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Wednesday, July 9, 2008
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36 comments:
Ugh...
Link
Listing Price History
Date Price
Feb 11, 2008 $480,000
Feb 18, 2008 $479,000
Mar 02, 2008 $465,000
Apr 25, 2008 $459,000
May 08, 2008 $449,000
Jun 11, 2008 $439,000
Jun 23, 2008 $429,000
Jul 03, 2008 $419,000
This can't be good when you are trying to sell a house...
Especially not when "Owners are licensed real estate agents."
random question for those of you who are waiting to buy: what do you with your down payment savings? in CDs or MM? mine's sitting in a savings account getting like $20/mo interests... any suggestions?
(BTW i do have a Financial Planner but his suggestions are useless when I don't know when I'll be needing that cash)
I kinda like that place rj.
If it gets down to 300k, that would be a reasonable home in that neighborhood.
mm, glad you brought up the down payment issue. Ours is sitting in a 9-month CD, and has been there for over 18 months (we've thought for a while now that we're somewhat close to buying...). In the winter we plan to make it a bit more liquid, and at that time we will probably split it between two institutions so we don't take a chance on losing cash over the FDIC limit.
I am quite interested to see what others are doing.
ING Direct online savings account. It gets 3% annually but it's safe and very liquid. HSBC may have a higher rate at the moment. So that's almost $100/ month for me, which is admittedly small, but better than nothing. We moved over what we had in Mutual Funds earlier this spring, not at the worst possible time, but not at the best either. I finally pulled half of my dot-com bubble dead-cat-bounce stocks out too.
If you choose ING, find a friend to introduce you to it and they get a kickback.
rj-
This selling tactic actually does work, especially if Buyers are "watching" a certain neighborhood hot & heavy!!
I sold my house in '06 in Fairfax by dropping the price 10K every 2 weeks till it finally sold.
We are so thankful we "got'er done" in 2006 -
our old hood is down another 100-150K since then
Purchased for $307,000 in 2003 according to Zip Realty. So they probably overdid it on the remodeling and have taken out too much equity to lower it enough to sell --or they're still sipping their kool-aid. Also pretty poor real estate agents if they don't know any better than to lower the price by such miserly amounts ($1000 off the first time??? Come one!) The median price for their zip code when they listed was $421,000. If they'd either started out at their current price-- or lowered it drastically in the first month I suspect they would have sold it by now. Any decent agent will tell you not to chase the market down.
mm-- It's all in CD's or bank money market. I've been doing year long ones, but the interest rates are so miserable now I'm looking around for better returns. When we sold in 2005 I was planning on putting about a quarter of the profits in euros, but never got around to it... If only! Now I'm thinking about getting a small option to sell on the Dow index. I think the stock market is going to crash hard within the next six months or so -- but again, just haven't gotten around to it.
I use Emigrant bank online, they are at 2.75%. Also, if you can stand a little risk with interest rate fluctuations, T. Rowe has a Virginia tax free bond fund. I think it is returning 4% right now tax free. But you have to deal with interest rate fluctuations that can affect your return. I have a little of my money in this, just for the higher return.
HSBC direct 3.5%.
ETrade Bank has a 3.25% checking account.
WAMU has 3.3% but I wouldent put too much money in there right now.
Contrarian,
Good point about capital markets health in general, but the fact is you refer to the technical analysis-style research, which most of the time has no substance in it.
Regarding the alt-a/sub-prime debt --- it is definitely not very liquid, but the loss rates of more than 40% (and i do not know what kind of loss severity this article suggests --- it is not like you recover nothing from the underlying collateral, foreclosed homes still have some value, right?) mean quite a large drop in prices. You also have to regard that GSEs buy mostly senior tranches of ALT-A deals, which have a sizeable support of lower-tier tranches, and given the structure any losses to the senior tranches will come only late in their lives, which can be 10 years from now.
Contrarian: That article is full of 'technical' analysis mumbo-jumbo (e.g Bollinger bands are based on Gaussian SD's, and since money is bounded at 0, it by definition can not be Gaussian -- never mind that they are backwards looking).
If this was an analysis based on fundamentals, then I might give it some weight. But, the author is predicting that the median home price will drop to 1998 levels based on nothing more than squiggles on a chart (without taking into account the mechanisms that produced those squiggles).
Sorry to seem harsh, but I'm not a big fan of 'technical' analysis.
Im gonna say this as lightly as possible but you have got to consider the source of that article too. The author, and really that website, has been touting gloom and doom and taking just about everything in the worst possible light for years.
