss." Here is a link:
http://www.businessweek.com/magazine/toc/08_27/B4091magazine.htm
It talks about the cycle of price declines causing foreclosures and foreclosures then causing further price declines. Also talks about the possibility of overcorrections.
Enjoy!
Link to businessweek article
Interesting article in Business Week: of the 10 major markets in the US, Washington is the ONLY one forecast to go UP over the next year!!!
Wapo is running another piece on commuting in Northern Virginia.
the Virginia Transportation Department is demanding that dozens of motorists ante up -- including a part-time barber from Reston who the state says owes $21,000 for 38 violations.
As cash-strapped transportation officials ready themselves for a new wave of toll lanes in the Washington region, including parts of the Capital Beltway and interstates 395 and 95, they have begun enforcing a tough law that allows stiff penalties.
Charles Stanley has been driving his 1996 Acura down the Dulles Toll Road for years, making the trip from Reston to his job as a barber in Alexandria a little less painful.
Uh-oh, another thrill for long distance commuters. That 2 mile commute from Alexandria to Crystal City looks better this morning.
$21K is a 10% down payment on some places.
Or even better: he could get a job in Reston. Surely Reston has barber shops.
Sorry, but even if there was no traffic, a part-time barber commuting from Reston to Alexandria is just dumb.
Oh, and a part-time barber can not afford your place, kh.
Hey Tom...thanks for the link.
Alexa: you're welcome, but you provided the link. I just noted the very interesting news in that link, i.e., that the local housing market is forecast to go up next year.
tom: it's going up because of all the barbers sick of commuting from Reston.
The Business Week article forecasts a 2 percent increase in house prices in the Washington area between now and May 2009. But if provides no explanation for this disparity with other cities they cite. I could suggest it is the upcoming change in government, which will bring some 4,000 new executive department employees to Washington, plus the pending 3.9 percent federal payroll cola. History shows that most who come here, stay here, so many of the 4,000 Bushites leaving will find other jobs in lobbying shops or some other place. The increase in prices still strikes me as extraordinarily optimistic.
edward: my parents made the same suggestion to me a few years ago, so I looked at a chart of the past sales history for the region (OFHEO?) and noted when there were administration changes.
To put it bluntly, the local market is completely uncorrelated with changes in administration. That may seem odd a first, but it makes sense once you realize that the influx of new folks is microscopic compared to the total population of the region.
The article is not forecasting a 2% price increase, it says that investors in the futures markets are betting on a 2% price increase.
I'm not seeing it. ?? Where in "The Housing Abyss" article does it state the DC area will increase 2%?
tom,
Simple question for you. Do you expect prices to increase by 2% (or more) by this time next year in the Washington DC region?
"tom,
Simple question for you. Do you expect prices to increase by 2% (or more) by this time next year in the Washington DC region?"
I don't know, John -- neither does anyone else! I simply noted that of all the major markets covered in the Businessweek article, the Washington region was the only one forecast to see an increase.
Two points in the BW article that I liked.
>>What they forgot was that markets can overshoot on the downside just as easily as on the upside, with both financial and psychological forces feeding the decline.<<
Will housing price declines be as disconnected from reality as the bubble increases? I think this issue is going to get a lot more attention in the months ahead.
I would love to see a survey of people who are actually buying houses. What have they realized that others haven't?
>>A survey of agents this year for Inside Mortgage Finance by Geosegment Systems and Campbell Communications found that about half of foreclosed properties have significant damage, which reduces a property's value by about 25% (e.g., $100,000 on a $400,000 house).<<
Not surprised here. I'll bet a large number of those super price cut houses (see sidebar right) will keep their new owners running to Home Depot each weekend for the next three years. Ugh.
alexa: it is part of the "10 Housing Markets" graphic. It says commodity traders are betting on a 2.6 percent increase for the Washington area.
novawatcher: I've been watching this phenomena for 40 years and agree you can hardly detect changes even when there are big switches, like the 1980 Reagan landslide, which produced a switch to a GOP Senate as well. Clinton forces had an impact on D.C., particularly Adams Morgan, but Bush aides attraction for McLean didn't stop gentrification. This year, it might have an impact in soaking up some of the unsold inventory close-in, but I don't see either McCain or Obama's troops attracted to Manassas or Fredericksburg.
