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Friday, August 1, 2008
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22 comments:
Has anyone ever seen www.ushousingmeltdown.org's Home Price Ceiling calculator? You enter a zip code, and it compares the 1999 house price to income ratio, and analyzes how far overvalued the market is now.
Link: http://www.ushousingmeltdown.org/house-value-to-income-ratio.asp
Just being curious, I entered 20147. They estimate the median home price SHOULD be about 314k to return to historic norms. My question is, what is the definition of the median house? 3bed, 2 bath single fam?
justin,
Sweet! In 22310, it "should" be 2.4 times income (from the single data point of 1999, slightly questionable...) giving median price of $246k!
random thoughts on Centerville...
similar to what Tabitha said in another thread, a development in Centerville are seeing sales prices 20-30% below when they're sold new in '05 (but of course '05 was the peak while Tabitha's are lower than '03 #s...)
13491 Bungleweed Ln
Jun 27, 2008 $466,000
May 02, 2008 $419,984 (foreclouse?)
Dec 13, 2005 $625,250
5459 Serviceberry St
Date Price
Jun 26, 2008 $460,000
Aug 09, 2005 $609,280
5449 Serviceberry St
Feb 07, 2008 $505,000
Jun 21, 2005 $593,700
A good coworker of mine sold his Arlington condo and make a killing in 05 then bought a TH on Serviceberry St for $650K. That's how I learned about these transactions. It's just so shocking to see a $200K value drop in 3 years.
The good news is I could afford to buying in his neighborhood next year.
Oh, yeah, but sadly the "median" house is literally the median (i.e. half purchases were more, half were less) price paid, so has no definition with respect to size or bedroom. In 22310 the bottom half is literally all townhomes and garden apartments, or at "best" 1940s-1950s SFHs, so it all depends on the housing stock in that area.
"Justin said...
My question is, what is the definition of the median house? 3bed, 2 bath single fam?"
I think it depends on the neighborhood. In Ashburn its probably a 4 bed 2.5 bath. In Adams Morgan its probably a 1 bedroom 1 bath condo.
Personally, I dont put much faith in these calculators. Back in 2000I remember looking at a similar one that stated
"in 1995 the historical MHP/MI was 4.5...Now its 7...its got to come down"
Today, for that same zipcode it says "in 1999 the historical MHP/MI was 7...Now its 12...its got to come down"
Justin,
I went back and did the "fundamental bottom" calculator and got basically the same number for the house price... So, all it really told me was that 1999 was the bottom of the last cycle for my zip code of interest...
Justin - if you want to cross check the median, you can do it here
http://www.mris.com/reports/stats/zip_stats.cfm
Just type in the zip and look up and average the last 6 months of median prices. Incidentally, I see that you are looking in Ashburn. Prices there are down about 40% from peak so you should check this. You may be closer to the historical norm than you think.
Here are those houses that sold this spring in Sumner Lake in Manassas. As you can see, they are selling for less than they did brand new (2002/2003), or just at what they sold brand new, and way under assessment.
8333 TILLETT LOOP
MANASSAS, VA 20110
Tau 5/20/2008 $435,000
GMAC MORTGAGE 5/20/2008 $0
BANK OF NEW YORK 11/26/2007 $0
MALIK 2/3/2006 $740,000
STANFIELD 12/3/2003 $448,625
2008 assessment $577,300
2007 assessment $730,400
8363 GAITHER ST
MANASSAS, VA 20110
PATRICK 5/14/2008 $380,000
DEUTSCHE BANK 9/6/2007 $0
SENAS 8/16/2006 $606,000
QUEIROZ 10/27/2003 $435,000
PANDOLFO 2/20/2002 $407,033
2008 assessment $418,400
2007 assessment $543,100
8305 TILLETT LOOP
MANASSAS, VA 20110
XIAO 4/23/2008 $450,000
BANK OF NEW YORK 10/2/2007 $0
SENAS 10/10/2006 $750,000
KARGAR 11/24/2003 $459,575
2008 assessment $577,900
2007 assessment $730,900
8309 TILLETT LOOP
MANASSAS, VA 20110
5/22/2008 $410,000
(bank) 4/11/2008 $439,500
2/17/2004 $412,600
2008 assessment $433,100
2007 assessment $560,800
8363 TILLETT LOOP
MANASSAS, VA 20110
VAN 4/21/2008 $340,000
FREMONT INVESTMENT 8/3/2007 $0
BACHOS 6/28/2005 $560,000
MEDRANO 1/12/2005 $0
MEDRANO 2/3/2003 $332,850
2008 assessment $439,900
2007 assessment $570,900
9499 BANKHEAD DR
MANASSAS, VA 20110
SOLARIN 3/4/2008 $350,000
DEGNAN 8/14/2006 $0
DEGNAN 9/17/2002 $331,575
2008 assessment $393,500
2007 assessment $448,900
using that calculator 22201 should be at $420K, and 22207 $487K.
with the 22201 price i'd get a 2/2 condo near Courthouse metro; and in 22207 i'd get a 2/2 TH near Glebe ES, or a fixer upper 2/1 SFH in Cherrydale.
i think they both are on the lower-end but not too far from the median...