Moreover it was brought to our attention by our friend Contrarian who has publicly stated he thinks we are going into a depression. Take a guess as to what sort of articles he seeks out (either explicitly or implicitly) when he chooses to report things to this blog.
Now before everyone jumps on me, I am not meaning to single out Contrarian. The fact of the matter is we ALL do this to one extent or the other. I am a bit on the optimistic side, so you can be sure I will have a bit of a bias as far as (a) what I read and (b) what I report here. I may read one article that says doom and gloom, and another that says everything is going to be ok. Of the 2, which one am I more likely to bring to the attention of this blog?
Whats my point here? My point is that neither I nor a doomer can really do an objective and unbiased job of reporting the reality of the housing situation. The realithy of the situation is almost certainly neither as rosy as "everything is coming up roses Lance" thinks, nor as gloomy as "depression" Contrarian thinks. Im not as bullish as Lance, but even my projections are probably too rosy to reflect reality.
Thus, that is why I think this blog is so good. It is dominated neither by doomers nor pollyannas. We all have a tendency to keep each other in check. Thus at the end of the day, reality of the situation is likely to be very close to if you will the "average" of what everyone on this blog says. Food for thought.
If it gets down to 300k, that would be a reasonable home in that neighborhood.
ROTFL
That was a splash of cold water. ;)
I'm in diversified CD's (multiple banks, none of the banks on the 'watch list', at least as of this week). ;) Mix of 5, 7, 9, and 12 month CD's.
This selling tactic actually does work, especially if Buyers are "watching" a certain neighborhood hot & heavy!!
No Argument there. Its just interesting to watch a "Dutch Auction" in process. In general, its more effective to drop in larger blocks.
When to buy? When those reporting to you can afford. :) Not when they are priced out.
Got Popcorn?
Neil
MM,
Some ideas:
1. CDs. 3-9 months.
2. BSV - Vanguard short-bond ETF holding mostly Treasuries
3. FLTMX - Fidelity intermediate municipal. Nice return on this but more interest rate risk (and default risk) than the others.
BSV is where the bulk of my money is sitting.
Comment and Question:
Comment: At the 400K to 450K price range, I personally think that dropping price should bring it into another search category so that would be a 25K or 50K drop...my opinion...
Question: Can someone explain the substitution effect to me? There was a chain about it two days ago and I don't follow.
Amy - as to your question - assuming you dont care much about esoteric concepts such as inelasticity and fungibility, let me give you an example as applied to housing.
Assume 10 houses for sale in neighborhood A all at 500K. 10 houses for sale in hood B all at 450K. In a normal market, prices between the 2 will stay relatively stable one to the other. In this case, 10 buyers reason "while I like hood B ok, I like Hood A more and am willing to pay an extra 50 K to live there" and 10 buyers reason, "while I like hood A more, I am NOT willing to pay an extra 50K to live there - I choose B".
Fast forward to a bubble market. Say because of alot of defaults or whatever, the prices in some of the houses in Hood B fall to 430K. Houses in hood A try to stay at 500K. Problem is, some of the buyers who would pay the extra 50K to live in hood A WILL NOT be willing to pay an extra 70K to live there. As such, now say only 8 buyers choose Hood A meaning 2 houses in hood A go unsold.
Initially, Hood A sellers try to resist lowering their prices, but if the marginal buyers stay away long enough, eventually Hood A sellers need to lower their prices to attract enough buyers back to the market to achieve a balance between Hood A and B.
Thus, even though in this case Hood A had no problems with defaults or whatever, it still had to deal with price drops due to the damage that took place in hood B.
I suspect other bloggers will chime in to improve upon, or point out some things I may have missed, but this is basically it in a nutshell. I hope this makes sense.
I think I was the unfortunate fool that originally mentioned the substitution effect. It states that as the price of a good or service changes, it affects the demand for a comparable "substitute" good or service whose price remains constant. So, for example, if the price of butter goes way up more people will likely buy margarine, even if they would prefer butter. This is a pretty simple, well recognized tenet taught in every beginning Economics class.
My point in bringing it up was to debunk the theory that certain areas - Arlington, Mclean, Georgetown - can continue to remain at the same price indefinitely while prices come crashing all around. While some people got my point, others missed it completely and ridiculed me for suggesting that people were choosing between North Arlington and the barrio in Manassas. I suggested no such thing - just pointed out that prices for different areas are all intertwined, and changes in one area will eventually affect nearby areas.
-Jason
Doug - while on the subject, I must admit it still irks me a bit that you dont seem to think the substition effect exists. Let me expand on my hypo.
