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Saturday, February 28, 2009
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77 comments:
Forbes says that Washington DC is 2nd best housing market.
That slowing rate of decline, also seen in places such as Denver, Washington, D.C., and Boston, helped rank those cities as some of the stronger markets in the country.
I found a chart with historical national home price appreciation. I did not make it so I do not know if it is correct.
It looks to me that it is about 5 percent annually over a 20 year period between 1975 and 1995. This is a national chart, local markets may behave differently.
See the link
http://mysite.verizon.net/vzeqrguz/housingbubble/
The fact that home prices appreciate at a 5 percent annual rate on average nationally does not mean that current home prices in Washington DC would reach that level in 2009, from 1999 pricing on.
As you well know, prices are pretty sticky on the way down. It is more likely that they will remain about the same for the next five years, depending on location.
Home prices in North Arlington, for example, will never reach the pricing point of 5 percent appreciation on a yearly rate since 1999 today. Some houses in that area may go down still but not to that level. The same goes for other highly desirable areas in the region.
You have also to consider the average household income in the area. Average household income in zip code 22207 is $170,000, way above the rest of the region.
Average household income in Georgetown zipcode, for example, is $240,000. So it is obvious why people in those zipcodes can afford higher prices.
I also checked some properties in Springfield given Cara's comments yesterday.
I found some older ramblers for sale at $250-260K. This is pretty much about the lowest priced SFH in Springfield that I found. Most properties are priced higher.
But when I looked a the price history of that particular house, I found it sold for $160,000 in 1999. That puts it right on the mark for a 5 percent appreciation on a yearly rate to $260,000 in 2009. I think that is the bottom for that particular house, unless there are other depressing factors (too many REOs) in the area I am not aware of.
Then again, I think the question is what is the average bottom for houses, not if you could time the maket to get the lowest possible price for any particular house at any particular time. You can probably get lucky and buy something under that price (a foreclosure in less desirable markets perhaps) but so can a few people in the stock market get lucky and time the bottom and gain a nice appreciation immediately after that.
As far as the Forbes article quoted by @j@, I also believe we are very close to the bottom in DC, some areas will experience lower prices, others regions have already reached bottom, for the reasons explained above.
@J@: I never believe any of Forbes lists.
"Quick, the deadline for next month's issue is looming. I know, let's make a 'best-of' list!"
I like how their #1 and #2 markets are NY and DC. My guess is that places like Champaign Illinois and Oklahoma CIty should be ranked far higher, but then again, that would require more than downloading the Case-Shiller spreadsheet (which only contains 20 cities) and actually doing some real investigative reporting.
5%??? 5%?!?!?!?
But the kind lady on the National Association of Realtors (tm) commercial says that home prices double every 10 years. But 5% implies that houses double every 14+ years. That would imply that NAR is off by a factor of 40%! Are you saying that the National Association of Realtors are liers?
;-)
P.S. I think that is OFHEO data
dc2, you may want to look at the Housing Opportunity Index historical data. Unfortunately, it only goes back to 1997, but if you graph the data you'll see that a rational median house price is about 2x median income.
CR just posted an excerpt from Berkshire Hathaway's report in which it claims the loans made 1997-2000 were of dubious quality, implying that prices were already being pushed up during this time.
If houses appreciate by virtue of existing, then why aren't the oldest farmhouses commanding the highest prices? Inflation only means something when comparing new houses, because the price of materials changes. Old houses really should only appreciate if they're updated & maintained.
All my amateur opinions, of course, but I'm sticking to them.
"If houses appreciate by virtue of existing, then why aren't the oldest farmhouses commanding the highest prices?"
Exactly...
It is amazing how many people don't stop to ask themselves such a simple question when they are told housing "appreciates" over time.
Housing tracks incomes, and thus over the last 60 years or so has generally beaten inflation slightly.
Houses appreciate by virture of exisiting because the cost of materials, labor, and land appreciate by virtue of existing over time.
Yes, a poorly maintained house will not reach the same appreciation than a well maintained houes.
Ralph,
"dc2, you may want to look at the Housing Opportunity Index historical data. Unfortunately, it only goes back to 1997, but if you graph the data you'll see that a rational median house price is about 2x median income."
Are you looking at the Washington DC area or national numbers?
Also, as I said before prices are sticky on the way down. Incomes will continue to go up, and inflation will eat the difference.
"You have also to consider the average household income in the area. Average household income in zip code 22207 is $170,000, way above the rest of the region.
Average household income in Georgetown zipcode, for example, is $240,000. So it is obvious why people in those zipcodes can afford higher prices."
They may be able to afford higher prices, but that doesn't mean they can afford the current prices.
The DC area in general has very high incomes, at some point recently Fairfax county had the highest median income in the country. (Loudon was high on the list as well, along with other counties in this region.)
Some people tried to make the argument that "Fairfax county is rich, therefor these housing prices aren't excessive."
The problem is that Fairfax had a high median income before the bubble. Its high incomes were already priced into the market if you will.
Now, the market is collapsing, but Fairfax still has an extremely high median income.
Whether incomes are high or low, it is a problem when housing prices move ahead of income growth.
