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In the News (H/T Tom): "Building on the Tax Base:
Construction, Prime Locations and Fewer Subprime Mortgages Push Arlington's Overall Assessments Up Despite a Slumping Economy".
Thursday, January 15, 2009
Northern Virginia Bits Bucket 1/15/2009
Posted by Harriet at 9:30 AM
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88 comments:
Interesting that they're still pumping the Columbia Pike trolley despite a budget shortfall of at least $35 million. Anybody else think this isn't likely to get started any time soon? I think this kind of work is exactly the sort of thing that the federal government will be happy to spend money on over the next five years, but I find it unlikely that a county struggling to pay for critical services will be tearing up a major business corridor...
Yeah, that was a stunner of an article. Full of fabulous detail:
A section of the county just north and south of Columbia Pike, for instance, had the steepest fall: 7.7 percent. The average assessment in that area in 2009 is $386,359....
A key goal is to preserve affordable housing in that area as growth emerges, she said. "The loss of affordable housing along the pike is almost certain" without a concerted county effort, she said. "
Um $386k is her idea of affordability? Not mine. Relative to the rest of Arlington, perhaps, and I laud her concern about skyrocketing house prices that might result from better public transit, but at the same time...
And the crux of the article's thesis, that Arl assessments are stable due to new construction just tells me that the next leg down is coming when they discover that the occupancy rate at the hotels isn't as high as projected, and the new condos turn into greater competition on the rental market when they don't fetch the asking prices that had been assumed. Arlington may have missed the brunt of the housing collapse, but it can't avoid the recession and the increased competition from near-in "outlying" areas like Reston, Franconia and Rockville.
Yeah, I think when officials in Arlington talk about affordable housing they're talking exclusively about rentals. Lots of the really old rental units have disappeared; the people who lived in them have to move further away from their jobs, which is a problem for most of them as people who live in cheap housing often rely on public transportation. In that sense, the link between the trolley on Columbia Pike and affordable (rental) housing in that area makes sense, but I still find it difficult to believe the county is going to break ground on the trolley when people will be screaming about housing, medical care, and food for the needy going forward.
I also think we haven't seen a significant decline in commercial real estate here in Arlington, but that's coming. I still remember the big crater that sat at Wilson and Glebe for, gosh, it must have been a decade, after they tore down the Putt-Putt mini golf and ran out of money before they put the (very nice) Westin hotel in last year.
You know, i was just thinking how much more interesting it used to be here with with real estate hookers desperately trying to keep their leveraged butts out of intensive care...
what is the current rate of PMI. is this same every where or how this works. can some one tell me....
"I still remember the big crater that sat at Wilson and Glebe for, gosh, it must have been a decade, after they tore down the Putt-Putt mini golf..."
I remember that mini-golf course. It was great to play there in the 1980s -- so easy to get to. Now the County says they want to build a "world class" mini-golf course in the same general area.
At least there's the Kettler ice rink on top of Ballston Commons Mall, which is great fun.
"Arlington may have missed the brunt of the housing collapse, but it can't avoid the recession and the increased competition from near-in "outlying" areas like Reston, Franconia and Rockville."
I think for most people who are seriously considering buying a house in N. Arlington (as opposed to "tire kickers" who just come to open houses out of curiosity), Reston, Franconia and Rockville are good examples of places that are NOT serious competition. They're simply too far out. There's also the question of general amenities and quality of life, which I won't get into in any detail, since there are folks who live in those communities who I suppose are passionate about them. Suffice it to say most of the N. Arlington neighbors with whom I've discussed this kind of subject are very happy here and wouldn't move further out -- several moved here from places such as Vienna, Springfield, and Bethesda.
Tom,
At some point the price disparity becomes so large that substitution has to kick in. Consider a two income household. In most cases, these two people work different places and have different commutes. Usually, you pick somewhere to live that is not an exact splitting of the difference, but rather a combination of schools, neighborhood, housing and at least one person gets a great commute. What happens when the person who works somewhere in Arl, is proposing to the person who works in Bethesda that they buy in VA? Hmm??? Does the greater choice of in-state colleges trump paying twice as much for a smaller house? When the school districts available are relatively comparable? For some people, maybe. Not for most.
When your housing price is halved, and one of the two of you still has a nice short commute, you forget about N. Arlington. And then N. Arlington's buyer pool is reduced to single income, or dual incomes at the same or adjacent workplaces. How much of a contraction is that? How much of a contraction can it withstand? Once you live in a community (if it's nice) you get attached to it, but the renter/potential buyer pool hasn't laid down these roots, and doesn't know the special qualities that make you fall in love with Arlington (so much so that you want to pay a 100-200% premium for the privilege).
I mean seriously, our downpayment fund could buy a townhouse outright in cash in Woodbridge by Dec 2009. I'm not doing it, but it's sorely tempting and makes anything that over rental parity hard to swallow. Likewise the downpayments in N. Arlington could easily buy property in Franconia for cash. At some point, doesn't reality have to sink in? Or is the entire population still the "greater fool"?
the Harrison St. home is under contract.
sigh.
Mm,
It was probably either the buyer for whom all those pictures were taken, or someone else seeing those photos that did it.
Sorry you "lost" the house. On the bright side hopefully it will be another low comp to help set the list prices this spring. And, at least you won't be bonking your head every morning.
Yeah, Cara, I also think some neighborhoods in the District substitute for Arlington, even with their schools, and prices there are falling.
Cara said: "At some point the price disparity becomes so large that substitution has to kick in."
Exactly. As I said the other day, because prices have fallen so much more in other locales than in north Arlington, prices in north Arlington are even more expensive on a relative basis than they were a year or two ago (despite the fact that absolute prices are falling). This means they have a lot of price correction still ahead.
From the article: "A section of the county just north and south of Columbia Pike, for instance, had the steepest fall: 7.7 percent."
The assessor must be smokin some good rock if he thinks the worst of the declines in all of Arlington is less than 8 percent. I could post example after example of neighborhoods with property prices down 20 to 30 percent. Hell hath no fury like a property owner over-assessed. We're going to see lots of complaints about assessments being absurdly too high.
Cara/Tom - your discussion on the substitution effect is something I have been thinking of for a long time.
About a year ago, I suggested that the threshold for the substitution effect to kick in would have to be pretty high to affect Arlington - especially for those who are effectively seeking an urban type experience (metro, walkability, whatever). That experience isnt easily replicated once you get into areas much farther out than Arlington (except possibly reston town center).
In a way, I suggested there are 2 tracks the urban one where DC, Alexandria, Arlington, Bethesda, etc. more direcly compete with one another, and a suburban one where Franconia, Springfield, Annandale, Manassas, Bowie, etc. compete with one another.
To be sure, there is some cross over. If SFH in franconia were going for 50K, there are a heck of a lot of people who prefer urban areas who will move to franconia regardless. Likewise, even people who consider city living repugnant would probably move to an Adams Morgan rowhouse if it went for 50K.
However, before houses in the 2 tracks get down low enough for a lot of people to consider crossing tracks, they are purchased by someone else in the same track. (i.e. the franconia house would have to get down to 100K for the Arlington looker to buy it, but before it gets that low, it is bought by the Springfield looker who is willing to take the plunge at 150K).
Right now, there is a lot more pressure on suburban buyers in terms of a seemingly unlimited supply of homes further out, closer in, across the river, etc, to choose from. Thus the cratering in Manassas is doing a job on Centerville, on to Springfield, on to Annandale, & franconia.
However, because Arl, Alex, DC and (to my knowledge) Bethesda are doing OK (relatively speaking), without one of them cratering, I dont think you are going to see as much pressure on the others who are direct competitors.
CRT said: "Cara/Tom - your discussion on the substitution effect is something I have been thinking of for a long time."
Yours is one of the most sensible explanations I've seen on this issue, CRT. Well done.