I fully understand the quibbling about 'median' and what it means. Having said that, I plugged in some zip codes for some areas I am very familiar with, and I think the numbers, at least for the ceiling calculation, are very reasonable.
For example, for one are that I'm familiar with, it says that the median price in 2005 was $548,321, and what it's really worth today should be around $314,588. When I think about the types of homes that were selling for $550k in 2005, that $315k number seems very reasonable.
Another thing about using medians is I hate the way they can skew. Zip code 22314 is swanky Old Town Alexandria. Next door is 22310, the Huntington Street Metro (condo canyon).
However, in 1999 the median income in Huntington was 78K and in Old Town it was 71K??? Me thinks this has something to do with all the projects in Old Town ya think.
Further this site tells me the "richer" Huntington would historically support a home price of 190K, but the "poorer" Old Town would support a price of 323K. How the hell does that work?
Hmmm Houston, we have a problem!
Cara already pointed out the one data point problem with this calculator. Another obvious problem is that just like the old CPI, it does not control for quality of the housing stock. With all the new construction in many zip codes (and relatively constant number of homes/lots) the quality of the housing stock has improved. Therefore, the median house should cost more relative to median income after a significant percent of the housing stock has just been redone with shiny new homes.
bubbleboy: I'm not sure that you can say that the addition of new housing stock should lead to a higher median, especially if you subscribe to the idea that demand (income) determines prices. Although it certainly could raise the median, another possibility is that the new house stock devalues the shoddy old housing stock.
Nova: A change in the quality of the housing stock will most certainly affect median price. Simply put, quality is a determinant of demand. As quality of housing rises, so to does the demand for housing.
Don't get me wrong, I am not arguing that prices have hit bottom. I will fall dead from shock if they have. I do not, however, believe that median price will ever fall back to the 1999 median (adjusted for median income). One of the reasons is that the housing stock is simply better than it was in 1999, and people will (overall) respond by spending more in housing than they did in 1999.
alright . . . I feel the need to jump in here. If I understand what you are saying bubbleboy . . . . you are flat out dead wrong.
#1) Higher quality does not necessarily = higher demand. Let's go back to basic supply/demand curves. Higher quality might mean some people are willing to pay a higher price. So higher quality at a certain price could mean more demand, but it could also mean less demand depending on the price, but higher quality != more demand.
Now if you are saying 2 goods priced exactly the same, that the one with better quality will have more demand, 100% agreement, and consequently a higher price when the two are compared, I agree. However, if they are priced at the same amount, as the demand shifts from the lower to the higher, the price of the higher quality goes up, price of the lower quality goes down, with an eventual re-baseline at the same price of the lower quality before the introduction of the higher quality good. Eventually the lower quality good is no longer produced and the higher quality good is now at the same price as the lower quality before the introduction of the higher quality.
#1a) This is actually how much of society progresses, the better, higher quality items are purchased by a few who have the means to do so. As this demand grows, better more efficient methods of production grow through investment in said better quality items, thus increasing supply, thus dropping prices to meet current demand. Said drop in prices increases demand, thus causing more production, etc. etc. etc, until a stable efficient production/consumption market is formed. Repeat this cycle over and over again.
#2) The old CPI was a much better method of "actual" inflation vs. today. Things are supposed to become less expensive as markets progress! (see #1) It takes a few examples to explain it, but as production grows and economies grow it is a natural tendency for the marginal utility (aka value, aka prices) of things to go down, even as the quality of the items go up. i.e. the more you have the less valuable each item in particular becomes.
#2a) The CPI old or new is total BS anyways. Price is determined by 4 factors, basic supply/demand, and supply/demand of money. Just b/c something goes up in price tells you nothing about the underlying factors, you know something changed, but was it supply/demand of the item or supply/demand of money, or a combination of all of them. The CPI doesn't and can't measure inflation b/c inflation is always a monetary phenomena and it is completely NON-UNIFORM. If the CPI measured true inflation correctly, it would have gone completely ballistic since 2001, since housing price increases have largely been the result of massive amounts of inflation (increase in the money supply through either actual printing or circulation credit aka fractional reserve banking). Which we are now feeling the effects of the end of a massive inflationary period with some massive deflationary events which the Fed. gov. is trying to stave off by using more inflation, with the net result of more total inflation! The results of inflation can be manifested almost solely in stocks, real estate, financial, or commodities. Funny, how everyone gets bent out of shape when inflation goes up in commodities (or CPI), but no one cares when its in stocks or real estate, yet it's just as (or more so) destructive.