I went to 2 open houses in the neighborhood today. I have to say that traffic was much better than I expected. Especially since 1 has been for sale for ~6mo and has fallen out of contract twice.
Not sure what it means, just an observation.
Oh, the CME futures...OK. I tried to look at their website to find these charts...didn't have the patience. Here is the closest I found :
http://housingrdc.cme.com/index.html
novawatcher: Or even better: he could get a job in Reston. Surely Reston has barber shops.
You'd think. He could bike out to Herndon. Lots of alternatives.
Why do people drive these distances?
I would think (but if data are out there, it would be great to see them) that only the top people in the outgoing admin. get those jobs in lobbying firms and stay. I would think many, if not most, of everyone else would return to their home districts, move to New York, or take a job elsewhere. Many political appointees don't particularly like it here and are happy to follow opportunities elsewhere once their stint here is done (and they are no longer in demand on the cocktail circuit), and their staff and support people may go with them or find good jobs in places with lower cost of living elsewhere. So the outflow of people would be almost as great as the inflow of people in the new admin. If true, the already low # several posters here have noted is actually lower on a net basis, so it would have very little impact on the housing market.
Ace: You may not have realized it at the time, but you made a good point, re: moving back home to a cheaper location. For example, if you bought a place in 2001 and you're returning to Indianapolis...well, these folks have made a killing in realestate and can afford to "price to sell" rather than trying to squeeze every last drop of blood out of the sale.
If I bought a place here in 2001 for $300k, and my neighbor sold last year for $900k, I'd be more than willing to sell my place for $800k next year if that is what it took. Or even $700k. Heck, even $600k would provide an obscene profit margin for doing little else than maintaining a house in good shape, and I could probably buy outright a better place in a nicer neighborhood back home.
for ace: I don't know of any data on where these people go after working in political Washington, but there's plenty of anecdotal evidence many stay around. One case that comes to mind involves lobbyist Jack Abramoff, who recruited Republican staff (particularly of Tom DeLay's office) from Capitol Hill. After DeLay left, many of his staffers ankled over to Abramoff's concerns. Look at the White House press secretaries Ari Fleischer, Tony Snow and McClellan who are stil Washington fixtures. The AFL-CIO used to pick up many Democrats (former Hubert Humphrey writer Lane Kirkland), and associations and think tanks pick up others. Beltway bandits like Caci and Rockwell are staffed with retired colonels and generals. I could go on.
re: the BW article that forecasts a 2% increase for D.C. ....
This Washington Post article talks about the coming Baby Boomer retirement tsunami for the federal government between now and 2012.
The Federal Aviation Administration. The Social Security Administration. The National Science Foundation. The Treasury Department.
All could lose as much as a quarter of their employees by 2012, mostly because of retirements. They are not alone.
Across the government, about a third of full-time employees will retire in the next five years, according to estimates prepared by the Office of Personnel Management. The turnover could be even higher in the ranks of federal executives and supervisors.
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The partnership calculates that from fiscal 2002 to 2006, the number of full-time federal employees who filed for retirement increased sharply, from about 30,000 annually to more than 45,000. The OPM has projected that the peak retirement years will be 2008 through 2010, when up to 60,000 employees are projected to leave each year.
By the partnership's reckoning, federal agencies will lose nearly 530,000 employees, many in leadership positions, by 2012. That's a rather alarming number.
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While some of these federal employees will stay put and become government contractors, many others have been planning their retirement for years.
Their homes will be put on the market and they will go to warmer places like Phoenix and Florida where the housing markets have gone bust and they can buy homes for a fraction of the price in D.C.