In the long run Arlington, etc, will return to something similar to the long-term trend lines. It will likely be a much slower process because of the absence of large numbers of foreclosures, but eventually it will get there.
"Houses appreciate by virture of exisiting because the cost of materials, labor, and land appreciate by virtue of existing over time."
No they don't.
In many cases costs actually decrease over time because of improved technologies and techniques.
Materials and land don't magically appreciate simply by existing.
Leroy,
Back your assertions with numbers not just generalities.
"Also, as I said before prices are sticky on the way down. Incomes will continue to go up, and inflation will eat the difference."
In a normal correction this is how things play out, in a serious correction nominal dollar price declines are still seen. (and in fact have been seen in most of the region.)
Leroy,
You must be kidding. Whom else in this blog believes land, labor, and cost of materials does not appreciate over time by virtue of exisiting?
Have you forgotten about inflation?
Are prices for land in the 1900s the same as they are today, hey in the 1950s?
In short period of times some costs may go down, but long term, everything goes up.
Correction for fast typing,
Whom else believes land, labor, and cost of materials "do" not appreciate over time by virtue of exisiting?
"Back your assertions with numbers not just generalities."
I am talking about fundamental economics here.
Land, houses, bricks, wires, piping, lumber, tiles, etc do not simply appreciate by existing.
If that were true, old houses would cost more than new houses.
"You must be kidding. Whom else in this blog believes land, labor, and cost of materials does not appreciate over time by virtue of exisiting?
Have you forgotten about inflation?
Are prices for land in the 1900s the same as they are today, hey in the 1950s?
In short period of times some costs may go down, but long term, everything goes up."
Ah, now I see the issue.
I am speaking about real dollar values here, not nominal dollars.
Buying a few pallets of bricks and locking them in your garage for 20 years isn't going to make you any money in real dollar terms.
Yes, you might be able to re-sell the bricks for "more" than you bought them for, but in real dollars the best you can hope for is to break even. (The price of those bricks relative to everything else will be similar to what it was when you locked them in your garage.)
Leroy,
The cost of a brick 30 years ago is not the same cost of a brick today.
What are you talking about?
A old house has an inherent value that continues appreciating over time. Yes the newer home will cost more than the older home, but the older home also appreciates over time.
Here's Berkshire Hathaway's annual report, which is always a good read (http://www.berkshirehathaway.com/2008ar/2008ar.pdf)
"The cost of a brick 30 years ago is not the same cost of a brick today.
What are you talking about?"
When I say "real dollars," I am talking about inflation adjusted dollars.
Nominal dollars are not inflation adjusted.
http://en.wikipedia.org/wiki/Real_dollar
The value of bricks does not increase with age, what is happening is the dollar is actually losing value. This is a very important distinction.
Does anyone care how old a brick is? Would you pay more for a 10 year old brick than a brand new brick?
Of course not, they are both bricks and they will both work equally well, thus their values are the same.
"A old house has an inherent value that continues appreciating over time. Yes the newer home will cost more than the older home, but the older home also appreciates over time."
No, what you are observing is your currency weakening over time, not appreciation in the house or other asset in question.
My current house has far older houses on both sides of it, older by hundreds of years. (literally)
The older houses have not become more valuable simply by virtue of being old. If I were to take these older houses apart and recover their extremely old bricks... these old bricks would be no more valuable than new bricks.
Inflation is the weakening of a currency, not the appreciation of assets. There is a difference.
Ralph,
"CR just posted an excerpt from Berkshire Hathaway's report in which it claims the loans made 1997-2000 were of dubious quality, implying that prices were already being pushed up during this time."
This is interesting. However if you continue plotting the appreciation from the historical graph I posted before from 1975 to 1999, you will realize that 1999 was still on the trend line of a 5% yearly appreciation.
I believe 1999 prices were normal, not inflated, for the area.
I'll post the HOI-based graph later. 1999 prices were a bit above the 2x income line, but not as obscenely as 2002-now. I may agree that 1997 prices weren't inflated, but I'm not so sure about 1999 (if they were then they weren't grossly inflated).
I used CPI-U as the measure for inflation. How do you come by 5%?
Houses is only worth what people can afford to pay (a year ago they were worth what people were willing to pay). If inflation takes off, as it's likely to do with our Federal Reserve policies, housing will depreciate even more, because most of our money will be going to the essentials.
Ralph,
5 percent is the trend line from the link posted before for national home prices.
In 1975, house prices were about $38,000. If you plot it with a 5 percent appreciation yearly, you realize that in 1995 prices should have been $100,000, the same as the graph shows, and $122,000 in 1999, the same as the graph.
Graph posted again at http://mysite.verizon.net/vzeqrguz/housingbubble/
Granted this is a national trend, not a Washington DC trend. The trend may vary also by locality within the Washington DC area.