Hello, all look at this and can you give me suggestion how much we can offer....i did checked the comps it is right on the money. any way give your thoughts....
http://franklymls.com/PW6954706
MM - I can see someone paying 675k for that house in this area I guess (though I'm always bummed to see houses like that sold at prices I can't afford). Big yard, plenty of bedrooms, etc. It was 300k off the original listing price though and took 9 months to sell.
CRT - Great post!
Case Shiller brought up a great point about the substitution effect and how it can help limit price declines in desireable areas. They noted that many who were priced out of their first choice during the bubble will rotate back in as soon as the price falls enough to meet their market clearing price. In their words:
So, even as overall sales volume drops (sounds familiar eh), relatively stonger demand for housing will limit price declines in neighborhoods with whorter work commuted, better schools, and easier access to parks, recreation and retail centers...
When combined with large inventories of unsold housing on the edges of urban areas (i.e. PWC) this shift in preferences will mean that prices for homes in outlying neighborhoods will continue their more rapid decline and will be slower to rebound when housing markets finally start to recover."
http://www2.standardandpoors.com/spf/pdf/index/052708_Housing_bubbles_collapse.pdf
Put into practice, consider that many buyers, rightly or wrongly, shop stricly on the basis of what they can afford. The buyer with 600K whose first choice was Arlington was priced out when Arlington went to 650K as the bubble ran up. He is now watching 2 houses - one in Fairfax overpriced at 650K and one in Arlington overpriced at 650K.
As the bubble started bursing, fairfax house fell to 600K. Tempting, but he is still hoping for the Arlington house to fall.
6 Months later, Fairfax house is down to 550K. Now very tempting, but wait, the house in Arlington fell to 625K. Now, he is thinking he has a chance if it only falls a little further...
6 months later, the Fairfax house is down to 500K - now very very tempting, but just then, the house in Arlington falls to 600K - he buys, the market clears.
As long as Arlington remains the first choice of many, this process is playing out over and over again. Each time as their first choice falls enough to reach their market clearing price, it is purchased over the second choice, even though the second choice may have fallen by a greater amount in percentage terms.
I don't know that I agree with that reasoning CRT, part of the problem is that as the Fairfax house dropped to 500k or whatever... an even more expensive Fairfax house would drop from 700k+ down to 600k. As always the end result will be a question of what you get for your money.
With the growing disparity between the prices in the close in areas and those in farther out areas the substitution effect will strengthen.
Afterall... there are numerous buyers who probably wanted to buy in Fairfax but then ended up in PWC because it was cheaper during the bubble. Just because Fairfax is more desirable than PWC hasn't saved it from the correction, it just delayed it a little bit.
Arlington and Alexandria have been shielded to a large extent, but their prices are dropping very rapidly by any standards other than those of this current bust. In the end they will end up returning to something similar to their historical trendline.
Hmm yeah I don't know if I buy it going both ways. I think very low prices might make people switch from a 'better' track to a less desirable one (from inside the beltway to out, for instance). But people that are fine with living outside the beltway probably aren't going to move inside the beltway if they can get a lot more things they want for cheaper outside.
I guess I can't believe that the number of people that can afford a 600k house and have Arlington as their first choice increased that much in the last 6 years. Because these houses weren't selling for anything close to 600k back then.
In reading these posts on the substitution effect and demand for housing in Arlington, I can't help but get the feeling that some people's perception about demand for housing in Arlington far exceeds reality. Seriously, if i was reading this board fresh as a new poster from the west coast, I'd believe (based on the posts here) that 75% of the population in the DC area yearns to live in Arlington and will make almost any irrational financial decision to do so. This just isn't true, of course.
And this intense focus on Arlington and its relative lack of a steep decline makes me wonder whether some people are imprudently seeking a rationale for something that just isn't rational. When things don't make sense, people often look to ascribe a reason. For example, when all housing in the DC area was overpriced in 2005, the masses justified it (i.e., sought a rationale for something not rational) by saying "this time is different," "there is a huge population increase in the DC area," "boomers are buying retirement houses," "there is a building shortage," etc. None of those reasons were real, but people sought them out and believed because it helped them be more comfortable with something that didn't make sense.
I think people are doing the same thing with north Arlington housing now, because it is one of the last remaining slivers of the region that hasn't become rational from a valuation perspective YET.
You know what folks, sometimes assets just aren't priced by the market properly. Period. But in the long run, they will be.
CRT,
Your first argument about there being 2 tracks I'll buy, in that, yes, there are basically two pools of buyers with different priorities, and thus the two type of neighborhoods will have different trajectories.
The second one? No. And I think Leroy nailed part of it, which is that new nicer houses will come down into your price range in the less desire-able area. But it's also just that the price disparities are too large, or could easily become so. I was walking the other day in this neighborhood of really gorgeous townhomes in Kingstowne, walkable to the metro, decks overlooking woods, high-end finishes, > 2600 sq ft. And their list prices are well under $500k. I mean seriously, if you're looking in Arlington right now, you really need to have blinders on to buy. You could something so much nicer, with decent schools, and still be on a metro line. Unless you work at the Courthouse Metro station or something, it's hard to believe that you wouldn't consider substitution. Kingstowne + European vacations, or Arlington in a dumpy house? Hmmm.
"Leroy said...
I don't know that I agree with that reasoning CRT, part of the problem is that as the Fairfax house dropped to 500k or whatever... an even more expensive Fairfax house would drop from 700k+ down to 600k. As always the end result will be a question of what you get for your money."
This goes back to the track question - when prices fall in fairfax, what does that get you? Usually just progressively bigger houses or nicer furnishings. Until those Fairfax houses come with a bunch of restaurants and a bakery (or whatever) within walking distance, they could still be second choice homes to those that seek an urban environment.
"With the growing disparity between the prices in the close in areas and those in farther out areas the substitution effect will strengthen."
And it has - considerably. Yet consider again how high the threshold has to be. Cara admitted she could buy a place with her down payment out in Woodbridge - yet she stands pat. Places in woodbridge are off 50%, yet this still isnt enough to incentivize Cara, one of our most frugal buyers, away from an area that is down probably 25%.
"Afterall... there are numerous buyers who probably wanted to buy in Fairfax but then ended up in PWC because it was cheaper during the bubble. Just because Fairfax is more desirable than PWC hasn't saved it from the correction, it just delayed it a little bit."
Correct, but its also limited the severity of the decline - PWC is down over 50% while FFX is about half that. Clearly, more and more people who were priced out of fairfax are moving back in even though they could now get a steal on a place out in PWC.
"Arlington and Alexandria have been shielded to a large extent, but their prices are dropping very rapidly by any standards other than those of this current bust. In the end they will end up returning to something similar to their historical trendline."
I agree that this should happen, yet, this is looking more and more debatable as time moves by. In 2006, exurban counties were down a smidge - not much happened closer in. In 2007, suburban counties were down a moderate amoun, but by then, exurban counties were posting even bigger declines, In 2008 urban counties are clearly down, but yet, as we look further out, the declines just keep getting bigger and bigger...
Perhaps this is the year the urban coutnties catch up to the rest (and assuming too, the outer counties dont again get worse). However, with most forward looking indicators suggesting the closer in counties will do best, I am not holding my breath.
CRT,
It's a matter of extent. What premium can be supported, and what cannot. Right now, with prices still painful relative to historical values, people like me are looking at the lowest priced area that they're willing to live in. And waiting to pull the trigger. Yes, I would start looking at Old Town if those prices came down to my comfort levels. But if Old Town were affordable, I could probably buy in Hollin Hills. And probably would. But my point was that everyone has a limit, and everyone assigns their own premiums, and buys accordingly (or continues to rent). And the question with substitution is what premium levels are sustainable.
The other thing to keep in mind, is that even in FFX the upper rungs (or really everything but the bottom of the barrel) haven't fallen very much yet. So, the snowballing effect of the lowest priced homes leaking their way up the ladder is still in progress. Thus the discount for FFX (or wherever else) has only begun to steepen versus Arl or whatever in the urban track.