I would assume this massive retirement wave would cause major price reductions in the D.C. area when these baby boomers decide to move else where for their retirement.
NOVAWATCHER said:
"If I bought a place here in 2001 for $300k, and my neighbor sold last year for $900k, I'd be more than willing to sell my place for $800k next year if that is what it took. Or even $700k. Heck, even $600k would provide an obscene profit margin for doing little else than maintaining a house in good shape, and I could probably buy outright a better place in a nicer neighborhood back home."
The problem is, they've gotten used to the Washington lifestyle ... especially the lifestyle that's come about during the time they were here. It too hard to give up the great restaurants, sidewalk cafes, and July 4th fireworks displays to go home and watch the sun set and the cows graze. No, they'd don't have an incentive to leave. Now, maybe they'd be up for selling their house here and buying a condo here and a house back there ... but they'd need top dollar for that ...
Lance: they've gotten used to the Washington lifestyle ...
I don't think that's it.
You're "buying" into their wishful thinking by refuting it.
The election turnover is a better-than zero sum game. Everyone who must move on is matched by someone moving in. As pointed out, some will just stay here and clog up the process.
While some might be able to give on price, they don't have to. It is supreme wishful thinking to imagine that just because someone can afford to drop their price a couple hundred grand, that they will.
They won't. If they can get two hundred grand, they'll go for two-ten.
Another factor is that over the last few years, commuting has gotten much worse, costs of commuting have spiraled up, people are more desperate to avoid the drive from far out.
And yet, as you point out, the amenities in the city have improved.
Zero sum, overall, average, across the entire region, perhaps prices are flat, perhaps falling slightly, who knows.
When you divide the region into "out thar" and "close-in", "out thar" is plunging in value and "close-in" is not.
When you look even closer, parse the market into "Metro accessible on foot" and "still got a 5 mile drive" or "Gosh that's a nice home" and "A hovel!", the same pricing differentials emerge.
I think there's a new split emerging, it's how much insulation and what's the heating and cooling bill. Also, does the condo fee pay for the idiot next floor who leaves his windows open in mid-winter because "he needs his fresh air." (Easy to spot, that's the same idiot who drinks Starbucks and bottled-tapwater.)
contrarian:
I work for a large Federal agency, and the retirement wave is ongoing. The first question is whether Uncle Sam will fill those vacancies, or leave the agencies understaffed in order to save money. That will result in a net job loss. There were similar policies in place during the "hiring freeze" days of the early 1990's.
Turning to the effect of retirements upon local real estate prices, I have no idea. I know anecdotally that about 1/2 of the retirees from my office leave the area, due to the defined-benefit annuity under CSRS. Those fixed payments go much further elsewhere. And they're trying to get away from the traffic, the crowds, and the self-important a-holes
"The problem is, they've gotten used to the Washington lifestyle"
You mean being stuck in traffic? You mean dealing with surly individuals? You mean living in an area with no culture?
Quite frankly, the only part of DC that is "special" is Old Town Alexandria. And before you get all smug, the reason I think that it is special is that it reminds me of a larger Iowa City, Lawrence, or Columbia (maybe Ann Arbor, Madison, or Austin, but I've never been to those places).
Lobbyists come in all levels. It's not just the high-level people who might or might not stay. when a hill-staffer moves to a lobby-shop, they make much larger incomes.
As for retiring Feds, even if the gov wants to replace them, fed hiring has got to be the slowest hiring process in the entire world.
Also,old town alex is nice but that tourist crush takes most of the charm away IMHO. I might get that from being from New Orleans. Speaking of, living in the Big Easy would cost a LOT less. However, WTF would I do?
edward allen, those are good examples given we don't have a bigger survey or systematic count, but most of them are who I would consider "top people", in the point that I made. The ten, twenty or so people assisting them have probably mostly moved on to other jobs outside of DC - or some of them may have been here with spouses before the Bush admin. arrived and were hired locally. Some of those think tanks probably moved a few people out to make room for the newcomers too. And even if only about half of the Bush appointees' assistants stayed, what would that be - 2000 - 5000 people staying on despite 2000 - 5000 replacements moving in? That's a drop in the bucket compared to the other inflow/outflow here in a given year.