Also,
Short-term anything can happen to home prices, but long-term the trend appears to be 5 percent.
great discussion folks.
take a break, and check out this Falls Church "fixer-upper" priced at $214K.
my co-worker went see it and liked it and is thinking hard about it.
dc2: materials are cheaper than they were 3 years ago -- in some cases they are half of what they were. Heck, they are closing so many mills that they are having a sawdust shortage (the sawdust is collected and used for pencils).
dc2: as for materials, entropy and other forces causes them to decay over time. Even then, some of the older materials are inferior to new materials. Who wants draft windows from 1975 when you can have new triple-pane super-duper coated windows from 2009. It's like computers: new material can make old material obsolete.
As for labor: less and less labor is going into manufacturing a house. Nail guns have replaced hammers. Not to mention that the labor cost of employing illegal Mexicans for next to nothing.
ralph: Those loans (for Clayton Homes) are for manufactured homes (e.g. "double-wides"), not your ordinary SFH, condo, or townhouse.
dc2, a lot of what is attributed to appreciation of the value of a house itself is actually a reflection of greater demand for the land on which the house sits (or on which a property can be developed).
>
I believe 1999 prices were normal, not inflated, for the area.<
Prices were a bargain in this area in 1999. You can chart it anyway you want, but when I moved to DC in 1998 from Connecticut I couldn't believe how inexpensive housing was -- even in some prime areas.
I spent a lot of time in 1999 looking in Foggy Bottom, in particular, and saw one bedroom condos in prime buildings on great streets for 60K and townhouses a block from the Watergate for $250K or less ...
Over at the Waterfront, condos were so cheap you could put them (if you could) on a credit card.
I honestly believed some of the initial price jumps in 2002 were triggered by a recognition that some of the housing in this area was a great deal for its location. I realize this is hearsay to argue that point, but I honest to God believe it.
MM, I tried to look but your link wasn't working.
NoVAWatcher,
The report explains why Clayton Homes has not experienced the default problems of others. He was contrasting Clayton to other the bad lending others' were performing.
Anyway, I promised to print the graph, but ran into some difficulties in the few minutes I had today. May try again later or tomorrow.
Check out this beauty:
House
You can have your own shell of a house in a shaky neighborhood for only $575,000! Sign me up!
Jeff: Damn, that's one ugly house. I swear, one of the side-effects of this bubble is the proliferation of ridiculous ugly houses. It makes "brick front, plastic siding on the remaining 3 sides" look classy.
Here's another look at the long-term housing appreciation, based on data compiled by Robert Shiller:
http://www.nakedcapitalism.com/2009/02/rise-and-fall-of-us-mortgage-and-credit.html
His conclusion on the national long-term appreciation rate, adjusted for inflation: 0.4%.
What's more interesting is the difference in "historical trends" even over long periods. Look at this chart based on the same data:
http://www.safehaven.com/article-6500.htm
In the years from about 1895 to 1942, housing depreciates over 40%. In the next 47 years it gains it all back.
Obviously, this is an extreme example, but it illustrates the problem of trying to make decisions based on long-term appreciation averages: There is too much variation from period to period to make them helpful in making predictions. If you wanted to predict appreciation over the next 20 years using historical data you could use 0.4%, and predict 8.3%. But based on the historical data, you're probably going to be very wrong. Some 20 year periods were much higher, some much lower. Very few would be close to 8%. So by making an estimate based purely on the historic average, even over a long period (20 years), you have a very good chance of being be way too high or way too low and a low chance of being right.
In theory, if this historical average is right, in the long run your errors will average out, but I don't expect to be around for enough 20-year periods for that information to be helpful.
To muddy the water even further, you have to ask if this historical average means anything for the future, i.e., are we trying to impose a linear trend on a the data that doesn't reflect any continuing fundamental economic reality. What if each era has its own economic fundamentals which determine housing price gains and losses, so that you have an ever-changing trend. You can calculate the appreciation for all previous eras combined, but it really doesn't help predict the next one with any precision and accuracy. Or the next two. Or the next three. Or the next N.
And I won't even get into regional variations.
Meshell,
i got the error page the first time too but a second click onward worked fine. could be the site.
try again here
One thing I am still struggling to understand is how these prices can possibly be sustained, even in these higher end neighborhoods.
My husband and I are 30ish. We have excellent credit and are strong savers. We have a solid income ($150k+) and also have realistic expectations about which neighborhoods we can expect to buy a SFH in (not Arlington, and that's fine). The strange part to me is that if you look at these numbers a couple like us maxes out their buying potential at around $550k. (multiple of 3xs income and $100K down) Most, yes most, of the nice neighborhoods in Fairfax county (north of 66 is our preference for commutes) are still way out of our price range.
I am looking for a 4bd, two car gr, large lot in Reston, Vienna, Oakton area that is actually on a nice street and I can plan to be in for 10-20 years. It doesn't need to be updated. We are willing to put in some work. But I scan my target ZIPs on franklymls.com daily and see house after house listed above $650k that are basically what I am looking for. What I don't understand is, if I am not able to be the buyer of this kind of house, who is the buyer? Couples looking for 4bd+ homes are on the younger side, starting families, and don't have ridiculous equity from the last five years of nonesense to throw into their next house. The crazy lending that got us into this mess is OVER. Buyers will have to return to more basic math to figure out what they can actually afford and therefore I think sellers need to start to recognize this. Maybe I am being naive, but I am surprised if their are a lot of couple doing significantly better than us. In fact I think we are probably doing better than most of our counterparts, so what gives? Who are these buyers?