House A in Arlington is 500k
Identical House B in PWC is 450K
Would you choose A? Ok fair enough. Now what if the price on house B dropped to 350K?
Still no dice? OK what if B was now 100K?
Nothing still? Hmm OK how about $1 for house B. Think about that for a sec. Same house, different locations, but now the price differential is $499,999. Would you still choose Arlington over PWC? More importantly, if you still say no, will every other buyer act exactly the same way you do?
Lets say your answers are No and No. OK, since were dealing with hypotheticals, say the PWC seller was an evil genius. First he says, I will pay YOU, doug 100K to buy my PWC house - will you say yes?
Say you still hold out. Frustrated he says, OK Doug, I will pay you (holding his pinky to his lip) 1 Billion dollars to buy my PWC house. Will you bite?
Say you have no monetary price. If the evil genius PWC seller says "OK doug - you are a tough nut to crack. I have now taken your family hostage and I will drop them into a tank filled with sharks with lasers on their heads. I will let them go ONLY if you buy my PWC house, and I still pay you $1 Billion dollars." Will you bite then?
OK an absurd example, but you see the point dont you? At some point (not the same point for everyone mind you) EVERYONE will choose to accept an inferior good because it is "cheaper" and this includes you.
Scaling back a bit, even if you would need to be paid to buy in PWC, surely you agree that some people some where will pay something between $1 and $449,999 to pick the place in PWC. Correct?
"Jason said...
While some people got my point, others missed it completely and ridiculed me for suggesting that people were choosing between North Arlington and the barrio in Manassas."
See the problem is you didnt go far enough (see my post above). I am willing to suggest it is even possible in a Georgetown vs. MS 13 gangland comparison - it may just take you the extreme example of "sharks with freakin laser beams on their heads" to get there!!!
Substitution effect: Got it. Thanks for the clear description. So the counter argument is that a buyer in ARL would NOT sub for Manassas b/c of, let's say, the monetary value of time if they work in DC. BUT might sub for falls church and those buyers would sub for Vienna and so there is a domino down-turn. I can see that and I can see buyers saying no, I'll rent rather than take your 1billion+PWC and I can make a new family...
My own hypothetical for fun.
Consider substitution effects in inflating this bubble in the first place.
Say (not looked up) to start off with a modest house near a metro in Arlington is priced at $300k, one 2 VRE stops out is $150k and 1.5 hr driving commute is $75k.
Then 100% LTVs, 80/20's Option Arms come in.
Some who wouldn't normally be able to buy a $300k home now can, driving up the price in Arlington to $400k.
Now a previously eligible buyer has to choose between an exotic mortgage they don't want and the okay cheap house 2 VRE stops out. They have more money than previous area buyers so that area goes up to their discount price limit of $200k.
Iterate.
At some point people have to choose between a monthly payment of $3000 on an Option-ARM to avoid being priced out forever in an area who's prices "never" decline and a $2000 normal 30year loan with a 3 hr daily commute by car. Which is more stressful? The housing risk everyone says doesn't exist? Or the daily grind of the drive?
My point being, the cause of the bubble out there, was the extent of the bubble in close. By the laws of Karma it will bite us.
(too bad economics don't necessarily reflect Karmic retribution)
"Cara said...
Say (not looked up) to start off with a modest house near a metro in Arlington is priced at $300k, one 2 VRE stops out is $150k and 1.5 hr driving commute is $75k."
Cara looks OK to me. You hit one big element (funny money) but you missed its correlary (flippers). Say it was funny money alone, but true demand only (i.e. no flippers). In that case the funny money makes the places that were 300K 150K and 75K 400K, 200K and 100K respectively. (up the same % across the board).
The problem is we have strong evidence a disproportionate (and sometimes absurdly disproportionate) amount of flipping took place the farther out you go. Thus, those same places are now 450K, 425K and 400K. (up an even greater % the farther out you go).
Finally, you have the issue of gas which (likely) looks to be driving up close in rents and pushing further away rental priced down. You also could have (maybe) a reordering of housing preferences towards the close in areas that is long term. You also have a much larger overhang of speculative new housing the farther out you go - much of which still exists, unoccupied today. Thus, it now looks like the severity of the downturn will get worse the farther out you go. How much further down is what remains to be seen...
Cara said:
"Some who wouldn't normally be able to buy a $300k home now can, driving up the price in Arlington to $400k. "
I think you're missing a step. How about this:
"Some who wouldn't normally be able to buy a $300k home now can. That means that they were now competing for the Arlington house with those that could have afforded $300k with conventional financing. This causes the later group of individuals to capitulate and take out a funny loan so that they can outbid the former, or at least until one of them blinks. Rinse, repeat."