So in sum the new housing stock (if built with better quality) will be higher priced when compared to lower quality housing stock. However the higher quality stock prices will generally tend to re-establish itself at the same baseline as the lesser quality stock before the introduction of the new quality stock.
Will the eventual baseline of this mess be 2-3x the median income? It's entirely possible, but it could be more or less. The 2-3x income baseline was pretty established for over 30+ years, b/c it gave people enough breathing room for savings, unexpected expenses etc. If we go from a scenario of people saving practically nil to 20%, you could see it drop more than 2-3x, maybe to 1.75x. Or it could stay at 4-5x and people cut back on everything else. That's why it's called a market, the conglomerate individual actions of millions take shape. Historically it's been 2-3x, so it is most likely conceivable it will go back to that ratio-regardless of the type of housing stock!
This much I do know, with the current savings at ~0%, and people spending 40+% of their income on housing, somethings gotta give!s
Regarding the Home Price Ceiling calculator at UsHousingMeltdown.org I don't think you should get bogged down with the minutia of the data but rather the basic message of a price ceiling dictated by income levels.
For houses not in the median, it's the percentages that matter as they will apply to other price levels. Data and stats will vary and there are many ways to interpret them
The concept of a home price ceiling dictated by local income levels makes sense when you do the math.
We need to realize that before the housing boom and after the bubble burst, prudent lenders would only permit a borrower to use a maximum of 28% of his/her gross income for a mortgage payment. Given that 80% of all homes are purchased with a mortgage, lending criteria is important.
During the boom, due to low interest rates and lax lending standards borrowers had temporary and excessive purchasing power to bid up home prices to levels that cannot be sustained once the excess purchasing power is eliminated.
For example, a borrower with $1000 a month to spend on a mortgage payment before the boom, the maximum mortgage this person could get would be $158,000.
During the boom when the bubble was forming, this borrower with the same $1000 a month to spend, could get an interest only loan at 3% and service a mortgage of $400,000.
When you have a hyped up environment where the prevailing belief becomes real estate is a can't miss way to riches, you have home buyers spending all the purchasing power a lender will give them.
Now in 2008, it's back to reality. The same borrowers have roughly the same $1000 per month to spend. But let's give them a an annual 3% income increase. So now, at 6.5% fully amortized, documented loan this borrower can only service a $190,000 mortgage. The difference between the $400,000 and the $190,000 is your bubble.
The meltdown calculator seems to be too blunt of an instrument.
The household income levels it reports seem awfully low for 20009 (adams morgan and parts of columbia heights/dupont/shaw) zip, at $54,461 for 2008.
There's a wide spectrum of incomes packed into this area. Large numbers of section 8 housing senior citizens, older dense, rent controlled housing, as well as many neighborhoods packed with professionals earning substantially more.
Regardless, at $54,461 it is very difficult to rent in many parts of 20009.
A $1,200 a month rent is 26% of the reported gross, just under the 28% maximum for buying. But all $1,200 will likely get you is a studio basement. One bedrooms are more likely to start at $1,300
gte--I do not mean to be snippy at all hear, but your understanding of basic consumption theory needs some work:
"Higher quality might mean some people are willing to pay a higher price. So higher quality at a certain price could mean more demand, but it could also mean less demand depending on the price, but higher quality != more demand."
To an economist, this is nonsense. The demand curve is specified as follows:
Q = D(P, I, A, X)
Where Q is quantity demanded, P is price, I is income, A is quality, and X is a vector of other determinants. Demand is graphed in Q, P space, which means we hold all other variables constant. Your moving A and P simultaneously violates the ceteris paribus condition--that is, you are moving from one demand curve to another. This is why you are confused.
Furthermore, your comments regarding the CPI are just flat out wrong.
(sigh)
alright . . . let's try this again.
goods don't create demand . . . people do. All advertising tries to do is persuade people that their product satisfies a demand, (i.e. a need or want). If the need or want doesn't exist then the product fails horribly.
Just b/c a good is a higher quality does not mean more people want it. I agree that there are multiple factors that change the demand schedule, such as
Changing price of a substitute
Changing price of a complement
Change in the income of consumers
Change in tastes and preferences
Changes in interest rates.