The bottom line is no one wants to take the hit. Sellers are not willing to admit they waited too long to sell. They missed the peak. Stop beating yourself up, timing markets is impossible. Experts spend their entire lives trying to make moves at exactly the right points and you can only ever see those peaks and valleys in retrospect. Some were very smart, but most who got out two years ago were lucky. But we in a new place now and overall it's a good thing. I just wish everyone would hurry up and join me in our current reality. Otherwise we are just gonna be at a stalemate for a very long time.
Gen Y Dink,
Welcome to a community of mostly like-minded people!
In the areas and ranges where you are looking, are the houses being snapped up or are they sitting unsold for long periods at those prices? That will tell you a lot about whether there actually are a lot of buyers out there with greater capacity to pay (or willingness to find and take on very risky loans). And if it's the latter, that's good news, because eventually those developers and sellers will have to face reality if they want to sell.
Gen Y Dink: My situation is almost exactly the same as you. My wife and I both thought we would own a house by the time we were 30, but it's not looking that way right now. We're likely to move out of our apartment and rent a townhouse for a couple of years when our lease is up because houses are still out of reach in the Oakton, Vienna, Tysons area. 150k+, no debt, and still can't afford anything. Prices have to come down.
Gen Y Dink,
"I am looking for a 4bd, two car gr, large lot in Reston, Vienna, Oakton area that is actually on a nice street and I can plan to be in for 10-20 years."
I understand that we all have expectations to buy our a big house in a nice area sooner than later. The reality is that for the past 20 years (anecdotal information) most people who purchased their first home in their early 30s, did not buy a 4 bedroom SFH in Oakton on a large lot, but often a Townhome or a rambler in smaller lots. Or, they bought a bigger SFH in cheaper areas such as Princes' George County.
With time and savings many were able to move up to bigger homes. So maybe we all need to revisit our expectations for this area. It has not been easy for the 30-something year old crowd to buy a big house as a first home in Fairfax County in the past 20 years. Why should it be any easier now?
Those who were afraid of being priced out and bought in 2006 in PWC are now underwater. What was the rush of buying a house when one could have rented for a little longer before truly beign able to afford our first home. This would have also helped keep prices in check.
A lot of people rent for 10 to 14 years after college before they can afford to buy their first home in this area. We all need to revisit our expectations, as the country also takes a deep breath about what we really need or can afford vs. what we want.
I know this message may not be popular but that has been the history. The future may be different. So one should count our blessings if we are able to buy a bigger home today than those who came before (20 years past).
Gen Y Dink, I can understand your frustration. But you might want to adopt the housing-ladder approach. I did and it worked out well for me. All of my property purchases have been in N. Arlington; all have been within walking distance of Metrorail.
I started out buying a two-bedroom condo in the Court House area. I held on to it for 14 years or so and then sold it. Eight years after I bought it, I had saved enough to buy a townhouse. I moved into the townhouse and rented the condo.
Six years after I bought the townhouse, I sold the condo and used the proceeds as the down payment on a SFH within walking distance of Ballston. That's where we live now.
I could never have afforded a SFH in N. Arlington when I was first starting to buy RE. But I was able to work up to it.
Lots of folks on this blog will scoff at the housing-ladder approach, but it worked well for me.
Tom,
I guess we were both thinking along the same lines. Exactly my point expressed in previous message. Thanks.
Gen Y Dink: I'm with you, and I'm looking in the same area. There are a couple of houses that have come on the market the past 3 months or so, and my impression is that they priced themselves based on current listing prices. That's actually key, as the houses that were currently being listed had sat for a while. The ones that actually sold last summer and fall sold for a lot less.
Even more importantly, the ones that sold not only were cheaper, but nicer. So the end result is that we have one house listed for $750k with an unfinished basement (dropped down to ~$700k). The ones that sold not only had a finished basement (they might have also been a hair larger), but they sold in the $650-$675k range.
Sorry, but at this time I'm just going to sit and wait.
And, DC2 and Tom: I'm closer to 40, have owned 3 homes in the past, have a higher income and a higher downpayment, and I still think GenYDink is being completely reasonable in his/her expectations. What you are proposing is the housing ladder. That's broken now, and GenYDink would be foolish to try that method to build a downpayment. Heck, in 2002, someone like GenYDink (inflation adjusted downwards) could have bought a 4br sfh in Oakton/Vienna, but speculators and fools drove up prices faster than increases in income or population.
I think GenYDink has two options: (1) continue saving, waiting for the market to come to him/her. It aint going up, that's for sure, so the worse case scenario would be stagnant prices. The second option (2) is to look elsewhere nearby. There are some nice neighborhoods in the Oak Hill / Herndon/ Franklin Farms area between Lawyer's road and Fairfax County Parkway. The downside is that the lots are smaller, so it feel more subdivision-y.