But that's just the plankton. Those folks who just sold their Arlington house for $400k -- they only had $100k left on their loan. They can now take their [nearly] $300k profit and use it as a downpayment in McLean, or Oakton, or wherever, outbidding folks with lower downpayments who are moving into the area.
Of course, when the plankton dies, so do the whales.
MM:
I got tired of savings accounts at 3%.. I was satisified at 5%... but need more of a return..
so I opened a stock account and starting to play with stocks.
Things have tanked since February.. and even more so recently..so it's a pretty good time to hop in and buy low and sell high.
I'm definitely going for small gains on smaller stocks that swing $2 every couple weeks.
"Amy said...
So the counter argument is that a buyer in ARL would NOT sub for Manassas b/c of, let's say, the monetary value of time if they work in DC. BUT might sub for falls church and those buyers would sub for Vienna and so there is a domino down-turn."
Not necessarily the "counter" argument but in fact "the" argument. Either way however, you got it...A+ for you. Now, if only we could say the same for a few other holdouts on this concept...
Indeed it is a highly non-linear process, hence the exponential increase in the Case-Schiller home price index historical chart.
Yup, the exotic loan terms create the beginnings of unusually high appreciation, which bring in the flippers (which are attracted to the mid to lower end homes for cash-flow reasons) who are enabled by the exotic terms to buy more than they otherwise could, which creates higher appreciation which allows banks to loosen terms since no one is getting foreclosed on because they can "always" sell for a profit. And the regular buyers (and flippers) now have bubble money that they can use to bid up the high end of the market, potentially creating non-linear gains there too (with respect to house price), which is only limited by the fact of the conforming loan cap... Yup, it's run-away leveraged inflation.
However, the appreciation charts that Harriet posted looked pretty even to me by county in terms of historic median prices, so while I agree that the greater percentage of new loans (and lack of intrinsic locational value) makes the further out areas be hit harder, I'm not sure about the conclusion. Which is why you want to know historic supply levels. Because it doesn't matter what percentage of houses are distressed sales, it only matters what percentage of houses for sale are distressed sales. So the sitting tight grandmothers are out of the equation in both time-periods and hence not relevant to the question of price decline severity. (unless they got too tempted by the money and sold to a flipper who later was foreclosed upon).
"cara said...
so while I agree that the greater percentage of new loans (and lack of intrinsic locational value) makes the further out areas be hit harder, I'm not sure about the conclusion."
Cara - I think this comment was directed towards me. If so, I dont understand what you meant with the sentence "I'm not sure about the conclusion". Can you elaborate (i.e. what conclusion)?
"Which is why you want to know
historic supply levels."
GOD I WISH I KNEW!!! The last few days I have been saying inventory is going down YOYOY, but it still "looks" very high historically. I have been asking the open ended quesiton for days, historically, where should we be???
The only answers I have gotten is (a) its not going down its just now hidden (which is a bit silly IMHO) or (b) silence. Maybe no one knows - if so fair enough, but honestly I wish I knew - I think we could learn alot if we knew "but for the bubble" where would the inventory levels be?
So this "substitution effect" is interesting. But doesn't it rely on the premise that Hood A was "worth" $50k more than Hood B? What if that premise was wrong (perhaps Hood A is actually worth $100k more than Hood B)? Or what if the facts that underpin that premise (gas prices, price appreciation expectation, commute time, etc.) change? That may explain the disparity between price declines in the outer burbs compared to the relative price stability in the inner burbs.
--Remy
"CRT said...
...I think we could learn alot if we knew "but for the bubble" where would the inventory levels be?"
just curious, CRT, let's assume whatever it is now (4-mo?) is the normal level, what would we learn from it? that price has hit bottom and would stabilize?
"The only answers I have gotten is (a) its not going down its just now hidden (which is a bit silly IMHO) "
I have never said that the months of inventory aren't falling.
I am just questioning how well that rule of thumb applies right now.
As of right now it does not appear to be predicting well.
crt,
The conclusion I'm questioning is whether the eventual drop in the close in areas will be "less" than that in the outer rim. It was in the middle of a stream of consciousness though, so really didn't address the points you had just brought up, sorry. I like to posit this in terms of roll-back year, since I agree that the percentage increase in the outer regions could quite possibly have been higher than inner regions (but that's based on Calculated Risks national graphs of what happened to each tier of housing).
I think the reason no one has answered your question about normal inventory is literally because no one knows.