I do think that places like Adams Morgan and Alexandria will retain some of the gains they've experienced since 2000. Because some of that is due to intrinsically increased desirability.
"John Fountain said...
And this intense focus on Arlington and its relative lack of a steep decline makes me wonder whether some people are imprudently seeking a rationale for something that just isn't rational. When things don't make sense, people often look to ascribe a reason."
John - that is exactly what I am trying to do. For the record, again, I dont like Arlington. However, I am trying to come up with an explanation for something that may not be explainable. It is what it is...
Cara and Jeff B - regarding the second part, reconsider what I said about Cara. She astutely pointed out, in her latest post:
"it's hard to believe that you wouldn't consider substitution. Kingstowne + European vacations, or Arlington in a dumpy house? Hmmm."
This is 100% correct, but yet she is likely facing a similar choice. She could buy the woodbridge place and probably hire somone to drive her her work for years for cheaper, yet she still holds out for her first choice. Substitution will work for her, but it has to be massive before she will consider it.
crt,
Substitution works, but everyone has their own minimum requirements. Franconia is not my first choice, Capitol Hill, Adams Morgan or Old Town Alexandria would be. But those are not options unless they become ridiculously cheaper.
Yes, if someone paid me $1 million, I'd take the house in woodbridge off their hands and try to start my own business with the $1 million. But assuming prices don't go negative (enough to pay for the driver and the au-pair), Woodbridge is just too terrible of a commute.
Indeed, there must be some people for whom Arlington is likewise their minimum requirement. I suspect those are the only people buying there right now...
Also we need to keep in mind that PWC and other outlying areas had a higher % appreciation between 2000 and 2006, so their % depreciation is bound to be higher as the bubble deflates. So Arlington having a smaller % depreciation than PWC between 2006 and 2012 isn’t inconsisent with both returning to their historical trendlines.
I do agree that in some neighborhoods a significant portion of the appreciation was also due to real changes that increased their desirability – the real question is how much of the appreciation was due to that factor. I don’t think it is as large as the combination of the belief that real estate would always go up and the availability of loans that made it possible for people to buy houses they couldn’t afford.
"Correct, but its also limited the severity of the decline - PWC is down over 50% while FFX is about half that. Clearly, more and more people who were priced out of fairfax are moving back in even though they could now get a steal on a place out in PWC."
FFX isn't done falling... I think part of the problem here is that you are trying to explain why some areas haven't fallen, when what you really need to be explaining is why they haven't fallen YET.
FFX has a long way to go. I suspect the run-up in FFX was smaller than the one out in PWC, and thus the decline won't be as bad, but there is a lot of declining left to be done.
"I agree that this should happen, yet, this is looking more and more debatable as time moves by."
No, it really isn't.
This is just a case where we are watching something so closely that we are missing the forest for the trees.
The real estate market moves very very slowly. We are already seeing large declines in close in areas. They have not declined as much as the outer areas, and probably never will, but they have a long long way to go.
Even in areas that have already seen large declines they aren't evenly distributed. Higher end properties in general appear to be falling more slowly, no matter where they are located. That doesn't mean they won't fall, just that they haven't fallen as far as fast.
The only way to argue that one area or another will somehow stay at bubble level pricing is to show a massive shift in the fundamentals in that area.
As Jeff B said...
"I guess I can't believe that the number of people that can afford a 600k house and have Arlington as their first choice increased that much in the last 6 years. Because these houses weren't selling for anything close to 600k back then."
He has the right reasoning there.
How can you explain the massive run-up in prices? We know incomes haven't done anything similar. It was not that long ago that these areas were selling for far less, and it was considered normal, and the people living in these areas valued urban living then too...
Cara,
thank you for the kind words. let there be more of better deals!
Jeff B,
i'm bummed too. but if the final sales price is indeed $675K i might as well kiss Arl goodbye. i'm hoping for some $$$ under $650K (bank's cost).
i know you are all inteligent bloggers and this discussion is very good all that. but i am in the market looking for house and trying from last 2 months. i made 2 contracts and both times got multiple offers. i am checking a house and the sold price for similar house on the same street. 1home got more then the asking price. 1 home got what they asked. 1 is little less because of subsidy. . any way what i am trying to say is if the price is right and house in good condition and newer they are selling fast and getting multiple contracts and in some cases more then what they are asking. but when i try searching homes for the same area in frankly i see 125 active listing but only 25 foreclosuers. that will tell me that there is more to come. since only 10% of short sales go to close. some how i think that this will continue for long time because of the govt policy and short sale model will drag this market. But if we like the house and right price i think it is work buying because of the rates and low prices. even if the market goes 20% down this year or next if we stay in the house 5 years we may not loose anything. since we have to pay for the apartment that AMT which is equal to that 20%. because of tax breaks we may make some. any way let me know what is your thoughts about buying now or renting and buying later. my experince from last 2-3 months if the price is right and house is in good condition and newer they are going fast....so let me know what you all think. thanks any way this is a very nice blog and helps people like me to educate on lots of things. thanks.
Leroy said: "...when what you really need to be explaining is why they haven't fallen YET."
Bingo.
"Higher end properties in general appear to be falling more slowly, no matter where they are located. That doesn't mean they won't fall, just that they haven't fallen as far as fast."
You know, the theory that the high-end of the local housing market won't fall is eerily similar to the now-discarded theory about the stocks of companies who catered to upper income customers.
Anybody remember the theory being bandied about a year or two ago? It went along these lines: "Retailers who cater to middle or low income customers will be hurt in a recession as their customers will have less to spend, but retailers who cater to high income customers will be immune to a economic pull-back because their customers have so much disposable income." Sounded good, right?
Well, that obviously didn't turn out to be true. High end retailers and restaurants are suffering big time now. Turns out that high-end isn't "immune" after all. It just takes a little longer before the impact is felt.
I suspect the same thing is going to happen with regard to housing. Some market observers are thinking of north Arlington as Tiffany's and believing it will continue to be 'strong' as a result. Meanwhile, the real Tiffany's is struggling.
manju said: "even if the market goes 20% down this year or next if we stay in the house 5 years we may not loose anything. since we have to pay for the apartment that AMT which is equal to that 20%."
I don't think this is a proper comparison of the costs in a situation in which house prices drop another 20%.
A buyer's costs include:
1. The 20% you overpaid AND
2. The interest paid to the bank (in substance, rent paid to the bank instead of a individual)
A renter's costs include:
1. Rent paid to an individual
If rent and net interest costs are similar, then the buyer clearly loses due to the overpayment of purchase price consideration.
Manju,
ah, if that's where you are in this process, go to (of all places) the irvine housing blog.
click on analysis and read to your hearts content. He does an excellent break down of rent versus own, "your buyer's loan terms", how the market will play out, everything.
Now, that is Irvine, and Irvine's bubble was about 2-3 times as high as the one around here. So, they are experiencing different market dynamics (more affected by both sub-prime and Alt A loans for instance) but the basic principles he outlines are well-laid out and fairly universal.
On your observations, houses selling quickly in this environment could mean a number of things, (1) they're priced close to comps, which is a given, otherwise they wouldn't sell (2) you have a lot of knife-catchers calling the bottom. Keep in mind that many many sellers made a killing selling back in 2004-2005. Some percentage of those waited on the sidelines with cash, and are jumping back in. At least that's what's happening for certain in Irvine, and it may very well be happening to provide support at the "nicer" levels here, just not to the same extent. These people are a limited supply however.
But run the numbers, try every online calculator you can find and determine what your realistic price point is. And if houses that you love, in communities you love are hitting that price point, then go ahead, pull the trigger, Harriet did this fall, Tabitha probably will soon, as may I later this summer.
For me that point (for buying this year) is when buying is $300 cheaper per month than renting after all related expenses and savings for maintanence. At that point, buying becomes about financial security. Whether anything I'd like to live in will reach that point, even at these low rates and a 30year term, is up to the market forces beyond my control.