There's also this place:
http://franklymls.com/FX6943324
It's in a nice neighborhood, and and a nicely updated version of that model recently sold for $750k (well, 18 months ago). The downside is that that model is handicapped by the 2nd floor, which can be a bit small.
housing ladder is perfectly fine approach in the normal market. does not work when the prices are bubbly though. you buy something, you just lose your downpayment 5 years later because of price drop and transaction costs. so you will go down the ladder this way.
also have to keep in mind that the depending on your background and income you can start on this ladder in very different places. if you have about 150k+ income and 100k in downpayment when you start i expect that you should be able to get a sizable sfh in an attractive area. may be not in arlington, but in oakton it should be feasible. if it is not feasible you have two options -- take a plunge and buy something smaller or wait. i would rent a place and wait, no problem at all.
Fairfax station homeowners are still in 2005 mentality, see the difference between the assessed value and list price.
http://franklymls.com/FX6786153
DC2: yes, we're on the same wavelength.
As for the housing-ladder being "broken:" that's definitely not the case, particularly if you're just starting the ladder now. This is a perfect time to get started. I know the gloom-and-doomers here will insist that RE prices regionwide are going to fall a lot more, but the Forbes article at the top of this page is just one of many recently that have pointed to a slowing rate of decline in the DC area. We're just about at the bottom in the hardest-hit areas.
In my neck of the woods in 22207, whatever modest decline there may have been been seems to have halted altogether. As regular readers know, I've been posting my observations of recent open houses I've attended in the area in and around my neighborhood. The pent-up demand is palpable. Today I went to a nice colonial at 4324 N. 17th St. Asking price 849K. I could hardly walk through the place due to so many people.
The RE agent, an old friend, told me a house he sold two blocks away last month had four contracts put on it, two above the asking price. Another cape cod he sold two months ago four blocks away also went above asking price. He noted that houses in this neighborhood can almost always get their asking price if they show well and don't need any repairs.
Sure, I understand sellers are facing some severe price realities in various parts of the DC area. But it's not uniform; there are a number of neighborhoods where prices remain high and there's plenty of demand willing to pay those prices. I'd say that walking distance to Metrorail is the single most critical factor for that particular demand, as the DC area's continuing traffic nightmare compels buyers to pay a premium to escape it.
...and what does that have to do with Oakton/Vienna/Reston?
Gen Y DINK,
We're a Gen Y one-income-seven-kids family, but we also have excellent credit, relatives willing to help with a downpayment, and a well-paying government position to work with, and when we look at the kind of houses on some land that would fit our family in PWC, we ask ourselves: who are the buyers? How many of them can there possibly be, that sellers think they can command $600K, $700K? Especially out here. Frustrating.
Did y'all see the Washington Post magazine today? Special "real estate" edition.
Our situation also matches Gen Y Dink almost exactly. I went to this open house 2-3 weeks ago:
http://franklymls.com/AR6981119
It went under contract almost immediately at $488,000. It's a 1200 sq ft single-level with a decent back yard in a decent neighborhood. The inside was nice but nothing special. To me that house isn't worth that price and it sold quickly (or at least went under contract). I see a fair amount of people at open houses (I've never been to a *packed* one in Arlington) and it honestly does look like houses in decent Arlington areas are selling right now without much of a decline from bubble prices.
I wouldn't be surprised if the declines do finally hit this area but I don't think it's a certainty.
Which brings up the third option for people in our situation...leaving the D.C. area. We've already talked about it and are going on some exploratory trips this spring. The only thing that really ties us to this area is employment but our backgrounds should be fairly easy to transplant.
I don't particularly like the D.C. suburbs outside of the beltway and unless I can get a great house out there for what I consider a reasonable price I prefer to just relocate to a different metro area. It certainly depends on what you're looking for in a house but for me there are no good values in this area right now. I look at the quality of houses I can get in other areas for half the price I'd pay here and I can't reconcile it with what this area offers.
We'll wait a bit longer to see what happens in Arlington but my internal voice tells me we'll be looking at another metro area at this time next year.
Jeff: Life is to short to be making $150k and living in crap like that.
@Jeff B:
Moving was also our #1 option. We've been looking at the Raleigh/Durham area of NC since they have the technology and health care jobs that my wife and I need. Similar houses are literally half the cost there as here. If it weren't for this economy our plan was to move this year. Now we're sticking around here with our current, stable jobs. Our ultimate choice may become a race between which happens first - prices returning to sanity here or the economy recovering everywhere else.
As for Tom and his property ladder - the whole point is that a 150k+ couple with no debt should be able to enter that ladder at a rung considerably higher than a 2 bedroom condo. It was possible before the boom and will be possible again after the bust has run its course. We want to start a family, not live in Arlington with all the recent college grads. Been there, done that already.
"I understand that we all have expectations to buy our a big house in a nice area sooner than later. The reality is that for the past 20 years (anecdotal information) most people who purchased their first home in their early 30s, did not buy a 4 bedroom SFH in Oakton on a large lot, but often a Townhome or a rambler in smaller lots."
