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Tuesday, August 12, 2008
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24 comments:
I will say this as gently as I can since this may unduly antagonize some bloggers out there, but this quote in the post got me thinking:
"The New Economy of the 1990s fostered delirious spending with easy credit. Americans were encouraged to borrow far beyond their means. A pervasive taste for extravagance equated size and opulence with luxury. The McMansion, gargantuan in size, appeared, often entailing the demolition of several historical houses.
A McMansion is rife with contradictions. It's an exhibitionistic house, yet it's set far back from the street, with tall gates and security systems. These Hummer houses appeal to people who want a truly conspicuous display of wealth. They've given freedom of expression a new and rather disturbing meaning: the right to do whatever you want, to be totally self-absorbed. Which is where we are, for the most part, today."
Could one of the reasons we are seeing smaller declines close in vs far out have to do with (and I stress here "in general") the people attracted to the various housing stock and their ability to live within their means?
Look at the "typical" house in Arlington - its not big, not showy, it doesnt really wow anyone. In a place like Peoria Illinois, it would be deemed very average at best. Its only real attraction is the lifestyle it offers via its location and close by ammenities. Very little about these places "screams its all about me" the way the 6 bedroom McMansion does.
Perhaps then, this is an indication of the type of people attracted to the housing stock. They are (again on the average) perhaps less showy, perhaps more likely to live within their means, perhaps less likely to take out the junk loans (we do know there are far less junk loans close in).
And before everyone goes crazy, I stress I am speaking here in generalities. A good many people live far out because they need the large house or because it is close to their work, or because they like the peace and quiet or whatever. This is not a statement about these people or their choices.
In a way I am talking only about the high income yuppie types (dinks if you will) who have the choice between the close in tiny colonial or the far out McManion. Does their choice on where to live and what housing stock attracts them indicate if they are more or less likely to live within their means?
I dont know, but it is an interesting thought.
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/08/AR2008080802941_2.html
I think the less-severe close-in declines are due to: 1) less new-constuction inventory to compete with close-in, at least at the SFR level and 2) The accumulated strains of increased traffic and gas prices. Number 2 is less of an influence than #1 - since not everyone is commuting into DC or Rosslyn or Crystal City from Loudon/PWC/Fairfax.
I think you're right that kidless or perhaps 1-kid families are better suited to smaller houses and closer-in neighborhoods - but I think that's always been the case. Of course, current market conditions and commuting costs figure more into the "should we move out to Landsdowne?" equation these days than 5 years ago.
I have to ask, why did you pick Peoria, IL? The city I grew up in is right near there, and I actually graduated from Bradley University in Peoria.
I think my wife and I are going to put off buying a house out here in Northern Virginia. All of our family and friends are back home around Peoria. So in 5 years when my wife is done with her master's degree, we might pack up shop and move back home.
Can't say if that will be the plan we actually follow, as our 'future plan' changes as often as the month.
Justin - I only chose it becasuse I was thinking of the phrase "will it play in Peoria" i.e. mainstreet USA.
A related thing I was thinking about is how the close in housing stock limits my ability to consume. I have a friend - we both make the same amount of $$$ but he and his wife (no kids) bought way out in the sticks.
He has the huge McMansion - 2 luxury cars both get filled up once a week, a big riding mower to mow the lawn, 11 rooms all filled with furniture, various exercise equipment, a kitchen filled with all sorts of countertop appliances and a garage full of power tools. Maintenance? He recently had to replace the windows in his house - all 22 of them. He recently joined the country club where all his neighbors joined.
By contrast my S.O. and I share one car - nothing fancy since we have to park it out on the street. We have to fill it up once every 3 weeks. We have only 5 rooms to furnish and only 7 windows that could ever need replacing. We have no lawn to mow. We walk alot which mitigates the need for exercise equipment. We have no room for power tools countertop appliances, etc. etc.