Your circumstances are undoubtedly different from mine, and thus you will have a different break-even point for buying this year, rather than continuing to rent.
But honestly, the price drops since I started looking last spring are breathtaking. The longer you look, the more patience you'll gain, as you see more and more properties reach prices that make sense to you.
manju,
oh yes, and keep in mind that houses are thinnly traded in the winter months, such that in the spring, when sales pick up, more comps may make prices fall faster.
"may" being the operative word.
If you're still seeing short sales, there are still more foreclosures to come. If you're still seeing foreclosures, prices will keep declining. 25 foreclosures is a lot!! compared to any normal healthy market.
Manju,
If you want an idea of the foreclosures coming down the pike for NoVa, look at this web site, specifically the red and orange areas on the map.
1/15/09 3:35 PM
crt,
I think you can't compare the substitution effect between ARL and FFX in equal terms with FFX/PWC. ARL school system is not significantly better than FFX's. The houses in ARL are older than in FFX, requiring significant maintenance costs. Metro comes into FFX as well, though it is not as walkable as ARL. The Metro extension to Dulles has been funded.
contration,
Thanks good find!!!
The NY Fed still doesn't have the absolute numbers posted anymore, but this is a great screen capture.
(I'll stop playing with the 6 months change map on the NY Fed site now...)
Anon 412/Leroy - I will agree, PWC rose higher than the rest, so its not surprising it is crashing that much harder. However, with respect to Arl, Alex, Ffx & Lou they all rose somewhere between 128-132% over 2000 prices, so it is reasonable to assume (if nothing has changed) that they will be affected the same.
Leroy/John Fountain - this is not just a high end low end issue its a geography issue as well. We all know Loudoun & Ffx are as wealthy as anywhere in the US - yet they are falling harder than the much poorer closer in areas.
Regarding the income issue, I think Novawatcher & The Anonymous provided a perfectly good explanation to explain why they did not rise as much as home prices.
That aside, the other thing is, given how badly the far out areas have been hit, one would assume the prices have fallen enough to bring buyers back in. I know I do this alot, but it bears repeating - sales/listings 700K-1.25MM by county.
Arl
36 sales/265 lists (7.4 MOI)
Alex
23 sales/138 lists (6.0 MOI)
Fairfax
96 sales/1,111 lists (11.6 MOI)
Loudoun
30 sales/426 lists (14.16 MOI)
PWC (just for fun)
6 sales/194 lists 32.3 MOI)
Are you kidding me??? After years of beat down prices and forward looking indicators outside the beltway still look worse? When will these people come to reality? Perhaps, one day with a lot of hard work, and more serious price declines, outside the beltway will look only as bad as the close in areas.
I meant to discuss the substitution effect only, but since we are on the subject it bears repeating. We see this again and again, month after month. In areas like CA, I see reports, the "immune" high end areas have 20-30-40 months of inventory. Its obvious, they are coming down, its only a matter of time. Yet here we are, early 2009 and the close in areas still look better?
Also, I am not denying prices are done coming down. A recession is a nasty bugger and it can hit hard. However, these forward looking indicators suggest if Arlington goes down 10% Fairfax will go down 20%, loudoun worse. If Arlington goes down 20%, Fairfax 30%, Loudoun worse. If Arlington goes down 70%...
No matter what though, the question remains, they went up together, why dont they behave that way on the way down?
contrarian,
thanks for the chart. but where can we find the numbers to each county ...let me know.
"TedK said...
crt,
I think you can't compare the substitution effect between ARL and FFX in equal terms with FFX/PWC. ARL school system is not significantly better than FFX's. The houses in ARL are older than in FFX, requiring significant maintenance costs. Metro comes into FFX as well, though it is not as walkable as ARL. The Metro extension to Dulles has been funded."
TedK - I agree. Again, not everyone is going to have the same set of priorities. You cite schools and metro, and if your concern is kids and transportation, that is indeed important, yet what I am talking about is a bit different.
If you are attracted to the urban lifestyle, there are few places that can satisfy it. Alexandria, DC, Annapolis, Arlington, Bethesda, etc. Its as close to a european style of living as you are going to get in the US, and right now, there are very few of these places that exist.
Suppose that generation ago, you had 95% of people who wanted to live a suburban lifestyle, and 5% who wanted to live an urban lifestyle. Housing and prices would reflect those desires via the mechanisms of supply and demand.
Suppose now, 10% of people wanted to live an urban lifestyle. The problem is, you have now doubled demand and not doubled supply. In this case, the only way to achieve a market clearing price is for prices to rise.
Suppose too there is a bubble. As it deflates, so long as the demand is still there, those that were formerly priced out will migrate back in as soon as it hits their market clearing price. To put it in parlance that everyone here can understand, there are knifecatchers out there every step of the way to soften the blow. Again, prices go down, but just not as much as they would have if we still had the 95/5% situation a generation ago.
"Manju said...
contrarian,
thanks for the chart. but where can we find the numbers to each county ...let me know."
Manju - this is almost a year old now (Jan 2008) but you might find it helpful:
Alt A loans:
Arl - 2700 (3% of homeowners)
Alex - 1900 (3% of homeowners)
Ffx - 13,600 (3.8% of homeowners)
Lou - 3400 (5.5% of homeowners)
PWC - 6000 (6.1% of homeowners)
Of all alt A's about 60% are adjustable the adjustable Alt A's are
Arl - 1300 (400 had reset 1/08)
Alex - 1000 (300 had reset 1/08)
Ffx - 8100 (2800 had reset 1/08)
Lou - 2200 (800 had reset 1/08)
PWC - 4000 (1400 had reset 1/08)
Likely about 5-10% more have reset in the last year so bump up your calculations a bit for present date.
Also, of those ARM ALT A loans, a subset is the negative amortization (pick a pay loans). These were as follows:
Arl - 400
Alex - 300
Ffx - 2900
Lou - 800
PWC - 1400
Again, since these are a subset of the ALT A universe, asume about 35-40% of these have already reset.
let me get my thinking stright. i am looking at a home which is 360K now and was bought for 615k IN 2005 at PWC. DO you think the prices will go down 20-30% in 2-4 years. don't you think if this becomes 150k we will have more problems then the housing. we might need to stand in line for the bread. any way let me know what you all think.
Also, Manju - thats what we had going in - thats the front end of the equasion. The back end is the foreclosures.
Just today, new foreclosure rates were posted for Dec 2008 by county. These numbers are a bit inflated because it includes notices of default as well as writs of possession (i.e. could count twice on the same house). However here is what realty trac reported today.
Arl - 1 per every 1064 homes
Alex - 1 per every 1171 homes
Ffx - 1 per every 299 homes
Lou - 1 per every 230 homes
PWC - 1 per every 121 homes
Look for these to re appear on the inventory roles in a few months and to once again do a disproportionate amount of damage to the various housing markets in the spring.
The divergance continues...
If you want an idea of the foreclosures coming down the pike for NoVa, look at this web site, specifically the red and orange areas on the map.
I looked at the web site, which shows a "heat map" of the alt-A and Option ARM loans. The first thing I noticed is the high heat in urban areas, and low heat in the rural areas. If I took this map at face value, I'd assume that Arlington is in much worse shape than the Appalachia portion of Virginia. In fact, the more densely populated areas are all in bad shape, and the less densely populated ones nearly all in good shape.
What it comes down to is this: the map doesn't show what the author thinks it shows. This heat map is based on number of "dangerous" loans by zip code.
If you live in a zipcode with one thousand homes, and 102 have Alt-A or Option ARM loans, your area will be orange. If you live in a zip code with 10,000 homes, and 102 are Alt-A or Option ARMs, your area will also be orange. In the first case roughly ten percent of the homes have dangerous mortgages and in the second case about one percent have dangerous mortages, yet they have the same rating.