I apologize for sounding egotistical, but my husband and I are not "most people". We have been uber responsible and have achieved success as fairly young people and seriously saved. We lived in San Diego during the height of this craziness and resisted buying a home with an exotic loan that we most certainly could have gotten, because our common sense told us it was not the right thing to do. We could not afford a $500k home on a $85k salary at that time, although we knew plently of people who did just that. So we rented. And then we moved.
To Jeff B., we moved away from SoCal with the same idea. Unfortunately prices in metro areas of most major cities have gotten out of control. Also in the end job opportunities dictating where we moved and once again we rented. We did finally succumb to the "American Desire" (play on American Dream) and bought a 2/2.5 condo in 2007 just so we could say, "we own". (I say this sarcastically now.) We bought what we could afford and luckily got a good deal and have really fixed it up as weekend warriors. We will keep the condo as a rental, but will barely break even on a monthly basis. So the "property ladder" has not exactly been a good option since we entered adulthood. Unfortunately for people my age, who are "overachievers" we have just had really bad timing. We are too young to have taken any advantage of this ridiculous appreciation, (which, by the way, is not normal and consistent over any 20 year period) and getting too old to still feel stuck in a condo or crappy overpriced townhouse. Their is something really wrong in this country when couples like us can't afford a decent house in the suburbs. And don't let me forget those people in SoCal who we are actually gonna have to help bail out so they can stay in their nice house while I start my family in a condo 16 miles away from D.C..
I am still trying to answer my first question though, who are these $650k+ buyers of 4bd suburban houses if not 30ish two income couples? When I look at my 50 something co-workers who could afford that kind of house, they already own one. So who on earth are these buyers?
dc2,
There are 37 listings for TH and SFH's in the Franconia Springfiled region under 250k, many many of them under contract or contingency, and about 1/3 not:
Frankly search for active non-condo's in the three zips closest to FS metro under 250k
These are indeed around 4-5% yearly appreciation since the late 90's, which is not to say we've reached the bottom yet.
Instead of subprime, which doesn't necessarily appear to be the case, I would say this area had more "weak hands". This includes subprime, Alt-A, option arms, as well as a large number of recent transactions at unbearable prices. The major difference between this area and say N. Arlington, dynamically, is the average home-ownership time during recent years. Here? It was under 3 years!!!! That's a lot of stressed owners, no matter what their style of financing or FICO scores. Why did they buy here? Because this is a mover-upper-neighborhood with good transportation and good schools, but still borderline affordable, which was no longer the case in Arlington/McClean etc. Which is why people will keep buying here.
On the other hand, yes, this area is close to its bottom, I think, given the crazy number of contracts in the past two months and the finally marginally favorable own versus rent comparison. Whether these will be sufficient given the momentum, and how much further things will fall before its through, is harder to say.
Basically, I think that 4-5% yearly is a best case scenario (for sellers), whereas you think it's a worst case one.
Cara,
Thanks for the update. So it appears as you said that Townhomes and smaller SFH reached bottom in Springfield, VA.
I understand there is a lot of interest because of the price range and since you can probably rent those properties for a profit (at least cover mortgage and expenses). It must also be attracting investors. For that reason, I do not think prices will get any lower than that, and they may possibly appreciate in value sooner than later.
Gen Y Dink,
There are a few properties with your specifications in Oakton and Reston. In Oakton there are a couple of Split Foyers wih garages in large lots under 500K. I also found this listing in Reston for an older colonial with your specifications, http://homes.longandfoster.com/Real-Estate/PropertyDetails.aspx?MlsCompanyID=2&MlsNumber=FX6934976&Add=12328-COLERAINE-CT,Reston,VA-20191
So it is possible to find what you are looking for under $500K. There are just not too many listings.
Good luck.
"Their is something really wrong in this country when couples like us can't afford a decent house in the suburbs."
It is worse in many other countries.
Gen Y Dink,
Regarding your comment about the property ladder not working for you because you bought in 2007, no one expects a home to appreciate in less than two years and be able to move up to the next level. That is not reasonable, even if you bought it at a good price. You have to wait minimum 5 years.
So again, count yourself lucky when you buy the home you are looking for. A lot of people making as much money as you are in 1999 (revised for that year) with savings and good credit, could not afford it. And 1999, was a real bottom back then.
dc2,
in 1999 you could buy a townhome in dc for a song. same was true for sfh in arlington.
there were plenty of townhomes in dc for $250k or less in nice nabes.
it was not a problem to buy a sfh in arlington for under 250k.
revised for inflation 150k in income comes to 100k at least, so you would easily buy for 2.5xincome in 1999. the problem is that prices went up about 3 times since 1999, while incomes only went up 1.5 times at most.
Konstantin, you might be interested in this chart:
http://www.zillow.com/local-info/VA-Arlington-home-value/
David, that's not what the article says.
It says:
"But homeowners in the highest marginal tax bracket, those earning more than $357,700 a year, get back 35 cents on their taxes for every dollar they spend on mortgage interest. Under the Obama plan, that benefit would be reduced by 20% to 28 cents on the dollar."
The rationale for the proposal is described in the article.
I suspect that this is just an initial negotiating position, and by the time the lobbyists and Congress have chewed on the proposal a bit, these numbers will be closer to the current ones.
ace,
i think that this chart supports exactly what i said, right?
