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Tuesday, June 2, 2009
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48 comments:
I pose a question to the board. Ignoring supply and demand fundamentals, which will move prices in the short term( but will be corrected over time) , do people here thinking housing is overvalued compared to historical norms.
I am starting to think we are approaching standard valuations. I was looking at http://www.ritholtz.com/blog/wp-content/uploads/2009/02/avg-house-avg-income.png
which says that historically household median income to home prices is 2.7X. If you extend the chart through March it falls from 3.6X to 3.2X. So houses are ~18% above normal valuations, but if you take into account 5% mortgage rates compared to a historical average of 8%, housing is more affordable now than average.
As I said I don't think this is relevant for short term price movements, but I do think it implies that if you are looking to buy a house now to live in for 5+ years it is unlikely to cause you big losses.
What are others opinions?
HELP!
Is there anywhere I can do a search of the sales price of sold homes in a particular neighborhood??
I know that Franklymls.com has a way that I can search sold homes in the last 3 months (by neighborhood), however, I'd like to go back farther than that.
Anyone have any ideas?
-Pacman
to only consider current interest rates neglects "your future buyer's loan terms" and hence is only relevant if you actually do live there for the whole amoritization period.
Further people keep talking about interest rates as if they aren't a function of the inflation rate. What matters is not the interest rate, but the spread between the interest rate and inflation over the life of your living in that house. If we enter a long period of stagnation with only 0.5% growth, that's exactly the same
as 8% mortgage rates with more typical growth.
Since DC is a transient and fluid area, that's not reasonable for the median home to come to. Whether it's okay for an individual depends on their own certainty that they will be paying off the mortgage in full.
Pacman, try your county tax website, their on the front of this blog, and/or linked to by frankly.
Hey everybody who remembers T:
his TH just closed!
http://franklymls.com/FX7006298
Congrats! If you're out there T!
Cara -
I agree that future interest rates mater and that will impact the price in the future, but this is why I was not counting the full benefit of lower rates. Increasing rates from 5% to 8% increases your monthly payment ~35%.
If you do not think you will stay in your house for 5+ years than low interest rates do not help you that much. You also probably shouldn't be buying, because the transaction cost of selling a house is ~6%-10%, which means you need significant price gains just to break even.
As to your point about inflation, I think it is highly unlikely that we see lower inflation in the next decade than the past decade. The government started enormous deficit spending with bush and it will only continue with Obama. I just don't see how we can have massive deficit spending without some inflation as a side effect.
Housebuyer,
I'm pondering the same questions. I'd be interested to hear how others have attempted to "estimate" how much bubble is left in the area.
I tend to think of it in terms of "but for" as in, "What would housing prices be in the region but for the bubble." Any difference between the but for price and the current price would be the bubble overage that needs to be removed in order to reach long run equilibrium.
I was thinking about using pre 2001 home values, estimating the average annual % increase, and using that info to project what 2009 values should have been, but for the bubble. Unfortunately I couldn't find all the data I needed. That type of analysis assumes the 2009 S&D characteristics look a lot like 2001 characteristics. I'm not sure that's true. Recessions, gas spikes, and tax breaks for home buyers do crazy things to people's demand curves.
A Realtor I spoke with suggested that months of housing supply would be a good way to gauge whether or not we are at the bottom. He stated, that pre-bubble, it would take 5 months for the housing supply stock to be depleted at normal rates. He then stated we are at that level now. I don't think that's an appropriate measure of equilibrium since there were likely times during the 2001-2007 bubble period where there was 5 months of available supply at inflated prices.
test1234,
using equilibrium based metrics to judge non-equilibrium states is never a reliable plan.
Pacman, you could try Sawbuck realty's search function.
Thanks Cara - I knew I'd stop back in here once I closed, I didn't want to discuss things at all until then.