Novawatcher, I think a lot of people are considering exactly what you suggested, though I don't think most houses are selling for anywhere near 3X what was paid in 2001 - even if sold in 2006 at the peak - unless substantial investments have been made to them. At least they aren't in Arlington. So the windfall isn't quite as big. But even if you netted $300K and took it to one of the small towns you liked, or to an inexpensive city, that's an extra $24000 in income in a NORMAL stock market year (8%) that could supplement your income. These days, though, I am not sure when we'll see that kind of year again.
To those who bash cities that aren't DC, you might try living in those other cities awhile before you stereotype them. It's true they don't have everything DC has to offer, but the cost of living gap has grown so much in the past 8-10 years that one really has to ask whether the DC net advantages are worth that much of a difference in cost. Columbus, for example, has more restaurant seating per capita than any other city (not counting its many fast food joints!), I think, and its best restaurants are as good as any restaurant I have visited here, including Kinkead's, which I love. And only about 2/3 of the cost.
"Another factor is that over the last few years, commuting has gotten much worse, costs of commuting have spiraled up, people are more desperate to avoid the drive from far out."
Bingo. You hit the nail on the head, KH. This is a big reason why N. Arlington neighborhoods within walking distance of Metrorail are doing just fine!
You can beat yourself over the head about whether federal retirements or election turn over matter in housing. Analyzing their impact is about concrete and useful as punching clouds.
On the topic of labor force growth the only statistic that matters is the region's overall job growth.
From April 08
Washington's job growth slips a bit, stays strong
Washington's job growth slips a bit, stays strong
Washington Business Journal - by Joe Coombs Senior Staff
The Washington area's job market maintained its growth rate in February, but is still lagging behind levels reached earlier this decade.
The region's labor force grew by 28,100 jobs in February on an annual basis, according to data compiled by the U.S. Bureau of Labor Statistics (BLS). That is about even with 2007's overall performance, when the local market created 29,000 jobs.
This whole "DC is the greatest city on earth" business has really worn thin.
If you like DC and wouldn´t want to live anywhere else that is just fine and dandy, but don´t pretend the whole world agrees with you.
There are plenty of people eagerly waiting for their chance to leave DC and live somewhere that offers a much higher quality of life with a much lower cost of living.
Anyone that thinks DC is some kind of a jewel of a city hasn´t travelled outside the Beltway much. It has a few nice aspects,(as do most cities) but it has heaps of problems to go with them.
>This whole "DC is the greatest city on earth" business has really worn thin.<
That's not what people are writing; I don't see any trend here that says people are pumping up DC to the exclusion of every other city in America.
Interest in urban living isn't limited to DC. The same people who want to live in the city would likely say the same thing about SF, Chicago, Austin, Miami, NYC, Boston, ETC, ETC.
"Interest in urban living isn't limited to DC. The same people who want to live in the city would likely say the same thing about SF, Chicago, Austin, Miami, NYC, Boston, ETC, ETC."
Agreed. The fact of the matter is the district has reversed a 50 year long trend. After 50+ years of decline, its population is now rising. Same thing with Arlington & Alexandria. Both areas showed population declines 1970's to 1990's but both have made a (earlier) comeback.
No one is saying it is a crown jewel when compared to NYC, but they are perhaps saying, if they have to live around here an increasing % of the population are saying DC is the place they want to be.
"No one is saying it is a crown jewel"
You must have missed the whole 'world city' spiel that some have been spouting.
anonymous, kob, I wasn´t refering to either of you.
I have nothing against DC. It DOES have its nice parts.
There are however a couple posters here who continue to insist that DC is the "next Manhattan" or the "pan-global capital of the world" etc etc
DC offers some nice things, but very little that isn´t available a lot of other places.
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