To get this map to accurately show the risk of an area, they should have adjusted by population per zip code (or better yet, by number of mortgages or number of houses per zip code). Yes, I'm sure Arlington 22205 has more Alt-A and Option ARM loans than whatever that little white (map color) county is sticking up into West Virgina. But I can't tell from this map whether is has a higher percentage of these types of loans.
It's only a slight oversimplification to say that this is a map of population density with a slight adjustment for mortgage loan types.
I'm not familiar with how the alt-A and Option ARM loans work, but if they are at all tied to current rates, wouldn't any resets have a minimal effect due to the record low interest rates we have right now???
Manju,
Forget the start number!!!! It's not relevant. Is $360k for a souped up townhouse, or fancified SFH reasonable for the area? No. It's not. $200k-$250k is a closer ballpark. The greater DC area does not have a premium over similar areas outside other US cities. Those expensive houses in Loudoun? They have horses, and land, and land, and forests and guest houses. They get that price by being that extensive and amazing. The stuff that got up to $650k at the peak is bubble fueled building, geared towards buyers who were assuming >10% appreciation/year into their financial calculations. Essentially, posers. So, in answer to your question. Yes, anything that is $360k now in the outer counties now will fall another 20-40% in the next 2-4 years. Because unless you can count on appreciation, it's not worth that price. And that's without factoring in the recession.
dgg,
it's not the reset that hurts (at the moment) it's the recast to the fully amoritizing payment. See Tanta's posts at www.calculatedrisk.blogspot.com for a full explanation.
"Yet here we are, early 2009 and the close in areas still look better? "
They don't just look better, they have been doing better so far, but I think you rely far too much on inventory to sales ratios.
As I have explained before, I think the months of inventory measure is not worth much right now. The most obvious reason for this are the large price declines we have seen even while the "months of inventory" remain low.
ANY nominal dollar price decline is pretty darn rare in a real estate market. Significant declines in prices while the months of inventory says this should be a seller's market? ...
Don't go assuming these markets are doing well simply because they don't have a mountain of inventory on the MLS. The more important fact is that the market is acting like a market going through a serious correction.
Volumes are tiny and prices are falling at a rapid pace. These are markets that are badly out of balance, whether you can see the inventory or not.
"Also, I am not denying prices are done coming down. A recession is a nasty bugger and it can hit hard. However, these forward looking indicators suggest if Arlington goes down 10% Fairfax will go down 20%, loudoun worse. If Arlington goes down 20%, Fairfax 30%, Loudoun worse. If Arlington goes down 70%..."
I don't believe there is any argument to support this line of reasoning. Just because some areas fell faster and earlier does not mean that they are somehow pegged to the inner areas, if anything it argues the opposite.
This is not a case where the inner areas are somehow pulling down the outer areas. It is a case where the outer areas are pulling down the inner ones. Now that the outer areas have taken a huge hit, the substitution effect will ultimately attract buyers to those areas. This in turn will work to erode the pricing on the areas that have not fallen as much.
The expensive areas will remain relatively expensive, but it is unreasonable to expect them to hold their bubble values when the rest of the region drops dramatically.
If a ordinary little house in Arlington wasn't worth twice as much as a similar house in Falls Church 6 years ago, why should it be worth twice as much today?
"No matter what though, the question remains, they went up together, why dont they behave that way on the way down?"
The market is a very very complex system, and one that is heavily influenced by human psychology. Real estate markets are not particularly rational markets. That is one of their best known characteristics.
Most markets respond pretty quickly to changes, they rise... they fall... etc. In real estate, seller psychology results in very rapid rises, and very very slow drops. I guess my short answer is, different rules apply going up than down when dealing with real estate, and in a market as big and diverse as the DC region no single answer is going to explain what is going on everywhere. It is all interdependent in the end, but on a short time-line it doesn't have to act like it.
Keith K - yes thats the problem with that map - it does it by zip code without accouting for density. As it turns out, there are twice as many homes in a single zipcode in an urban area versus an exurban area. Thats why I posted the results in homes per thousand.
"Suppose that generation ago, you had 95% of people who wanted to live a suburban lifestyle, and 5% who wanted to live an urban lifestyle. Housing and prices would reflect those desires via the mechanisms of supply and demand.
Suppose now, 10% of people wanted to live an urban lifestyle. The problem is, you have now doubled demand and not doubled supply. In this case, the only way to achieve a market clearing price is for prices to rise."
This is a "new paradigm" argument.
Basically what you are saying is "what if the fundamental rules have changed because buyers just want something different now than they used to?"
That doesn't mean it is wrong, but I for one am going to need a lot of convincing that that is what is indeed happening when we have other more mundane explanations for what we are seeing.
If our two basic theories are:
1. We have a massive and well documented real estate bubble that affected this region heavily. The bursting of the bubble has not played out identically in all areas, resulting in some areas falling faster than others.
2. Buyers today just don't want the same thing they wanted a few years ago and are now willing to pay far more for a house in Arlington relative to similar houses in the rest of the region than they have in the past.
I just haven't seen much evidence that suggests buyers today are really that different from buyers 10 years ago. Slightly... maybe, but not enough to explain a swing as large as we are seeing.
In 1998...
FFX: 194k
ARL: 200k
ALX: 193k
In 2008...
FFX: 320k
ARL: 430k
ALX: 407k
crt,
My point was in response to the following from you:
"Cara admitted she could buy a place with her down payment out in Woodbridge - yet she stands pat. Places in woodbridge are off 50%, yet this still isnt enough to incentivize Cara, one of our most frugal buyers, away from an area that is down probably 25%."
Your generational change argument is unconvincing to me. Most of the people looking to buy in Arlington are not really looking there for the urban lifestyle. We know mm, Doug, Tom and Bill (the lawyer and real estate investor--I don't see him here these days), for instance. They are there (or looking there) for the proximity and schools, and in some cases for their own sense of 'elitism,' which other people don't acknowledge or care about.
I don't think very old SFH's in North ARL offer any more urban lifestyle than newer/better homes in, say City of Falls Church, Vienna/Oakton and Rockville. When people still need to drive to experience walkable urban lifestyle, does it really matter the drive is 5 mins vs 15 mins?
This urban lifestyle argument has always been very unconvincing to me. Sure it does apply to some people, especially for people under 30, but such people are probably not the ones who can afford the high end ARL homes. That argument may be valid for small areas in Clarendon, Ballston, Old Town, but not to ARL as a whole.
"As I have explained before, I think the months of inventory measure is not worth much right now. The most obvious reason for this are the large price declines we have seen even while the "months of inventory" remain low."
And as I have said before, (and as I thought we all agreed), the higher the number the worse the pressure. For example,
One market has 40 sales and 400 homes
Another market has 40 sales and 4000 homes.
Which one is worse? Will they both go down at the same rate? Will one decline more precipitously than the other?
At the end of the day, it still comes down to supply and demand, and the relative dislocation of each in relation to the other. Its all relative...
"Don't go assuming these markets are doing well simply because they don't have a mountain of inventory on the MLS. The more important fact is that the market is acting like a market going through a serious correction."
I agree, the market IS going through a serious correction. However, if there was a mountain of inventory to work through, it would imply there is an even more serious correction to work through would it not? Again, its all relative...
"This is not a case where the inner areas are somehow pulling down the outer areas. It is a case where the outer areas are pulling down the inner ones."
In case I wasnt clear, I agree.
"Now that the outer areas have taken a huge hit, the substitution effect will ultimately attract buyers to those areas. This in turn will work to erode the pricing on the areas that have not fallen as much."
The substition effect works in lockstep across all areas. If area A goes down 40%, it does not have to pull area B down the same 40% to work - otherwise, Area B would pull down Area C and then D, E F, etc. til everything was down 40%. It doesnt work that way, there are breaks in the action (i.e. it blunts as it moves), 30%, 20% and so on.