Brief story:
List price of 300, got the offer at 289. Figured it was a very fair (only 3.6% below list) and just took the guy up on it, no negotiations at all. He had an aggressive close date, which I liked. But it was a VA loan. Instead of closing in the 23 days per the contract, it actually closed in 40. I allowed for it, knowing that all VA loans were taking approx 45 days at the time. I could have been more stiff but just gave the guy a break.
Truthfully, though, after it went under contract mid/late April, I continued studying the market. I realized I would have been alright if I held out longer.
That is because the inventory on TH, particularly 4 BR ones in Burke, Fairfax and Springfield, plummeted big time in May. I tracked it from mid March and thru end of April, the number of available listings was between 8 and 11 at all times (looking at those <= $300k), but the number under contract rose a lot in April. But by mid May, there was a total of 20 listings, with 18 under contract and just 2 available! That's 90% under contract across a broad/desireable area of NOVA.
A similar story (though not as drastic) could be said for 3 BR TH in those 4 zip codes. Compared to mid March w/ numbers of 55-60% of all listings under contract, those numbers rose to the mid 70s by mid May, w/ the inventory dropping by as much as 35% in one month.
I have stopped by the board just a few times and have seen some new faces w/ new ideas (some more optimistic than the avg poster) and I enjoyed the breath of fresh air.
The reality of the situation, from my first hand perspective is this:
I bought a larger SFH in March and put it under contract in Feb. That was when it was great to be a buyer, w/ a high inventory and great rates and lower prices. I do believe "spring sprung" and prices increased in mid April and May. But the reason it was great to be a seller (and would have probably been even better for me if I waited to sign a contract in late May rather than late April) was the inventory has been decimated in these TH. It is obvious the first time buyer credit really played a role, along w/ interest rates. The way I think things happened: the savvy buyers who had their ducks in a row for financing were able to get some great deals in Feb/Mar/Apr when inventory was still good and sellers knew these were desperate times. I personally think in May, the people putting offers in were those people who did not get their finances in line early enough, or they were the people waiting for school to be out to move in during the summer. These people are paying more than they should for these entry level houses because there is a lot more competition and a lot less to choose from.
As an example: A 3 BR 1.5 Ba TH in my neighborhood was listed for 272 and went under contract in late May in 1 week. It will be interesting to see what it went for...
At any rate, all my comments relate to entry level TH, typically at $300 or less. I studied the market w/ great interest since late January and those are my "real world" insights from my first hand experience w/ buying first, and then selling.
I was disappointed initially that I bought first and then sold. But now I realize it really was the best thing for me to do: Buy in Feb and sell in Apr.
To those who like to talk "assessed value": My TH was assessed in 08 for 315 and assessed in 09 for 242, and I sold it June 1 09 for 289 without any negotiations on the price. I think people realize assessed value means little, and I learned a lesson over the last few months. (when I first came on here beginning of 09 worried about my assessment.)
I'd like to thank everyone for their insights and assistance over the last several months.
test1234 said...
Housebuyer,
I'm pondering the same questions. I'd be interested to hear how others have attempted to "estimate" how much bubble is left in the area.1. Income
2. Income
3. Income
housebuyer, I think the answer depends very much on which part of the "here" you're talking about.
Areas where there have been many sales at prices where the bubble has been wrung out of them (mostly) may no longer be overvalued much, if at all. But there are some areas and price ranges where there is a big gap between what would-be sellers want - which is often close to bubble top prices - and what buyers are willing to pay. Since that results in lots of sitting inventory, I know that most of it is currently overvalued by would-be sellers, but I don't know by how much.
Congrats, T, sounds as if the buyer got himself a very nice place.
