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Wednesday, December 31, 2008
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29 comments:
Not-So-Bad News Cheers Arlington
Home Values Down Only Slightly
By Michael Laris
Washington Post Staff Writer
Wednesday, December 31, 2008; B01
Arlington County's assessor has what passes for bright economic news this holiday season: Home values are down just 2 percent, and commercial assessments have actually ticked up by 1 percent.
The picture offered yesterday by Arlington officials demonstrated a central tenet of this, and any, recession: Some get hit harder than others. In the Washington region, areas farther from the District and the region's core are taking the brunt.
"Around the country, residential has been hit so bad. We took a big beating last year. We're going to take a real hard beating next year," said Prince William Board of County Supervisors Chairman Corey A. Stewart (R-At Large). Home values fell about 30 percent this year and are expected to fall an additional 15 percent next year before leveling off, he said.
Arlington's comparatively modest drop in the assessed value of existing homes surprised even some of the closest observers of the region's real estate trends.
"That's amazing. I'm not surprised that commercial is up one. I'm surprised residential is not down like 5 [percent]," said John McClain of George Mason University's Center for Regional Analysis. "Closer-in locations have a much higher premium than the ones farther out and are more stable."
County officials said more is at play than simply the accident of Arlington's location next to the seat of U.S. power.
Arlington County Board member Barbara A. Favola (D), who will be elevated by her colleagues to the position of board chairman tomorrow, said years of policy choices helped usher in large amounts of convenient commercial development near Metro stops in the county.
"Businesses are not always greeted with open arms. People are very anxious about new development and new office projects coming in because of the traffic," Favola said. But "the value of being a job center can't be overstated."
In past recessions, "we were able to weather the cycle better than our neighbors, and it was because we have this really vibrant commercial base," she said.
Stewart warned that today's strength could become a significant liability in the future as the recession evolves.
"We're going to see a tremendous drop in commercial values all over the country. That's really going to hurt Arlington. That's when they are going to get their trouble," Stewart said. Commercial values "tend to be more stable, then all of a sudden, they also start declining."
But McClain said geography will help Arlington on that front, too.
"We know that commercial is going to hurt," McClain said. But data from around the Washington region show how vacancy rates tend to be lower in the District and closer-in locales such as Arlington and Bethesda, and higher in Tysons Corner and Reston, for example.
Complicating the picture, thousands of Defense Department jobs are to leave Arlington in coming years as part of the base realignment and closure plan. But, McClain said, "by 2011, when they are having to leave, the economy is probably doing fine. . . . Office space that's closer in is going to fare better than office space farther out."
Tommy Rice, Arlington's director of real estate assessments, said early conservative estimates had the county losing zero to 5 percent of its total tax base. But modest decreases in the value of existing homes and small increases in existing commercial buildings, combined with new construction, resulted in a 0.4 percent increase in the overall tax base.
The good tidings probably won't mean lower tax bills, however. Favola said she thinks the board will raise rates even higher than members signaled previously to make up for the fraying safety net.
Worst case scenario price-point to buy.
I was playing with the nytimes calculator the other day and came up with $180k as our new upper limit for buying in the short term, when the bottom hasn't yet been reached. I did not like this answer at all, because I don't see it happening anytime soon for properties we would actively want to buy.
But then I realized, wait, at our monthly rent of $1604, a 120 grm is $192k. That's supposed to be the rule of thumb amount for investors who intend to rent out the place. Given that we would buy someplace bigger and nicer than what we're renting, $180k seems unreasonably low.
This was because I was requiring the decrease in monthly payments to make up for the potential future equity losses. However, if what we buy has reached cash-flow positive, is it reasonable to assume that any losses would be extremely temporary as landlords moved in to buy up the properties?
I reran the nytimes numbers with our actual tax rate and our current interest on savings (3%, generous as we're actually getting only 2.5% now) and came up with $200k for 0% appreciation and 0% increases in rent would break even in 1 year even with closing costs and selling costs. Is this reasonable logic, or am I talking myself into a higher price because I don't like the cheapest houses?