"I guess my short answer is, different rules apply going up than down when dealing with real estate, and in a market as big and diverse as the DC region no single answer is going to explain what is going on everywhere."
There are indeed different rules on going up versus going down, but if (on a geographical basis) they are the same on the way up, why are they not the same on the way down. The credit crunch hit everywhere in the US at the same time. The Lenders removed the fuel of crappy loans everywhere at the same time - its not as if they left them in place longer in places like Arl that have held up better. The loans are gone, but yet the buyers still show up in higher percentages in some areas than others. As long as that condition exists, I find it difficult to conclude all areas will be hit to the same degree.
"Leroy said...
1. We have a massive and well documented real estate bubble that affected this region heavily. The bursting of the bubble has not played out identically in all areas, resulting in some areas falling faster than others.
2. Buyers today just don't want the same thing they wanted a few years ago and are now willing to pay far more for a house in Arlington relative to similar houses in the rest of the region than they have in the past."
Thats actually not a bad way of putting it. However, it does not have to be just one or the other. It could be both were occuring simultaneously.
Thats why I find the run down so much more interesting than the run up. The crap loan pool was drained. It killed some areas (PWC), seriously wounded others (Lou & FFX), but didnt do as much harm to others (Arl Alex). Its not unreasonable to assume that the areas not as hard hit werent in as much need of crap loans as the others were.
And its here where we see so many people getting into disagreements. If both things were affecting the area, that doesnt mean it wont decline. The bubble was the bubble, it was unsustainable, it must disappear. However, if there was something else underling some (not all but some) of the value, it doesnt need to fall as far. In effect a new equilibrium has been reached.
Note, I am not saying this is what IS, I am saying this is what could be, and the longer this divergence exists, the more likely it becomes. If the inventory starts building again in the inner areas next year, you know me, I am very likely to drop the whole thing like a hot potato. I am making my determinations base on what the data is telling me. Sure it would be nice it if was true, but theres no point in arguing something if the data clearly suggests it aint going to be that way.
"Ted K said...
Your generational change argument is unconvincing to me. Most of the people looking to buy in Arlington are not really looking there for the urban lifestyle."
Ted, this is but one of many alternatives. My neighbors moved here because they are big greenies, they had a big house and a prius, but figured their carbon footprint would be that much smaller with a smaller house to heat and cool, and less distnce to travel. I know another who didnt mind the long drive if it was consistent. Problem was, he couldnt predict the traffic 1 hour one day, 2 hours the next - he couldnt stand it.
There are a number of reasons people would want to live here now that they may not in the past - and lets be honest snobbery is one of them. That said, we are talking about tiny areas here, a few thousand homes available at any one time. It doesnt take but a few percentage points (relative to the entire DC population) to have a disparate impact (these sorts of things are set at the margins).
"Leroy said...
That doesn't mean it is wrong, but I for one am going to need a lot of convincing that that is what is indeed happening when we have other more mundane explanations for what we are seeing."
Thats really what it comes down to. I watched in fascination in 2005 when sales slowed, 2006 when inventory rose, 2007 when sales fell and MOI built, at the beginning of 2008, I thought this is it. Its here, all areas will crash.
Funny thing is, ALL those things did happen everywhere in NOVA, just to varying degrees. Enough so to make me mostly, but not totally convinced.
Lets put it this way, if it doesnt happen in 2009, will you be convinced? If not, what about 2010? 2011? You dont need to answer as this is a bit rhetorical but you get the point.
Finally, I should mention, no, I am not discounting the recession. The recession is very dangerous, but it is an equal opportunity killer. The recession, if severe, could take another 20-25% off prices everywhere.
If that happens though, we still have the big divergance in pricing that emerged this year that needs to be adressed. Median prices in Alex look to be down a total of 8% this year. Median prices in Loudoun were down 9% last year and likely close to 20% this year. If they both go down 25% next year, theres still that intervening 20% drop in loudoun that wasnt adressed...
Also, I should say too, that one of the reasons I dont think it will resolve during the recovery is that everything I have read suggests any price increases will start in the closest/most desirable in areas, and work ouward. (LIFO for the accountants out there). If thats true, there is even less of a chance all areas will revert to their long term trends.
dgg said...
I'm not familiar with how the alt-A and Option ARM loans work, but if they are at all tied to current rates, wouldn't any resets have a minimal effect due to the record low interest rates we have right now???
Cara said...
dgg,
it's not the reset that hurts (at the moment) it's the recast to the fully amoritizing payment. See Tanta's posts at www.calculatedrisk.blogspot.com for a full explanation.
The re-set may hurt, but maybe not as much as the fully amortizing payment.
Many of the ARMs I have seen re-set at LIBOR + x points. I’ve seen it at low as LIBOR+1, sometimes as high as LIBOR+8 or more points. I show the current 6 month LIBOR at 1.47. Imagine if you had an ARM re-setting at LIBOR+5 or more..
Interesting discussion. I would just add the same (small) point I always do when people talk about home purchase decisions as if everyone is a renter who is choosing among any of a number of neighborhoods. Don't forget the move-up buyers who want to stay in the same neighborhood or county, because their friends/church/stores/doctors/vets, etc., are there. For many of these buyers, they wouldn't consider moving from Arlington to Reston until the differential is much bigger than it could ever get (as CRT pointed out, others (e.g., without these ties to the same community) will snap up bargains well before these buyers are willing to seriously consider it). They just keep hoping that the differential won't get that big.
By the way, assessments for 2009 are on the Arl. website now. They are going to be inundated with reassessment requests. For example, I noticed that some of the houses near $1.5 million on franklymls (out of my league) that have been sitting have been assessed at WELL above their asking prices.
Some of the comments about Arlington "snobbery" make me laugh. Whenever I attend an event in the District, if it is somehow discovered that I live in Arlington, District residents typically react with an "Oh" and a look of pity, condescension, etc. It's as if I told them I was a former Lorton inmate! :-)
crt,
Using a physics analogy would only be instructive to me, so I'll try to keep clear of that. But essentially, we are watching a non-equilibrium evolutionary process. Which transitions happen at which rates tells us only about those rates, not what the fundamental ground-state of the market is.
Okay, I can't avoid it.
If essentially this recession and market down turn ends up with a final state where people are no longer calculating in positive appreciation into their buying decisions, all regions will reach a new equilibrium relative to rents and income. What we're watching here is just a matter of how. I don't think it matters to anyone whether the high end of Loudoun is forced into capitulation 1 year ahead of Alexandria, what matters is where do they both end up in that long slow period that we're bound to have before any other bubble can be launched from collective amnesia about this one.
So basically, you are correctly discussing the dynamic processes which are all we can currently observe. But from them you're assuming we can tell something about the fundamentals, and that's just not inherently true, of any dynamic system.
No one ever mentions the Town of Vienna as desirable place to live. It has two metro stations (Vienna and Dun Loring)very close by, a downtown area full of restaurants, bakeries, bike trail, parks, stores, grocery stores, close to movies at Tysons and many other areas, a great music hang out place called Jammin Java. It was voted best town in America in 2004 or 2005. Schools are superb and the town has a very strong sense of community with festivals and crafts fairs all year round. Home prices are much more affordable than Arlington. Have you ever considered the Town of Vienna?
I said a day or two ago that Bank of America would probably bite the dust due to their derivatives.
Late today, they are talking about up to a $200 billion bail out for BoA:
Bank of America sought the aid to absorb growing credit losses at Merrill Lynch, which it bought on Jan. 1. CNBC estimated the guarantee at $100 billion to $200 billion. Both Bank of America and Treasury declined to comment.
I think it's interesting they mention the losses resulting from Merrill Lynch, but not the losses from BoA's buyout of Countrywide.
Leroy @ 6:02PM:
I just haven't seen much evidence that suggests buyers today are really that different from buyers 10 years ago. Slightly... maybe, but not enough to explain a swing as large as we are seeing.