Tired bubble watcher-
My husband and I are both local (born and raised!) and we have a sad, sad social life because almost all of our friends (and most of our same-ish age cousins and ALL of our siblings) have moved to cheaper places. So your brain drain theory is legit, IMO.
Gen Y-I am 32 and I thought I was generation X ?!? Anyway, I agree with you on who is supposed to be buying those houses? We would love to have a family home (and really need another bedroom--our little guy is in our room for now) but rent and the idea of spending money to move into another rental is so unappealing. Still waiting for prices to align with what we want to buy for what we want to pay.
dc2,
Thanks for your tips. I have looked at the properties you suggested. The Reston one is not really in a very good neighborhood. (Believe it or not, Reston has some sketchy areas.) And your right there are a few splits on weird lots that are in my price range, but when I'm spending this much $ and planning to stay there for a long time there are certain things I would like to have a little preference on. And I'm not gonna let people make me feel bad about that. That's part of valuation of real estate, certain properties have unchangeable flaws that I'm not willing to except as a buyer.
As for my experience on the property ladder, OH Pleeaassse! I did not expect my condo to gain $100k in 2 years to step up, I bought a unit I could afford to pay for and save money every month at the same time. My SIZEABLE down payment grew by not eating out for years and working like crazy to move up and get promoted while my husband worked 50 hours a week, while going back to school at night. I bought it planning to keep it as a rental. It's close to a future metro site in Reston.
My preparation to buy has nothing to do with a property ladder, but the point is, in this market since I've been out of college real estate has gone NUTS! This is not a case of unrealistic expectations on my side. Quite the opposite, this is a case of ridiculous expectations of sellers who paid very reasonable prices 15-20 years ago who can't seem to let go of the idea that their net worth exceed $1 million bucks just because. They didn't earn this equity, they just bought a house to raise their family in and around 1997 things started going crazy and by 2005 prices had completely left affordability reality and it really sucks for those of us who are trying to be responsible and just want the same thing as the sellers have had.
As for things being worse in other countries, really? I apologize I'm still suffering from that "American Dream" thing. No worries it's starting to wear off.
Tom and dc2,
if possible, please share your income levels and the prices of the first properties you owned (i assume before 2002?). i'm only asking for ballpark #s. tks!
MM, my first condo cost 107k in 1987. My townhouse cost 187k in 1995. My SFH cost c.425k in 2001.
Gen Y,
-- Ideally, you'd buy a place that you can afford on one salary, in case one of you is laid off.
-- With that said, what you're doing is sensible. You're saving your money and you're refusing to rush. Well done.
-- Prices in the "nice areas" have nowhere to go but down. Check the number of sales in the zips you like and you'll likely see that they're worse than 1998 levels. This is because buyers like you are demanding better prices, while sellers who have the wherewithal to hold out for the "magic buyer" or a return of peak pricing will do so. [Research the term "price anchoring" for more detail.] And marginal buyers will snap up places where sellers ask 5% below market. All this makes for a slow but certain decline.
-- I have no problem with the notion of laddering. I do, however, have the problem with the argument advanced by some that certain "nice" areas will be immune from the correction in housing prices. The cause of the housing bubble (easy money) caused prices to increase everywhere. Likewise, the end of easy money will cause prices to fall everywhere. And then there's soon-to-be 10% unemployment.
tiredbubblewatcher: I had a good friend with a PhD that was ready to move out here. Personally and selfishly, I really wanted him to come out here, but I secretly thought he was nuts to consider it. He had all but signed a contract, and then he and the wife flew out to look at houses. After looking at houses, he backed out of his contract.
He couldn't justify moving out here when a house that was equivalent to his 2-year-old house back home would have cost him 4x as much in Fairfax. WIthout the bubble, the price difference would have been smaller -- maybe only twice as much.
Other than a bit of signing bonus, the salary out here would have been the same as back in the midwest. And frankly, for his field, the support/infrastructure and intellectual culture was better back in his midwest college town compared to DC.
Oh, and like tiredbubblewatcher, I told my friend to wait, as DC prices would eventually return to normal. But he couldn't justify renting a 3br townhouse for hundreds more than his mortgage on his newish 4br SFH back home.
Konstantin, it generally does (note huge gap between Arl and the national average that developed during the time period you noted, though the Arl peak didn't quite get to 3 times 1999 Arl, but it got close).
But did you also see the decline since peak? Who knows whether this trend will continue?
So much for the 'nice' areas and 'high-end' being immune. I found these two properties by searching WaPo's "Notice of trustees' sales"
(#1)
http://www.zillow.com/homes/map/2504-COULTER,-oakton-va_rb/
According to WaPo, the repossession is for the original principal amount of $1,980,000. Based on the tax records, that means they only put 11% down in 2006 when they paid $2,215,565.
(#2)
http://www.zillow.com/homedetails/3012-Fox-Mill-Rd-Oakton-VA-22124/51765734_zpid/
At least these guys put 25% down when they bought this place for $1.1mil in 2005.