I like the 200-210k number as well because this is within the 3x income level for just my salary, so we could carry it comfortably even between jobs.
Cara,
I don't know much about your situation, but if you can swing a 3x at 210K on one salary and it's a reasonably steady job (else why are you looking to buy at all, and why here?) and you have sufficient cash saved up for a down payment, I think you're quite OK looking at the higher priced spots.
I'd say, take your downpayment cash, subtract it from the price and keep the mortgage on the rest under that 200-210K range and even though you may be tight at times, and there may be equity loss in the near-term, it will probably be OK for you long-term. An example to make my math clear. If you have 20K saved for the downpayment, and a 3x mortgage is 210, you could place a bid on a $230K property with a high degree of confidence.
i am planning to buy home from ryan homes. and i am going to do some negotiations. can some one help me what to ask and not to ask and how to negotiate...etc...
and one more thing i am thinking of asking about NVR mortgage finanecing to take some discount they offer but how good is this mortgage....can some one help me..thanks.
The owner bought this place for $181k in 1999. Now the place is selling for $310k and it's a short sale. Over $130K is evaporated. Absolutely crazy!
http://www.franklymls.com/LO6874595
Cara,
I am not familiar with the NY Times calculator, but you may want to take into account the depreciation or the maintenance costs of owning a home (typically 2.5%) when comparing monthly cash flows. my two cents
thanks xpvovos,
Yeah on affordability I think you're right, we can definitely go up to 200k + our 40k downpayment and comfortably pay the mortgage. I keep running things with the 15 year loan, because I hate the concept of paying that much interest over the life of a 30 year loan, and forgetting that (a) right now the rate discount for 15 year isn't large enough to make it worth it to lock in the higher payment, (b) if we're talking about getting a 30 year loan anyway for that reason, then I can use the 30 year payment for my affordable on one salary scenarios.
So, yeah, I was being too harsh in that sense. Thanks for helping me get that part back in perspective.
My original question is about whether cash-flow positive is a safe bet for the bottom. CRT at one point questioned whether everyone else is less risk-adverse than me. From which I would draw the conclusion that if I'm willing to buy in, then it must be the bottom. What do you all think? If my buy-in point is the point at which things make sense to buy and rent out, is that true? Or am I just going to kick myself for buying into a neighborhood HOA that's going to get taken over by greedy, lazy landlords who don't want to pay for snow removal?
"Thomas said...
Not-So-Bad News Cheers Arlington
Home Values Down Only Slightly
"
well, as i said in yesterday's thread, welcome back, GS-14 Tom.
lw,
Even better it "has to close by Feb 5"
That's a pretty nice one (on the outside), I'd look for it once it's a foreclosure resale in March. Maybe even save a copy of the page so we can jeer later.
The NYTimes calculator lets you put appreciation as low as -10%/year, and includes a line for maintanence allocation which you can edit under the "buy" tab. It's a pretty good one all around:
NY rent versus buy
It graphs for you the progress of the decision over the coming years. I don't like the constant appreciation/depreciation rate, but otherwise it's way cool.
MM said...
"well, as i said in yesterday's thread, welcome back, GS-14 Tom."
GS-14?
Cara,
I do think you are being too risk averse. Try increasing the expected appreciation. Even though I think we have further to fall, over the next 30yrs there will be some appreciation. To estimate appreciation, figure expected price after 39 yrs of 4% annual aprreciation starting at year 2000 price (my example is a house with a 400K price in Y2K, by 2039 expected price at a historical rate of return would be 1.85M. Now use the current price ~850K and the final price to calculate the expected appreciation over the 30yr mortgage~2.6%). Also 0% rent inflation may well be likely over the next 3-4 yr, but very unlikely over a longer period.
