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Tuesday, August 11, 2009
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104 comments:
TBW posted something yesterday that made me wax nostalgic for the bubble days of yore:
http://bubblemeter.blogspot.com/2006/03/bubblicious-bench-flippers.html
If you havent seen that picture, you should. It made the rounds on the Washington Post, WSJ, and wikipedia as the graphical image of "The Real Estate Bubble".
I cant help but think how giddy I was in those days. Up til then, we had rising prices and not alot of inventory. Yet this was the first real clue -- its happening -- the bubble is bursting -- countless inventory and likely more, much more on the way.
That of course was 3 & 1/2 years ago. Back when we thought a tsunami would wash over every county in the DC metro area, driving prices into the ground. Contrast that to the lack of quality inventory some of us noted over the post this weekend.
I do agree that prices are lower than they were then, but I still cant help but go back to those early days and think what might have been. Sigh.
anonymous, tbw,
It is an awesome picture, and one I had never seen.
I guess the number of knife catchers has exceeded the supply of motivated sellers by just enough to keep the price declines modest so far for the most desirable areas. The interest rates help.
The house-apocalypse is now unlikely, but the long slow period has only just begun. And the stage is just being set for act II featuring the houses of the uber-rich.
Wow, I thought that bench was closer to DC, but that was outside the beltway in Fairfax.
http://maps.google.com/maps?f=q&hl=en&q=2655+Prosperity+Avenue,+Fairfax,+VA&ll=38.881746,-77.2332&spn=0.014632,0.041842
related to the stock market angle, dshort has some new graphs:
http://dshort.com/
Calculated Risk featured his new one where he aligns the current bottom with the first major bottom in 1929. I agree with Krugman (gee, Cara, really?) that the government intervention this time is different enough that there's no reason to feel dshort has jinxed us all, i.e. that we're headed for further lows in stocks.
But it's still an amusing picture.
Nova-
The place is right next to the Dunn Loring metro. So it is pretty ideal for people working off the orange line. As I said yesterday I am going to start renting there soon. I almost feel bad for a lot of the owners. There were multiple places listed renting for 1900-1950 a month. Seeing that these people bought for 450K have a have a $400/month condo fee and ~$300/taxes they are netting 1200 and their mortgage is probably over twice that.
That has to be pretty rough losing over 1 grand a month in carrying cost and being 150K underwater on the house...
housebuyer,
Under the whacko assumption that the only people who are renting out their units are trust fund babies who put down huge downpayments and thus are at no risk of going underwater, then at $450,000 purchase price, $250,000 loan amount, 1% savings account rate that they're losing out on, 6% interest common in the hey-day, these folks are only losing $10k by renting out the unit for 5 years. Given that they'd have to realize a $150k loss, that's a pittance.
Therefore there exists a class of rational actors for whom taking a small loss as a landlord is worth the upside potential of not having to take that loss.
For underwater borrowers, who are in a sense even more motivated (i.e. trapped) to hold onto their condo because they have no hardship, and their loan wouldn't be satisfied by a sale, the math doesn't work out as well. For them, unless they can rent a place for themselves that's $12k a month and thereby make up the difference in a kind of arbitrage, renting out the unit doesn't make sense. You bought this albatross, might as well enjoy living there, it is a ridiculously convenient location and presumably a nice building.
Cara-
I think in the case of the people we are renting from their family grew so they just needed a larger space so they bought a different place. I guess they are fairly well off and will just continue to eat the 1K/month loss, because they can not afford to eat the 150K loss. In 5-10 years rents will likely have increased enough that they will not be taking much of a loss. I guess 10 years from now they will also be 13 years into their mortgage so they should have paid it down enough that they can sell it if they want.
Anonymous,
I don't see why you regret your choice so much. You were right.
It's a real shame that being right doesn't translate into a 'win' here but I think that's what happens when the people that would lose have the power to game the system. I think prices in the more desirable areas will stay at historically unrealistic levels for a long time until inflation and normal wage increases make those prices normal.
housebuyer,
Makes sense. No reason to take the double-whammy of the credit hit and loss of downpayment if you don't have to, and are only bleeding about 1 cheap car a year. And yes, while it may take 10 years for rents to make them break even, every little raise will help. They may even already be at the point where rent covers most everything but their principle (which while not the same thing as equity, still counts in the sense of reducing their debt burden). 10 years from now, I also expect inflation to have helped eliminate some of that debt, unless we have a Japanese style lost decade.
housebuyer,
That's what I wondered about with all the zillion condos built in Arlington along the orange line the past few years. For most buyers, condos have a shelf life of a few useful years, and then they are outgrown as people have children (since it seems the vast majority of condo buyers are young professionals pre-kids, and most condos are too small to raise a family in.) It just seemed like everyone buying at the same time would likely need to sell around the same time.