Now, since moving close in, I have develped other vices - particularly food and wine for which I am willing to pay a respectable premium over what he pays. However, given my relative inability to consume other "stuff", I know for certain I still come out way ahead of my friend when it comes to having money available for all the other necessities of life.
My guess is, he is probably much more stressed and stretched than are my neighbors who lead pretty much the same lifestyle that I do.
I think your friend probably makes a lot more money than you.
Either that or he is a fool.
Contrarian said...
"This next wave of foreclosures will be Alt-A loans, which are obtained by people with good credit scores. These loans more likely will be in upper income areas such as Fairfax, Arlington, Alexandria and D.C."
Contrarian, you must have missed it but CRT noted that when the Fed gave us access to county by county records of where the ALT A loans are located, (instead of just state by state as we do now), it showed the Alt A loans are mostly an outer county phenomenon.
Perhaps if CRT is out there he can republish what he has, but if I recall correctly, Alt A loans are 2 to 3 times as concentrated in Fairfax, Loudon and PWC than they are in Arlington, Alexandria & DC.
Thus, while all areas will be hit as was the case with subprime, the outer areas will get the harder hit once again.
Incidentally, this goes back to my earlier point. Why didnt the Arl & Alex crowd engage in as much equity extraction as those farther out did?
Interesting discussion.
When discussing demographics, don't forget that not all households in Arl/Alex, etc., comprise couples with or without kids. There are many single, widowed and divorced people--40-50% of the households, IIRC. People with school age kids at home are < 20% of Arlington households. And, don't forget that not everyone is 25-34. A lot of homeowners are older than that.
A larger % of people who are older than 34 (vs. younger) may have experienced enough of life's risks to know better than to buy the most expensive house they could afford or borrow against it to the max. They have probably owned more than one home and have substantial equity.
Although sellers love young people who don't have to sell before buying, have little wealth but two high incomes, and are willing to borrow against their future incomes to the hilt, there just aren't as many lenders willing to accommodate them any more. And they are a small minority of buyers these days. Are there enough to prevent further declines in close-in house values? I don't know.
Anon,
A potentially interesting question.
In your scenario person A (in Arlington) and person B (in the boonies) both paid the same for their house though. I would guess as many people moved out in order to minimize house costs, as moved further out to maximize house size.
From my life experience, any given bucket of people has good and bad apples, in similar proportions to every other bucket (unless the bucket is so nasty that only jerks can stand to stick around in it, but that's way off topic).
The differences that have reared their ugly head so far between in and out have been differences in opportunity. A larger percentage of outer-ring housing was bought and built recently so a larger proportion of people who own had the funny-money opportunities of the bubble to mess up with.
What you pointed out is also a matter of opportunity, but requires similar purchase prices in order to work out that way.
I think the opportunity to screw up financially is a better explanation than personality-type, people more attracted to country or city living being more financially conservative than others. (although I do agree that one of the good things about renting is it keeps me from buying furniture and more kitchen gadgets) You may splurge less on food and wine than your friends do on cars and furniture, but I'm sure there are counter examples.
The thing is, it's not the mainstream that's going to cause the decline, it's the distressed few, and whether there are enough able buyers to soak up the distressed inventory. (Later it could snow-ball into the many, but it doesn't have to start that way). As CRT has pointed out, the actual numbers of Alt-A in Arlington are low compared to further out, it's just a question of are they low enough not to distort the market.
and I should have also said that the anonymous's caveat that s/he's speaking in generalities applies to my post too. I know there are many individual differences and don't mean to stereotype.
Ace - good point and something I had not thought about - older couples. In a way, this goes back to Cara's post about move ups. One potential group of buyer close in are empty nesters moving closer to the city. If this is the case, as Cara noted, they no longer have the equity in their old place in order to move up.
Cara - I should have noted that in my example my friend paid just as much way out there (goes into the whole "showiness" aspect if you will). I know many who when they got out of school, their housing budget was say 650K. The only question was, do we get the 3/1 Arlington bungalow, or the 6/4 Loudoun county McMansion...
anon,
I inferred as much. It was heavily implied if not stated explicitly that this was a "if we have X" what do we do with it question.