These aren't isolated. People have posted several of these in McLean. I really don't follow that area -- more the Oak Hill, Oakton, Vienna area. But here are some more foreclosures, both bought in 2005-2006 for roughly 1 million $:
http://franklymls.com/FX6740441
http://franklymls.com/FX6945094
I'm not sure who's buying the 600-700k houses around here either but I don't think it's people that are that much better off than my wife and I. We could probably squeak out a 600k house but we choose not to. The value just isn't there.
I've come to realize that others don't really look at money the same way I do. I think a lot of people don't think about what 600k really represents. They have a vision of a house and neighborhood that they like and they find a house to buy in that neighborhood without really thinking about it all that much. That's what the realtor is for, right? They see what houses are selling for and if the bank tells them they can get a loan they go ahead and buy it. It's hard for me to think about such a significant decision from these different points of view but I'm slowly getting there. I don't even know if it's necessarily bad, I just know that I can never treat my own decision in that way. As long as people treat buying a house like buying a big screen TV I think we'll have a certain degree of price support in Arlington. Outside of blogs like this I don't run into many people that think Arlington prices are still absurd.
"I hear you. I'm in a similar situation than you (but probably a few years younger). I've often said this area could have a brain drain if this is not fixed (brain drain of people in their late 20s to mid 30s from our generation who finished college or grad school too late to buy pre-boom.)"
Add me to the list of Gen-Y professionals who just happened to enter the workforce at a particularly bad time.
My wife and I both had good jobs and made good money in the DC area, but it just didn't seem to matter. We could actually afford a house inside the beltway, but were simply not willing to pay the absurd asking prices people were asking.(especially knowing it was a bubble)
Run down 1950s ramblers for $500-700k? We rented in a neighborhood of such houses and realized most of our neighbors who had bought 5 years before us were squarely middle-class, plumbers, teachers, etc
These were people that couldn't dream of buying a home in their own neighborhood at the time we were living there, but had done so easily only a few years before.
Fortunately we got lucky and I was able to take a job overseas. Eventually we still plan to return to the DC area for professional and family reasons, but we are glad to be out of there for the time being.
Leroy sums it up well: my neighbor was a roofer. Real good guy, and he patched my roof when part of it blew off while I was on vacation. But in 2005 there was no way he could have bought in the same neighborhood (bought in 2000). Heck, I'm not so sure he could have bought in the same neighborhood in 2002, as prices had increased by 1/3rd since 2000. By 2005, prices had gone up 2.5x since he purchased in 2000.
Late to the ballgame, but my 2cents,
I'm really starting to just say screw the whole homedebtor theory anyways.
Let's think about this, really think about it. You take out a 30 year mortgage, a 30 year mortgage. If I bought now, I'd pay it off just before I hit 60!
d2c and tom explain about the housing ladder . . . the housing ladder is only possible with debt and inflation. Over 30 years you will pay approximately twice the value of a home w/ interest. For a 500k place you will pay 1m over 30 years.
The only things that makes it even remotely possible is more debt and inflation (in the form of higher incomes).
Consider that most people on the "housing ladder" just take their old home, sell it for more, buy a new home which costs way more and roll the difference into a new loan, sometimes a 15 year loan, but many do not. They spend their entire lives mired in debt! 30 frakking years just have a frakking place to live!
I'm sorry, I'm getting off that train. No thank you. I have learned relatively young in life that debt should be used to produce something not consume something.
Before GDI and even for a good while after most people put down at least 50%, if they got a loan it was no more than a 5 year loan. Sure homeownership wasn't as high, but it was still up there >50%. Think about that you could own your home free an clear after 5 years. Most families had more kids (5-6) and survived on 1 income. I'm not saying life was peaches and roses, b/c it was definitely rougher than we have it, but not to be so far mired in debt . . . wow. When you are in debt you are beholden to and a slave to your creditors, not being in debt provides freedom.
gte
Here, Here!!! (I never know which way that's spelled).
If this all plays out the way I think it will, with another 7-10 year flat spell trolling along the bottom, you'll have your wish. If you're earning interest rather than paying it, it only takes 7-10 years to save up enough to buy a house in cash, if the prices aren't inflating you out of it.
The whole 30 year loan thing is a bill of goods. 15 year all the way! And start paying it off even faster as you get raises to own in 10 years. Too bad there are those pesky property taxes and possibly HOA fees. But, you do what you can.
The problem is that since others have the 30 year option, (and recently even crazier stuff) they inflate the house prices beyond what we're willing to pay in cash. So we have to pay in prices that reflect everyone else's leverage. Grrrr. Again, you do what you can with the cards you're given.
I wonder how much this current bust will change the public's perception of debt.
It is probably too optimistic to think it will have anything like a similar effect to what the great depression did for the baby-boomers' parents.
I have toyed with the idea of buying a nice house out in PWC for cash, and never having a mortgage at all, but that plan just doesn't make that much sense for me. I expect to end up using a mortgage to purchase inside the beltway, but even so it will be with a large down-payment and hopefully a 15 year mortgage.
I just hope lending requirements and interest rates rise. There is no way to win when you are bidding against people borrowing more money than they have ever seen in their lives without giving a thought to what that means over the long-term.
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