Cara,
Equilibrium is a theoretical idea and disequilibrium is the only reality. Therefore any economic measure has issues but that doesn't make it unhelpful. I'd prefer a benchmark analysis over a hunch or "gut feeling" any day of the week.
test1234,
agreed, but it's just a general caution. The reason behind why MOI is low or high or even "normal" can be different.
i.e. when prices are steady relative to inflation or incomes, then any MOI that's moving steadily higher indicated coming problems, MOI lower indicates that perhaps people's incomes are higher than is thought, or that credit is being extended more easily, and thus that prices will go up.
however, interpretation of the same metric in the highly dis-equilibrium situation we've been in since 2004 is different.
t,
that market analysis is depressing. But pretty much just a more dire take on what I've been seeing. The question is, will it improve in the fall/winter again or will all the inventory be gone... For things that do take longer than 3 weeks to sell, prices are still marching lower though. It's a complex by complex thing.
Ace-
Sorry I should have specified, I was actually talking about the entire country not just the DC area. I just figured it would interesting to see some perspectives in trying to figure out how much of the bubble is gone...
"do people here thinking housing is overvalued compared to historical norms.".
location, location, location.I'm cashing out a commercial RE holding in a prime resort area and should do fine, I don't have the final accounting yet.
My small place close-in (Alexandria) has held up well since 2006.
Friends out there, Manassas and beyond report 30%+ drops. Some would like to refinance but are upside down.
My Guess - out there could fall further. Prime resort (positive cash flow) RE is cheap. Close in is under priced and is rebounding now; there are very few places available. We won't be able to tell for another year or so.
T,
Did you see my posts that we've finally found something we're interested in buying? Background is buried in yesterday's and this weekend's posts, let me know if you need a recap...
It's tough, because unlike when selling a house, you don't want to advertise which place it is....
Ace - thanks.
Cara - yea, that is anyones guess. You are likely right, it depends on exactly where you are looking within the Burke area. I was shocked to see a 3 BR 1.5 ba go under contract at 272. A typical full bath in a TH is not very large. I don't know how much sense it makes to have just 1 full bath in a 3 BR TH. So that was why I found it surprising, but shows just how desperate some people are to buy their first house.
I wish you luck - I think you're finding the "right town", which really is half the battle. It's hard to guess what will happen w/ interest rates and inventory in 4+ months. But you've got a good ability to mine for expert opinions so you should be able to have as much insight as anyone.
Cara - that is great! No, I didn't see the posts on it.
So by having found the place, are you in negotiations or have you yet to put in an offer? I hear you completely about not wanting to disclose too much. I'm sure you've done your homework and then some. It's exciting to at least have found something that could one day be yours. I won't ask any more questions because you probably don't want to disclose much, but good luck!
T,
Yeah I've seen some incredibly foolish purchases as well as some perfectly dead-on deals.
We saw this one this weekend:
http://franklymls.com/FX7069425
$325, with a garage!! Woohoo! Right? Um, hello you have like 10 feet of woods between you and the Walmart loading dock! You have a wierd shaped condo, that's really quite small, whose roof and siding need to be decided by committee without the organization level of a condo association. And the garage is only big enough for a sentra if you are the best parker in the world and skinny enough to fit out the door when it's opened inside. Making what looks like plenty of visitor spaces if the garages were for cars, totally packed. And no basement. Yes, it's maybe even 100k under anything else with a garage that close to a VRE stop, but do the buyers realize that they'll need to be passing along that discount to the next buyer when they sell?
If it's move-in ready, it's gone and for quite a premium. People are stumbling over themselves for THs.
What we've found is compact 1360 no basement, but 3 bed 2.5 bath with everything livable size and high ceilings. Very workable u-shaped square-ish kitchen with a cut through to the dining area. No updates, but either well-maintained, well-staged or both. (lowest possible grade new carpet doesn't count as an upgrade, it's maintanence).
But I'm just afraid they're not going to come down to what my husband's willing to offer. But at the same time, I thank my lucky stars I have him with me, so that I'm anchored to a real reserve price. (It's not a low-ball by any standard but, not what they're looking for either).
Sounds good, Cara. Mine was a 4 BR 2 level w/ 100 more SF than that one. It never hurts to put in an offer and hope for a counter. I countered every offer made to me, no matter how "low ball" but when I got what I thought was a fair offer, I gave the guy respect and didn't counter. Maybe I could have made a few extra K but decided to keep the buyer happy and in the end, me happy too.