The local use of MOS is an interesting point to consider, though. I know that in the great wide expanses of the mid-west selling in under 6 months has always been considered selling quickly. Because there simply isn't the turnover of people moving into and out of those areas. Thus while I'm not sure that 4 MOS or less is required to sustain the prices in Alexandria or Arlington, I would however guess that there is more rapid turnover in the jobs people take in the D.C. area, and greater desirability, such that it is usually the case that you can sell a well-priced home in under 4 months. So, I do think there are local turnover rates that are normal here that may be shorter than the US rule of thumb. However, I'm not sure that longer turnover rates necessarily dictates price declines. Because, even if things were now at affordability level, with job uncertainty and tightening credit, there might be fewer people trying to move right now anyway. (if it weren't for them trying to escape their over-priced recent purchases or over-priced rentals). Thus I think MOS may say more about local general economic conditions and uncertainty than it does about the accuracy of the prices. Just another possibility.
regarding crt's 7/9/08 3:21 PM post.
1) As evidence to debunk your theory, in the great city of Detroit there are currently several houses "for sale" for ONE DOLLAR. Several of these house remain unsold.
2) crt says "EVERYONE will choose to accept an inferior good because it is "cheaper" and this includes you."
Based on this comment, I gather crt d/n have children. Also, I the comment seems to imply that crt eats all his meals at the food pantry and only uses the library's internet connection. After all, these are "cheaper" alternatives available to all than purchasing one's own food or buying a computer and using free wi fi elsewhere.
Remy - yes the substitution effect works both ways. The guys at fistserv (case shiller) suggest that certain changes (including gas) are helping to prop up (or keep prices from falling further) in close in neighborhoods. Not just in DC mind you, but in most cities with a "core" (i.e. not phoenix, LV & possibly LA)
MM - we are confusing 2 different things here (and this is my fault). My question about inventory levels has to do with sheer inventory numbers exclusive of sales. For example, Fairfax now has like 6,000 units of inventory. My question is (again putting sales aside for a minute), where should Fairfax be. Should it be at say 4,500 units, 2,000 units, 6,500 units? This is what I am trying to get at.
MM - your second comment re: 4 months. What we can learn is that the smaller the number, the more of a balance there is between ready willing and able buyers and ready willing and able sellers. When the number gets up to 10, 15 or 20+ (i.e. PWC its only a matter of time before you see a severe price crash (which we did). When the number is lower, and stays lower we can safely assume the prices will be more stable in the near term.
Leroy - that comment about hidden inventory was not directed at you. You have never suggested that. The hidden inventory thing is mostly a west coast phenomenon the bloggers out there use to explain trends they dont like. In any event, dont worry about it, this comment was not in any way directed towards you.
Cara - regarding greater percentage increases the farther out you go. Honestly I havent looked at it much. I remember our friend Leroy (I think) had a post a few months ago comparing median prices for like Arlington Fairfax & Loudon - he might be the one to ask.
Your other comment re: the rate of turnover. That sounds pretty logical to me. I could easily see there being a lower (or higher) months of inventory number depending upon the city (within reason).
Also, your comment, even if there was affordability "I think MOS may say more about local general economic conditions and uncertainty than it does about the accuracy of the prices." Cara - this one I feel very strongly about - general economic conditions and uncertainty pretty much IS prices (or more accurately translates into prices). Think of it this way. If a good % of the population believed there was a credible and imminent threat to a city, be it economic, terrorist, whatever, it would be reflected in fewer people looking to purchase there and more people looking to sell (i.e. months of inventory) until prices hit their market clearing price. Again, I cant stress this enough, this is what makes the market the market. In many ways (not all but many) it is not very different than the trades taking place on wall street, the futures contracts in commodities, even sports betting. All markets rely on presumably rational actors looking ahead and making educated guess as to what will happen in the future. If they like what they see at the price offered, they act on it. If they dont, they wont. Thus months of inventory tell us if the actors out there are willing to accept what the market is currently dictating in terms of prices.
Buck - good example. Detroits problems are a bit more complex its a city with housing for say 3 million people, but a population that only supports say 2.5 million houses. Until more people show up, there is a permanent imbalance of supply and demand (city wide) and the market dictates some of those houses are essentially worthless (they have no market clearing price). You will note however that I acknowlege this possibility and thus had to resort to negative pricing and threats from an evil genius to get to a market clearing price.
Also, when I said "cheaper" I put it in quotes because I was using the term in economics parlance. Cheaper is a concept that can translate into things other than dollars, time is a good example. If you choose the library internet connection over home based wifi, you are essentially saying it is cheaper (more correctly, more beneficial to you) to spend your time to and from the library versus the $25 a month for home service (to each their own).
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