The transformation in demand that you and CRT are discussing, if it exists, would be borne out in increased rents as well as prices. But we know that price/rent multipliers have increased dramatically over the past 7-10 years. The "hip, happening" places should see rents rise in correlation with prices; otherwise, there is likely a speculative component to the buyer side of the market. And as you correctly point out, local markets everywhere will eventually revert to historical metrics; I'll stick with historical metrics over "it's different this time."
Seriously, I can't imagine paying a premium of several hundred thousand dollars just so that I could walk to a restaurant. To be honest, I don't want to live anywhere where I can walk to restaurant. A 2-5 minute drive, walk, no.
Given my druthers, I'd rather pay for a house in a wooded area of Vienna within bike-able distance to the metro (actually, I could care less about the metro) than to realize that I'm throwing away hundreds (or thousands) extra a month just so that I can walk to restaurant. I can't imagine looking my kids in the face and telling them that they won't be able to be an exchange student, go to summer camp, etc., because the money that could have been used for that is instead going to more expensive house payments. Just so I can walk to restaurant.
[rant-mode on]
Oh, and arguing that the substitution effect doesn't occur because nothing changed in the past two months was an old and tired argument last summer. Not to mention ignorant.
[rant-mode off]
As far as Months of Inventory predicting anything: I pulled tons of historic data off of MRIS, and found that it had no predictive power as far as price direction. None, nada, zip. It surprised me, given that it is conventional wisdom. But, this wouldn't be the first time in history that conventional wisdom wasn't backed-up by the data.
ugh, shouldn't post when I'm drowsy. Spelling and grammar bad.
dc2: shhhh! Stop talking about Vienna! It's a horrible place to live, full of smelly people with bad haircuts. I'd rather live in New Jersey than in Vienna. Hear that people? Stay away from Vienna! You'll catch rickets if you move there.
;-)
Ok, this is a little out of my price range, but I had to ask which you all think is a better deal:
http://washingtondc.craigslist.org/mld/reo/986096458.html
Ok, 1.8M. 20% down makes it 1.44M, and at 5%, the monthly mortgage is $7,730.
But you could rent this place for $6,000, saving the $360,000 down payment and $20,760 a year.
http://washingtondc.craigslist.org/mld/reo/994460750.html
Which do you think is the better deal?
Federal Workers Delaying Retirement Because of Economic Crisis
In recent years, federal officials have been bracing for a wave of retirements brought on by the aging of the federal workforce -- the "retirement tsunami," as Lynn A. Jennings, executive vice president for the Council for Excellence in Government, puts it.
OPM has projected that close to one-fifth of the federal government's full-time permanent workforce will retire over the next five years, and that 36 percent of the Senior Executive Service will retire by 2012.
"Our projections are going to be changing," said Kichak. Revised figures are expected by later this month or early February.
.
OPM has been expecting a peak in retirements between 2008 and 2010, Kichak said, and that has not changed. "We still think we will peak between 2008 and 2010, but the peak will be lower," she said.
Jennings said hopes of better times for the federal workforce under the Obama administration may be contributing to a decision by some to put off retirement. "Given the economic realities and the excitement over the Obama administration, we may not see the tsunami," said Jennings.
"The economic turmoil certainly changes that equation, as does the change in administration," said Max Stier, president and CEO of the non-profit Partnership for Public Service.
"And as I have said before, (and as I thought we all agreed), the higher the number the worse the pressure. "
No, I don't agree with that. That is my point, and NOVAwatcher seems to have noted this as well.
I know the conventional wisdom about months of inventory on the market, and I know that it makes a lot of sense from an economics standpoint.
The problem is that I think the normal rules don't apply right now. (We have seen large price declines on very small inventory to sales ratios...)
I can make various explanations for why that might be. One of the simplest is that the average would-be seller knows the real estate market is a mess and isn't even TRYING to sell their house, although they would like to.
The sellers that are trying to sell their houses are disproportionately highly motivated sellers.
In such a situation we just aren't seeing all the inventory and have no real way to determine how much of it there really is.
It makes it very difficult to make comparisons between areas. If all else were equal I think we could say that areas with higher inventory to sales ratios are likely to do worse, but we don't know that all else is equal.
"The transformation in demand that you and CRT are discussing, if it exists, would be borne out in increased rents as well as prices."
This is also a good point. A good historical look at rental prices in these areas would be worthwhile.
"No one ever mentions the Town of Vienna as desirable place to live. It has two metro stations (Vienna and Dun Loring)very close by, a downtown area full of restaurants, bakeries, bike trail, parks, stores, grocery stores, close to movies at Tysons and many other areas, a great music hang out place called Jammin Java."
Right... and there are several other mini urban areas within DC and for that matter... much of Arlington is no more "urban" than the parts of Fairfax it borders.
This is a lot more complicated that simply urban vs suburban in this area.
I've been saying for a long time that we were headed into a depression.
When I made that call, others said: "I don't think we're likely to go into a depression anytime soon. I put the chance of that at no more than 15%-- and that's on my bad days."
And, The Anonymous, admits being the optomist's optimist all the while the world's economies are crashing.
We now have analysts saying: "While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere.""
I don't consider myself a "doomer" but rather a realist.
Many people find reality to be an alternate universe. They can't stand hearing the truth when it is presented to them. I prefer reality so I can deal with the facts as they are, not as I may want them to be.
Liv Sinning,
given that the remaining 1.44mm would be jumbo, it's rate would be at least 7% (unless you bought it down, which would obviously increase the upfront costs)
So, the contrast is even starker in favor of renting. However the listing is for 18 months "rent to own", so you'd have to carefully consider what exactly the rent to own terms were before you could evaluate the wisdom of the rent option.
contrarion,
Yeah the deflationary price index that was reported last night on NPR scared me. And the threat that China's stimulus package may be insufficient to hold them over until the US recovers such that they consider devalueing the yuan (even more than it already is), is certainly a dire possibility if it comes to pass.
I think these things are all still in the "if" stage, not the "when" stage, but certainly worth keeping an eye on.
I still have my emergency back-up plan. Move up to my sister's mini-farm in western Massachussetts. What's yours?
CRT: - yes that's the problem with that map - it does it by zip code without accounting for density. As it turns out, there are twice as many homes in a single zipcode in an urban area versus an exurban area. Thats why I posted the results in homes per thousand.
Unfortunately, I hadn't seen your post when I wrote mine - I started it before yours was posted, but took a break before finishing mine. I was only responding to the earlier remark about the red and orange areas on the map.
Liv Sining said: "But you could rent this place for $6,000, saving the $360,000 down payment and $20,760 a year. Which do you think is the better deal?"
It's obviously better to buy because it's totally worth the $360,000 and extra $21,000 a year (or more) to be able to paint the walls any color you want and to be able to brag to your friends that you are a homeowner!!
;-)
for some perspective, Manju, since I gather you'd like a concrete response within these comments, let me share the evolution of my thinking on how much we could pay for a home.
Our first calculation was to equate interest and property taxes to rent, figuring on the FHA loan downpayment of only 3% (I believe it's noe 3.5). And the rent we used, was not our current rent, but the rental list prices for similar properties. This gave a rent number of $2000/month *12 months, which at the interest rate of the time + 1% property tax, equated to 7% of $343k. That immediately seemed steep so we backed down to our rent at the time of $1400/month or $240k. However, others, making the same calculation, then deducted the tax deduction amount from the interest and property taxes (forgetting about having to give up that nice standard deduction) and found that you could equate rent to 5% of the house price or $476k!! Oh, yeah, and since that's just the mortgage amount, if you have money saved for the down payment you can bid even higher.
That last version of the calculation is the only way I can explain for how 1960's townhouses in Franconia Springfield reached $450k at the peak. Or rather, how any rational buyers managed to get trapped in at those prices at the peak (as opposed to pure speculators). And it was circular, speculators built up prices, then had to rent out the units for a year or two while waiting for their appreciation gravy train, and therefore listed these places for rent at prices that would cover all expenses. And then live-in owners ran foolish calculations that equated rent with just interest and bid things even higher based on the already inflated wishing prices for rent. (they were as high as $2300/month).