Negotiations were a tricky thing. It's important to have a great agent who knows what you want and is willing to work very closely w/ the other agent to make it happen, without divulging any of your key needs/limitations. Some agents are better than others. But, give it a shot and you never know. With times like this, I think you may have many types of owners out there. Some are pessimists and see doom and gloom, and just want to move their house. Maybe they were holding firm to start, but without any contracts, they are getting more flexible. And maybe they are not studying the local market closely to realize that they really do have some leverage given the low inventory. "some" being just that, some (not all, but not minimal or none like early this year).
But if you've got an owner or an owner's realtor who is really sharp and who can afford to be patient and knows how things are looking locally as of late, it may be tough talking them too far down.
That is what makes things exciting in this business. Unlike most consumer products you buy from a manufacturer or a reseller, here you are buying from individuals and individuals have way more pressures and desires than a handful of car dealers (for example). Get your realtor to tell them about you and your family and get the owners to "want" to sell their house to you guys, and you'll do alright.
T,
we're in the scramble stage before putting in an offer.
The impetus to look at all now, was one place that turned out to be a trash-out but looked great on line, and then, since we were out might as well look at all the others that were my top picks in the current market, because we found out from our landlord that month-to-month will be an extra 300/month, and 6 months will be 75/month extra. So, we suddenly needed to get serious now, in order to determine our lease renewal length.
We did not expect to like this one, hence the sudden scramble. But there are 4 others in the same complex also on the market, we just liked this combination of property/price/owner best, so will do her the curtesy of buying hers if she accepts our price.
(my bank agent's hours are 11 AM to 8 PM, which would have been great if I had known that last night.)
housebuyer said:
"do people here thinking housing is overvalued compared to historical norms? ritholtz.com says that historically household median income to home prices is 2.7X."
Price to income is not a measure of valuation, but of affordability. Areas close to DC are still significantly overpriced. Further out, not as much so.
John-
Why do you say price to income is not valuation, but instead it is affordability.
I would actually say it is the opposite. I would define affordability based on the valuation and the mortgage rates. I don't see how you can ignore borrowing costs from affordability
John Fontain,
You said "Areas close to DC are still significantly overpriced. Further out, not as much so."
What is the basis for that conclusion? Thus far, I've had a hard time finding data sufficient to confirm or reject this belief.
Measures of affordability answer the question, “Can I afford it?”
Measures of valuation answer the question, “Is it worth buying?”
Here is an (unrealistic) example to make my point clear:
Assume I earn $1,000,000 per year. A house I like is available for sale for $500,000.
Can I afford it? Yes, the price to income ratio in this case is 0.5%.
Assume further that this house can also be rented for $1,000 per month.
Is it worth buying? No, the price to monthly rent ratio is 500. I can rent for much less than the cost to own, so this house is not worth buying.
With this simple example, the differences between measures of affordability and valuation should be evident. You should only buy something that is BOTH a good value and affordable to you. These are not necessarily one in the same.
One last example. Assume again that I earn $1,000,000 per year. A commercial property I like is available for sale for $500,000,000.
Can I afford it? No.
Assume further that it rents for $8,000,000 per month.
Is it worth buying? Yes, the price to monthly rent ratio is 62.5. This results in a pre-operating cost cash flow return of 19.2%.
Example 1 is a property I can afford, but one that is not a good value.
Example 2 is a property that is a good value, but one that I cannot afford.
The first should not be purchased by anyone. The second should not be purchased by me, but should be purchased by someone who can afford it.
T,
really? I don't know, I don't see why they'd want to sell to a pair of over-educated cheap ass bastards, who want inexpensive housing while one of them goes on to law school...
Perhaps the want to start a family and thus want to be able to afford it on one income would work better. (Which is also true).
:) Perhaps Jeff Royce can make that sound better than I would... He's fantastic with people.