But none of those change the actual good itself.However,quality is a subjective term, so a higher quality good, can mean multiple different things to different people. A change in the quality goes to a different demand curve b/c they are no longer the same good. You are now comparing one type of apples vs. another type of apples instead of just apples. Each type of apple will have their own set of curves! Taken together they will have a demand curve for apples, but you have to take into account the different types along with it, i.e. different qualities.
Say we take a conglomerate of apples which are composed of 30% type I and 70% type II (each type has it's own demand/supply curves which are different for each and inter-related), and then the quality changes to a 40%/60% mix. The 30/70 mix is a conglomerate different good vs. the 40/60 mix.
So the 30/70 mix is a different quality than the 40/60, and is a different good, with a different curve structure. If one believes the 40/60 mix is a "higher" quality good, it may have a higher demand, or it may not . . . it depends on how people value this conglomerate "higher" quality good, when compared to price, substitutes, etc. as listed above.
I tried looking on wikipedia, and google for a demand curve that included quality in it . . . I couldn't find it.
Higher quality does not create higher demand. People can demand higher quality, which creates different goods.
Higher quality = different goods = different demand curves.
I'm not going by consumer theory, I'm going by general economic theory, as dictated by the Austrian school.
As for the CPI . . . per chance you would like to enlighten me on what is inflation, what the CPI measures and what is the best way to measure inflation?
RealEstateEconomist said...
Now in 2008, it's back to reality. The same borrowers have roughly the same $1000 per month to spend. But let's give them a an annual 3% income increase. So now, at 6.5% fully amortized, documented loan this borrower can only service a $190,000 mortgage. The difference between the $400,000 and the $190,000 is your bubble.
My HH co-workers are quick to argue that housing prices will rise to boom levels again. I’m quick to agree, but in the same breath ask “what will bring back the run up, the return of toxic mortgages or a substantial increase in household income?” Their response is “huh?”. They do not see a likely increase in income, and they believe it less likely that toxic mortgages will return any time soon. They offer no ideas of how current home prices will be substantiated save the promise of XXX new jobs coming to the area.
And there in lies the crux. It matters little of how many “new” jobs are coming to the area. It matters more of the income those jobs will provide. If average incomes are only able to service a $190K mortgage, anyone care to take a guess what the average home price will be?
bubbleboy said...
Nova: A change in the quality of the housing stock will most certainly affect median price. Simply put, quality is a determinant of demand. As quality of housing rises, so to does the demand for housing.
Hummm. Not so sure I agree.
During the top of the bubble, I noticed that you could get a new home (bigger kitchen) for just a little bit more than the price of an older home. Later on, the prices were on par. Later still, you could get an older home (bigger lot) for much less than a new home. Now, the new homes have dropped on par with the older homes. Looks like a cycle to me. (As I re-read what you posted, I realize that I may be associating “new” with “quality”, which we know is not always the case, especially with builders building as fast as they can/could)
Sure, new homes are attractive (bigger, updated kitchens etc.). So too are older homes (bigger lots, established neighborhoods etc). I’ve probably looked at (physically) over 100 homes both “old” and new. Unless I have one built, the best homes only match my criteria by 80%-85% (100% being the “perfect” home). If I go for a bigger lot, I forego the bigger kitchen. If I go for the bigger bedrooms, I forego the established neighborhood.
Realizing this, I changed my strategy (more importantly, so did my wife). We don’t pick/go look at, a single home. There is always more than one home that we have an eye on.
I believe, and I hope, this is the buying strategy for potential buyers. If so, the new homes do not hold a much greater price point than older homes.
Robert said...
My HH co-workers are quick to argue that housing prices will rise to boom levels again. I’m quick to agree, but in the same breath ask “what will bring back the run up, the return of toxic mortgages or a substantial increase in household income?” Their response is “huh?”.
Robert,
Your co-workers are wrong. The ability to obtain financing and the terms of that financing play a major role in the housing market and limit how high prices can go, acting as a ceiling on prices.(80% of all homes are purchased with a mortgage.)
If someone can't afford what you're selling you either need to reduce the price of find other prospects.
Housing is no different. If people can't qualify for financing or afford the payments, sellers either need to reduce their prices or find other prospects which brings me to the possible exception to this rule. If the neighborhood is experiencing a transformation and the demographic is improving, then the limit or ceiling on home prices in that neighborhood can rise.
Another point here, is when we talk about the ceiling on home prices we are assuming buyers will spend the maximum amount of purchasing ability a lender will give them.
In recent times, the prevailing sentiment was buying a house was a can't miss way to prosperity and home buyers stretched themselves buying as much house as they could.
If could be that going forward, many buyers will be more cautious and not spend everything they could on housing. Everyone now realizes real estate can go down. And if you're leveraged, that can hurt.
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