What was wrong with this calculation? (1) It didn't include maintanence funds (2) It didn't include the 6% realtor fees at sale (because you were going to live there forever), (3) It assumed implicitly that all those principle payments were equity that was yours to keep. The first two are just basic failures in math. The third, is patently untrue right now as the market is still declining. Oh, yeah and (4) it assumed that the rents weren't themselves a bubble.
Where we're at now, takes all these into account, and gives us a sale price of ~$220k if we base it on our own current rent and assume another 10% decline. What does this entail: Equate rent to all owning expenses including principle payments and maintanence and HOA's, and then force the buying payments to be less than rent by enough to cover 6% realtor fees and 10% depreciation in under 5 years of ownership. Luckily for us, where we're looking, things are starting to pop up in this range (though the current trendy listing price is $309,000, 309, man, it's the new pink). Hopefully this will soon be true for you as well.
"Leroy said...
"And as I have said before, (and as I thought we all agreed), the higher the number the worse the pressure."
No, I don't agree with that. That is my point, and NOVAwatcher seems to have noted this as well."
You realize adam smith is rolling over in his grave? You need a lag to account for stickiness, and you need a decent sample size.
For example, in 2007, the average MOI for the entire year (i.e. all 12 months averaged together) by county is as follows:
Arl - 4.33
Alex - 5.27
Ffx - 7.27
Lou - 9.21
PWC - 13.85
In 2008, the median declines for the year (average of all 12 months) are likely to be close to as follows:
Arl -6.3%
Alex -7.4%
Ffx -14.6%
Lou -16.8%
PWC -31.9%
Conicidence? Maybe, but it sure seems to work and salvages the basic principles of economics.
"I can make various explanations for why that might be. One of the simplest is that the average would-be seller knows the real estate market is a mess and isn't even TRYING to sell their house, although they would like to."
Then call it a distress monitor then. I agree, very very few non distressed sellers are on the market right now. If anything this is telling us the number of buyers out ther IN RELATION TO the number of distressed sellers in the market.
For example, the more skewed the ratio, I would think the more distressed sellers who fail to find a buyer and go into foreclosure.
I started tracking foreclosure rates last may. I averaged the last 7 months together. Not surprisingly, this is what I saw:
Homes in foreclosure per 1000
Arl - 1 in 1170 homes
Alex - 1 in 984 homes
Fairfax - 1 in 307 homes
Loudoun - 1 in 204 homes
PWC - 1 in 108 homes
Again, conicidence? Maybe, but it fits with alot of what we have been seeing.
Now, this doesnt work perfectly. And it does not work well across political borders (i.e. MD is notoriously slow with foreclosure proceedings, whereas VA is fast). However, across the river, I expect to see a similar relationship between counties at some point next year. Still, in either event, it seems to work, and I for one am unwilling to ditch the principles of supply AND demand to explain what we are seeing.
Otherwise, there is no point in discussing sales, inventory or anything.
"You realize adam smith is rolling over in his grave? "
Of course not...
I am in no way arguing against supply and demand, what I am arguing against is relying on inventory to sales ratios to accurately reflect the two.
If these ratios were following their "normal" behavior Arlington wouldn't be falling at all, and certainly not at the pace it currently is.
"I for one am unwilling to ditch the principles of supply AND demand to explain what we are seeing. "
Again, I don't think anyone here is proposing ditching "supply and demand." What I am saying is that however useful the months of inventory data is in a normal market, it has proven to be highly suspect over the last couple years.
Don't confuse "months of inventory" with "supply and demand."
It is one way of measuring supply and demand certainly, but lately it hasn't been measuring accurately.
"Don't confuse "months of inventory" with "supply and demand."
It is one way of measuring supply and demand certainly, but lately it hasn't been measuring accurately."
Do you know any other way of measuring it?
Maybe we could use days on market (yes manipulated by realtors) but not by geography.
I will tell you now however, DOM will show you the same thing. Lowest DOM areas doing best, highest DOM areas doing worst.
CRT:
What about "Avg Sale Price as a percentage of Avg List Price?" I'm guessing in bubble years (high demand) this number had been > 1 most of the time, and in declining years (low demand) this number has been < 1? Can the few percentage points swing tell us anything we don't know?
Just curious if you look at this at all.
MM: I looked at sold price as percent of asking in three areas: FFX, Arlington, and Loudoun.
From 2001-2005, it hovered around 100%, fluctuating periodically from 98%in the winter to 102% in the summer.
From 2006 onward, selling prices have been around 92% of asking in Fairfax and Loudoun, and 94% in Arlington county.
This is aggregate data from MRIS, and I'm assuming that the average 'list' price is the last list price after any price drops.
"It is one way of measuring supply and demand certainly, but lately it hasn't been measuring accurately."
Do you know any other way of measuring it?"
Nope, that is basically the problem here. I don't think we have access to good data right now.
I can look at the data we have right now and tell you it isn't accurate, that much is obvious, but I don't know of a good source for what we want to know.
MM said...
CRT:
What about "Avg Sale Price as a percentage of Avg List Price?"
It too is manipulated. I see realtors changing list price to sold price to keep that ratio around 10%.
Leroy - I was going to come back with a quip, but frankly I am a bit tired, so heres the deal:
I understand the objection to the 6 months rule - it makes perfect sense to me.
I do not understand you objection to the principle, the higher the number (and the longer it lasts), the worse it will be for an area.
The cynic in me would note that you only started questioning the accuracy of MOI once it started declining close in.
Imagine that a few months from now, a bunch of holdout sellers re appear on the market and Arl & Alex start posting 10-11-12 or more months of inventory, and then you decide it is now again accurate. You could imagine why I might be cinical in this instance.
Or imagine that at that point I come back and say "I see your point Leroy - clearly it isn't accurate, that much is obvious".
Or imagine in a few months Arl & Alex show big declines and then I come back to question median price and offer no real viable alternative for what we should use.
The thing is for the forseeable future - Harriet will continue to post sales over inventory, Cara and I will talk about high end vs low end MOI, Terminator X will talk about the bid ask spread widening/lessening, etc. Feel free to chime in whenever you think the data is once again accurate. In the mean time, why dont we say your objection is so noted and leave it at that.
"I do not understand you objection to the principle, the higher the number (and the longer it lasts), the worse it will be for an area."
I don't have a problem with it in a very broad sense. My issue is that we aren't sure what exactly these numbers mean when looking at these specific areas. The market is obviously not behaving the way the ratios suggest it should be.
"The cynic in me would note that you only started questioning the accuracy of MOI once it started declining close in."
I started questioning the accuracy when it became obvious it wasn't behaving the way it was supposed to.
"Or imagine in a few months Arl & Alex show big declines and then I come back to question median price and offer no real viable alternative for what we should use."
There are problems with median price.
...and you aren't obligated to provide an alternative. Sometimes there just isn't a good answer available.
2 things to bear in mind
the feds just committed to vuild the metro to dulles so tysons and reston will improve,
there is no funding source for the columbia pike trolley
Doing some old reading and just found a really choice Contrarian quote that he missed during the Great Deletion Campaign of 2009:
"contrarian said...
I've been saying for a long time that we were headed into a depression.
When I made that call, others said: "I don't think we're likely to go into a depression anytime soon. I put the chance of that at no more than 15%-- and that's on my bad days."
And, The Anonymous, admits being the optomist's optimist all the while the world's economies are crashing.
We now have analysts saying: "While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere.""
I don't consider myself a "doomer" but rather a realist.
Many people find reality to be an alternate universe. They can't stand hearing the truth when it is presented to them. I prefer reality so I can deal with the facts as they are, not as I may want them to be.
1/16/09 5:59 AM"
Glug, glug, glug, glug, glug...
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