I don't know. They priced it extremely well (kinda like yours). It's listed at 20k under the most recent comps but is lacking a fireplace, and doesn't have any real kitchen renovations (a terrible paint job with brush marks all over the cupboards doesn't count). So I'd say it's priced right on the money. It's just that, it's a condo, and so it will be hard to sell now, and hard to sell later. So, I do expect these to eventually go lower than our reserve price, by as much as 10%. But you can't buy now for your future dream bottom price, you have to buy now at buy now price, so I'm willing to take some of the fall in paper losses.
Anyway, we'll see.
test1234 said: "What is the basis for that conclusion? Thus far, I've had a hard time finding data sufficient to confirm or reject this belief."
The best evidence is had by looking at individual properties in different areas and comparing their sales prices to what they could rent for. Further out, price to rent ratios are much more closely in line with pre-bubble average price to rent ratios for the DC area (about 135 times rent) than are the closer-in areas.
John Fontain said: "The best evidence...."
Thanks, that's helpful. I'll start to look into it.
John-
I still think you are missing the mortgage rate part of the calculation and what you expect rents to do in the future.
If we are looking for absurd examples you could assume you have a 0% mortgage rate(in reality Japanese rates were only slightly above this)your monthly payment would be $1097 a month. So your payments would only be slightly higher and after 30 years you would own the house and have no payments. You could also assume that the rent is going up, so after a couple of years the rent would in fact cost more than the mortgage.
Wow which economists did they talk to? http://finance.yahoo.com/news/Pending-home-sales-rise-67-apf-15413011.html?sec=topStories&pos=main&asset=&ccode=
Everyone on this board has noticed that houses started going under contract much faster in April. The economist were predicting that pending contracts for April looked like March...
housebuyer,
yup, harriet started a new thread on this news about pending's being up.
I don't think the uptick was as drastic nationally as it was in FFX county VA. But who knows, that $8k was burning a hole in people's pockets.
Cara-
I know that most people on this board mock the $8K, because compared to housing here it doesn't really matter, but in some areas that's a lot. It really helps protect your downside if you are living in an area where houses are in the 100K range.
housebuyer,
That's not why I mock it (just speaking for myself). But yes, absolutely the $8k (does this have a tie to purchase price, the 0% interest loan version of 2008 did), can make a big difference to housing markets where the typical house is closer to 100k. That should make for some serious spring buying even in a recession. I'm afraid it'll make it's own mini-bubbles in the midwest. But they should be small.
housebuyer,
It's very significant, especially in its power to be the incentive to get people to buy as we are currently witnessing. I do mock its inability to change anything long-term. All it does is add to the taxpayer debt and cause more price stickiness.
t,
and btw, I applaud the way you treated the offers, always countering any offer that came in, but when one came in that was totally and completely reasonable, not quibbling over what had to have been less than 5k, just make them happy.
housebuyer said: "I still think you are missing the mortgage rate part of the calculation and what you expect rents to do in the future."
With regard to changes in rents, yes, I am missing that. Purposefully so. A proper valuation would incorporate the present value of expected future rents. The method I used in my examples was admittedly a short-cut, but one that should get people in the ballpark of the right answer from a valuation standpoint. The proverbial "rule of thumb."
With regard to mortgage rates, I agree that we could "make the numbers work" were we to employ excess leverage. I don't think that's a good idea nor a good model to put forth for valuation purposes. An asset is worth what it produces. How you afford to purchase it and whether you decide to leverage your investment are two additional, seperate considerations.
Cara - thanks - I always try to put myself in others shoes. I was just a buyer myself. I low balled someone and got no counter. I also put a very competitive offer on the table for one house and went back and forth over every last penny, back in Feb when it was a buyers market. It was annoying and it made us add many more items to the home inspection lists in order to try to get more out of the ultra-stingy sellers.
I decided to be much more open minded when it came to selling mine. No offer is insulting, but my counter may not be what you are looking for, and that is the way that it is. You throw a very low ball and I will not counter in the hopes of meeting you dead in the middle of your offer. I will counter in the hopes of meeting at the lowest point I was comfortable going.