So if your time-horizon is short enough to justify your use of 0%, I'm not sure buying is a good idea. If it is longer, on the order of 10yr, then consider rerunning with slightly different assumptions.
In the end, I think cash-flow positive is probably fine, but stop following it afterward because an overshoot to the downside is possible.
"My original question is about whether cash-flow positive is a safe bet for the bottom. CRT at one point questioned whether everyone else is less risk-adverse than me. From which I would draw the conclusion that if I'm willing to buy in, then it must be the bottom. What do you all think?"
Cara - you really make me laugh. Yes, the fact that you are considering taking the plunge could be a sign of bottom, then again, I think you are a little to stressed out in your decision making.
Let me offer my 3 step guide to when to buy:
1. Can you afford it. If you can, go to step 2, if not wait.
2. Do you plan to live there at least 5 years or more? If yes, go to step 3, if not wait.
3. If prices go down further, is it going to tear you up with "what ifs" or are you going to be OK with it? If the answer is no, go ahead and buy, if the answer is yes wait.
I should mention I went through the same thing when I bought 7 years ago. I remember distinctly a conversation I had with my boss. We both agreed there was a bubble and prices very well could come down.
His advice was to wait. I didnt listen because 1. I could afford it, 2. I was going to be there a long time, 3. I was OK with prices falling - I would accept the consequences of my risk, and pay down the principal faster, or wait to sell til I wouldnt be under water.
Mind you, I wouldnt be saying this in 2006 or 2007. At that point, the momentum had turned, it was clear there was a good chance for healthy losses and in a short period of time. Today, the picture isnt so clear.
As I see it, (and again thus is just my gut feeling, not based on anything more than that):
There is a good chance prices will decline and then recover such that they are flat 5 years from now.
There is a decent, but not as good a chance prices could be down 15% 5 years from now. If this happens, could you accept the fact you had to wait, or pay down the principal?
There is a decent, but even less likely chance, that prices will be up 15% 5 years from now (bernanke & his printing presses). If that happens, will you be ok with it if you decide NOT to buy?
Note, the top 3 scenarios cover 90-95% of the outcomes as I see it. There is always a chance that prices crater because the government decides to move 500 miles away. There is always a chance that prices explode because of hyperinflation. I cannot live my life accounting for every contingency. Thus, as I see it, buying at this point is an acceptable risk.
eponymous,
Good idea with the start from Y2K and compare scenario. For the ones I'm interested in their Y2K prices were around 150k. so if the ones I like come down to my price point, they will already be at trend.
Our time horizon is indefinite, I have a good job with a foreseeable career path and am unlikely to find a better one elsewhere. So, we're not planning on buying unless it's a place that we can envision living in for at least 10 years. But I've been doing the ridiculously short term calculations in order to compare buying now or waiting another couple of years, and to avoid pain in the event of an unexpected reason why we'd need to move away from the area.
CRT,
That made me chuckle out loud. It's number 3 that's the stumbling point. At this point it's the combination of potential loss of equity with loss of a liquid savings cushion. Because that 40k is every last cent of liquid savings we have (retirement doesn't count). And, okay, by August when we'd be thinking to close, we'll have accumulated enough more for closing costs and 5-6k for minor renovations, but I think I'd be happier waiting a full year from now, and having that 3 months living expenses saved up as well and less of a tight constraint on the downpayment and renovation funds. But at a price point of 200k, buying will be cheaper than renting and we'll accumulate the savings cushion just as fast...
This all implies, that just because we may not buy yet doesn't mean it isn't the bottom.
crt,
Oddly I think the answer to that set of questions for me hinges on how much I actively like the house. If the payments at 15 year amoritization are affordable and I love the house and the neighborhood then I'll totally be okay with 15% paper losses. But if the only things on the market now at our current level of affordability are not things that I'd really want to live in 5 years from now, then I won't mind so much if prices go up by 15% in 5 years, because by then, we may be able to afford a higher quality place, and will certainly have the downpayment for it.