I just think that there's also a pool of people who, like my husband, have a minimum standard of house for which they're willing to part with $300k. (And who think anything over $300k is either pure insanity or for the truly wealthy). This may be based off of "false" comparisons to similar prices in hometowns, or just not having gotten used to the types of compromises we Northeasterners do to live where we want. This group will be more attracted to the land/house size further out, and will include some thrifty buyers (looking to put less money towards housing) as well as those who buy without doing the numbers because it's inconcievable to them that at their income level that they can't afford this level of house, and the mortgage broker agreed and showed them this neat product to make it all possible.
I'd agree that age and existing equity would push people more towards conventional loan products, both by making the exotic terms unnecessary (except in the short term to be paid off once the previous house is sold), and through the school of hard knocks.
Contrarian & Anon
Yes we used to have acess to county by county numbers (rather than just ambiguous shading to determine degree or amount). Then a few months ago the fed took that away.
That said, I was able to jot down a couple of things - this data is 6 months old now and rounded to the nearest hundred.
Total Alt A loans
Arl 2700 (3% of HH)
Alex 1900 (3% of HH)
Fx 13,600 (3.8% of HH)
Lou 3,400 (5.5% of HH)
PWC 6,000 (6.1% of HH)
OF THESE LOANS, those that are adjustable - mostly neg am and int only
Arl 1300
Alex 1000
Fx 8100
Lou 2200
PWC 4000
OF THESE ADJUSTABLE LOANS - some have already reset. Those that have yet to reset are
Arl 900
Alex 700
Ffx 5300
Lou 1400
PWC 2600
Incidentally by my calculations - another 4-6% has reset since Jan so drop each of those numbers down a bit to see whats left.
Contrarian - you are correct, the rest of the state had far fewer junk loans than did NOVA - but with respect to NOVA only, the farther out areas once again had bigger percentages (and will be harder hit) than the close in areas.
Contrarian - that is the first time I have seen that report - thanks. I thought my numbers were off when I looked at the map (it looked like all NOVA) was relatively the same color - but then I realized that close in zip codes are far more dense (i.e more mortgages per zip) than they are in the suburbs. Again though. Thanks.
Also, if there is a big shift in administrations(god i hope so) you're going to have a LOT of people who are forced/motivated to sell.
Anyone who argues that the market is in for at least two more rough years, has immediate history and a wealth of statistics on their side.
But despite all the foreclosures, the gloomy headlines, there are people buying homes. Why?
This is a silent minority that remains motivated to buy. Why is that? What do they know that the fence sitters don't? Or, perhaps, the question is: what is it about their outlook, their psychological makeup, that makes them run counter to all the facts, stats and daily drum beat of bad news?
Thanks for the links contrarion.
Apologies for reverting to analogies, (world's least meaningful rhetorical device) but I think with Alt-A's this is like standing in front of a smoldering house, looking at sparks fly off the neighbors.
"But their house has more wood than ours"
"But your house is burning down"
"But theirs is burning faster!"
"But your house is still catching fire"
"But it's not as bad as the neighbors"
"But your house is still going to get burnt to the ground in the end"
We don't need no water, let the [ex-del] burn.
CRT said...
Yes we used to have acess to county by county numbers (rather than just ambiguous shading to determine degree or amount). Then a few months ago the fed took that away.
Any idea why they stopped posting it? Did anyone complain and try to get it re-posted? That would be ace-in-the-hole type of data, I regret that I’m only finding out about it just now.
CRT, could you provide the link where the data was posted and/or the link for the parent page? I looked on the feds web site and didn’t know where to begin.
Robert - here you go
http://www.newyorkfed.org/regional/subprime.html
Click on the links that say "subprime" and "ALT-A" to see the state by state data.
I have no idea why they switched from county by county to state by state data. Yes it was ace in the hole data - im glad I wrote down as much of it as I did before it went away.
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