When a buyer puts his best foot forward on his first offer, I respected his honesty and most of all, his number he gave. Sure, it was 11k less than the list price, but it was probably the lowest I would have felt comfortable going without countering. And it was a good deal for both of us (in my opinion). He tossed out a sweet number for him and I just went with it. Him coughing up a few more thou financed over 30 years won't matter to him as much as me getting that cash at settlement. But at the end of the day, I'm glad I just took his number and I hope he is happy w/ his purchase and enjoys the house.
There is more to life...
t,
yuck what a nasty negotiation on the house you bought. Bleh. They deserved you nickle and dimeing them (or being prepared to).
yeah, we've already been running scenarios in our heads for if the counter is above or below what, what would our reaction be. But really transactions are most likely to happen and happen in a smooth manner, the closer the two parties reserve price are to each other. Your buyer obviously exceeded your pain-point with his first bid, so it was bound to go pretty smoothly anyway.
Whether we get a contract on this particular place is going to be dependent on whether our reserve price is above their reserve selling price. Because if it's not, either there will be no sale (to us), or it will end up being a bitter and contested one like your house purchase.
But as you said, your counter is an indication, not of your ability to do the math to find the mid-point, but of where your true bottom selling price is. The closer the bid is to list (or the number in the seller's head), the more likely the counter will simply go ahead and be the half-way point and be done with it.
http://franklymls.com/AR6997681
interetsing place, the bank has dropped the price 3 %
it still seems kind of overpriced.
Is there any way to map Option Arms, NODs
and other toxic waste in that area?
I like the pike and i like the convenience to get to ballston, but, i don't want to buy into a bomb
Plus it looks like there is a roof leak in one of the pictures.
"Pat said...Is there any way to map Option Arms, NODs
and other toxic waste in that area?"
Pat with regard to Option Arms, the NY Fed indicated there were at most 400 such loans in all of Arlington county - making it the lowest concentration of any jurisdiction in all of northern virginia.
Since then approx 120 of them have reset, and (assuming arlington is following the pattern of the rest of VA) another 100 have sold, refinanced, or otherwise, been subject to foreclosure.
That leaves 180 loans to reset over the next 3 years (assuming none sell or refinance before their reset). Whatever problems Arlington has, Option Arms is not one of them.
There has been much more drama today. Or rather I've been making little things into dramas in my head. But all I can say so far is Jeff Royce rocks, and is doing an excellent job of navigating between this nervous as a bird first-time buyer and the out-of-town listing agent...
Pat: AR6997681 is under contract to one of the investors who has been buying those short sale duplexes in Westmont for the last few months. Despite the need for work, the house got to a good price at $285,000. One of the flips is on for $359,000, one is on for $311,500 and one is under contract and was listed at $324,500For Westmont the better buy is not the short sales but the houses being sold by long time owners. They haven't done anything to the houses, but they haven't done anything bad to the houses. Good thing about these duplexes is that you can easily put a second bathroom into the basement and make them similar to the townhouses in Fairlington which sell in the $425,000 plus range. But these duplexes have no condo fees. That is a good part of the Pike to buy into as it borders Arlington Heights -- single family area with stable prices.
great find, contrarion!!
That's awesome.
anie
I like that westmont neighborhood,
and i like Penrose, I'm sure the areas just south
of the pike are also good, i just want to get my house
sold before i lock into anything new, and,
I'm watching fo rthe second half of the financial storm
there is a good news bad news aspect to the
arlington area not having a lot of OPTION ARMS,
in that the area is not going to go down, the bad news is the area won't go down.
How about ALT-A financing? is there any stats on
that for Arlington or Alexandria?
"Pat Said...
How about ALT-A financing? is there any stats on
that for Arlington or Alexandria?"
Pat Ill try to find the old stats, but as was the case with Option Arms, the amounts of Alt A financing used in Arl/Alex was minimal.
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