So I guess the bottom line would be, if you're buying into a market with considerable downside risk, make sure you love the house.
"Cara said...
Its number 3 that's the stumbling point."
Then my 3 part (TM) buying test says wait. See how simple that is!
In all seriousness, I can sympathesize with giving up the cash. I saved a bunch of cash just for that reason, and then when it was time to put it down, I still had trouble parting with it!
On the mortgage front, I like the idea of a 30 year only because you can still prepay and treat it like a 15 year. Then, if times get tight, (job loss or whatever) you can always revert back to the lower 30 year repayment whereas you dont have that option on the 15 year - just make sure there is no prepay penalty.
Its kinda like the interest only mortgage. I have some clients (small business owners with intermittent cash flows) who got the interest only mortgages. When cash was flowing, they prepaid, treating it like a 10 or 15 year mortgage, yet if times were tight, they could always revert back to interest only and make much smaller payments.
The last few years has shown people like my clients werent the norm when it came to IO mortages. Still, if used properly, they can be an effective tool for hedging against risk.
crt,
That's basically our thoughts on the 30 year loan as well. When rates were closer to 6.5 and the 15 year rates were almost a full point lower, then it was tempting to give up the cash-flow contingency for the lower rate, but with interest rates down near 5%, and negigible difference for the shorter term loan, it doesn't make sense. And at those rates such a large percentage of what you're paying is principle even on a 30 year loan that the monthly price hike is too obvious. (I think this is how it should work, if I weren't too lazy I'd graph this somehow and figure it out...)
That article about Arlington County's assessor's conclusion that residential values are down just 2 percent would more appropriately have been titled, "Arlington Fudges Values to Keep Tax Rolls High."
It is a complete joke that the county asserts prices have basically held flat. I think in about two months we are going to read an article in the Washington Post titled, "Arlington County Assessor's Office Deluged With Valuation Appeals."
Manju,
My one negotiating tactic--and it works for everyone:
Don't need to buy. You do not need to buy a house. You do not need to buy a house from Ryan homes. You do not need to buy this specific house in this specific area from Ryan homes. Repeat it to yourself and ensure you know it. Then make your agent on the other side know it.
It makes it much more convincing when you say, "Nope, not in my range" and walk out.
Ok, so it's two tactics. The second is walk out at least once. Start the first part of the negotiations late in the day so you can use that as an excellent excuse for walking out, "It's getting late, we'll come back tomorrow." They'll be calling you with better offers.
John Fontain said...
That article about Arlington County's assessor's conclusion that residential values are down just 2 percent would more appropriately have been titled, "Arlington Fudges Values to Keep Tax Rolls High."
I seriously doubt that John. Most counties have a "revenue neutral" regulation in place to prevent this. Generally speaking, if the assessed values go down, they usually adjust the tax rate upward so that the net money in to the county is the same. The same thing works in reverse - assessed values go up, the millage will drop and the revenue is again neutral. Either way, the county gets its money.
That said, I think you are right in that there will be a lot of valuation appeals this year. The CRE owners especially are going to have a fit when they see their assessments have gone up!
CRT, It's true that Arlington reduced tax rates when assessed values soared, but I don't believe that they reduced them enough to produce revenue neutrality.
My taxes went up considerably during 2000-2008, and Arlington used the money to start some new programs, increase teachers' pay, etc.
I just checked my tax record from the time of purchase of the house to this years amount, and my taxes have increased 113% since then. While maybe 20 percentage points of that are attributable to an increase when some improvements were made, the resulting 93% is WELL over the general CPI 2000-2008, which was less than 30%, per the westegg calculator (with a generous % added for 2008, since that calculator goes up only to 2007). So unless I am missing something, the county has not given back enough to offset the windfall from rising values, and they likely will not reduce taxes now.
Ace - I agree total tax has soared, but perhaps I am not explaining the revenue neutral concept correctly.
When the county sets up its budget of XYZ dollars it does so a year or two in advance of assessments. If (when the time for assessments comes up) the houses have since risen more than expected, they cant just tax at that rate and "pocket" the excess. Instead, they have to adjust the mils down (hence revenue neutral). Hope this makes more sense.
crt - i think we all understand that jurisdictions can alter tax rates in response to valuation changes in order to maintain the tax base.
the practical reality is that raising rates is politically unpalatable whether individual tax bills rise as a result or not.
therefore, a jurisdiction could leave rates steady, inspire false confidence in it's housing market by saying prices haven't fallen, and still keep revenue rolls high and jobs safe all in one fell swoop.
just wait; there are going to be a lot of people complaining when flat assessments arrive on january 15th.
Well, it's happened again... another steep drop in the lowest priced houses in one of the Montgomery Co. neighborhoods I follow. For the first time there is something for sale-- a couple of somethings, actually-- for less than $200,000. Two years ago there was almost nothing for sale for under $400,000. Then quite suddenly in September of '07 several properties came on the market for less than $300,000.
What happened there seems to have been mirrored by Alexandria in the last few months-- quite modest inventory levels and price declines for some time followed by a sharp decline accompanied by a sudden spike in inventory.
So far Arlington has held up pretty well, though it has had over 6 months inventory for the last couple of months. However as the steep price drops creep closer to its boundaries I don't see how it can avoid similar price declines in the near future.
I'd just like to point out again for those of us still waiting and looking that this seems to be the pattern in many of the 'better' areas: long periods in which a neighborhood seems to be almost immune to declines followed by a dramatic drop which then settles into many more months of relative stability at the new price level.
In case any of you are curious, I found my predictions from last year for 2008, and I predicted that NoVA "will be off 18% ±2% by this time next year."
http://thehousingbubbleblog.com/?p=3953#comments
drum roll please...
(1) according the the latest Case-Shiller (Oct '08 vs. Oct '07), DC-metro is off 18.1%
(2) according to housingtracker.net, the median price is off 21%.
(3) according to MRIS, the median sold price for Fairfax (11/8 vs. 11/7) is off 16.9%.
(4) according to NVAR, "the average sales price in November fell by 17.68 percent from November 2007, to $423,088, compared with last November’s average of $513,930."
I missed the housingtracker.net prediction by 1% (granted, it's DC-metro, not just NoVA).
"John Fountain said...
the practical reality is that raising rates is politically unpalatable whether individual tax bills rise as a result or not"
It looks like tax hikes are on the way
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/01/AR2009010101851.html
The other thing to keep in mind is their bond rating. Every county is subject to intense auditing scrutiny right now regarding the way it calculates numbers. To risk your bond rating by artificially inflate values, (especially when you can just bump up mills and get the same result) is financial suicide.
Nice work Novawatcher! Out of curiosity, have you made a prediction for 09 yet?
CRT: I'm waffling between 16 and 20%. I'll have to think about it some more.
After talking to many homeowners from FFX, Mont and Howard at parties over the holidays, I was surprised that most homeowners are still in denial. Many people still think prices are stable and will go up this year.
Yes, some of them have seen the predictions about 20% more drop for the DC area on CNN, etc., but they don't believe it will affect their homes. Many don't even bother with the news.
In fairness to some of them,it seems the Potomac and Bethesda areas in MD have so far been holding up as well as Arlington.
NoVAWatcher, Congratulations on your prediction for 2008.
Normally I don't expect more than 15% drop in a single year from regular sellers. People are so reluctant to let go of their "gains" that even 15% may be too steep for some people. Anything more than that probably comes from foreclosures.
"Jeremy said...
kevin said...
lol, temporary decline. Is a reversion to the bubble's peak on the horizon?
You nailed it. I think some of the bulls here really do think that way."
Its not just bulls who think like that.
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