Tabitha, we had an amazing heavenly doula with our first birth who had (I believe) 7 or 8 children at the time, I wonder if its the same woman who is your friend?
Has there been any discussion of the new CEPR study?
http://www.cepr.net/documents/publications/100city-2009-08.pdf
"Only three of these markets, however, are predicted to have larger losses in equity relative to last year (Providence-New Bedford-Fall River, RI-MA; Washington-Arlington-Alexandria, DC-VA-MD-WV; and Worcester, MA). In the remaining 18 markets, homebuyers this year can
expect to see less loss of value than homebuyers last year. Yet, even accounting for the improving equity outlook over the next four years, renting continues to be a more attractive option for homeowners in these markets."
Hmm guess I'll keep renting for the time being! As a single person I can't justify throwing money away just for the sake of owning a home.
Nice, Jason. Good catch. I'm practically out of the market myself. Might even just quit my job, go back to school, and return when all the bubble heads have floated away.
Jason,
No we have not discussed this report here. Figure 2 gives a little rosier picture when they actually use the real market trends in rents to calculate the rent versus own balance for the DC area.
The whole paper is predicated on the rule of thumb assumption that 15 x yearly rent should be the baseline cost for housing, period.
What CRT and I have been arguing is that this is not historically accurate for high-income, high-transience areas like NYC or other hot cities. (nor is it accurate for the boonies where no job growth can be expected, 15 to 1 is way too high a barrier for entry into owning there).
Thus I feel the whole paper is overly simplicistic. Even so, they admit that the loss for owning versus renting in DC may be as little as $20k over 5 years for a median HH. Would you bet the price of a car in order to live in your own owned home now versus later? The answer for you is clearly no, it's not worth that much to me. However, if the answer for enough people is yes, then we will have already found our floor.
You've also got to recognize that they're coming at this from the angle of low-income housing. And there, the argument does apply. Because you really don't want to encourage paycheck-to-paycheck people to take on risky bets in which they are also losing out on a cash-flow basis. So, for the population of concern to the authors, their analysis is perfectly reasonable and sound. (If fatally flawed by its simplicity)
Sorry for the hyperbole inflation going on within this comment.
Cara-
Would you say normal the normal ratio for rent to own is also 15X for Condo's. If so the condo we are looking at is well under that. They are selling for 300K-320K and you can rent them for $1,900 a month or $22,800 a year. Which is only 13-14 to 1.
I found the first lost I have seen capital LLC take. They bought it for 309K and sold it 6 months later for 309K. Once you count carrying cost, condo fees, taxes, and realtor commission they probably lost 20-30K
http://franklymls.com/FX6878076
housebuyer,
In general condos are considered to be an inferior good, and trade below rental parity. (1) because they have a limited time-frame of appropriateness for occupancy (i.e. you're going to want to move someday), (2) they have historically gotten hit harder in downturns such that people don't trust them as an investment (3) because they're not very different from renting, such that normally people need an incentive to buy them, in the case of the bubble the combined fear of being priced out forever and potential for appreciation, in normal times the incentive of "fixing" your housing costs low against rises in rent.
So, 10x to 12x annual rent is where condos typically lie. However, that's not true for NYC. There it's closer to 15x, I believe. If there's simply a barrier to entry, then the 10x-12x rent that would typically be cash-flow positive is no longer the pattern for condos.
regarding MOI, i wonder if anyone had thought about the effect of the internet house hunting and mortgage financing on MOIs? my 'theory' is, with the power of online research/shopping tools, the market has become more efficient, and MOIs no longer need to be at six month or whatever to maintain 'neutral'.
(gotta run to a meeting. to be continued...)
Cara, do you happen to know what the historic rent vs own ratio is for the DC area? In any case, the neighborhoods I'm interested in have such a disparity between the rent/buy ratio that I do think I will hold off for now. There were a fair amount of condos built during the boom that were never sold & were converted to apartments or executive suites. I feel like there's even a rental shadow inventory since so many units are sitting empty! In any case I'm happy to wait it out at least until 2010, I'm pretty risk averse.
MM,
Good theory, but probably a bit optimistic. I think most people still get their housing data the old fashioned way: Realtors. The savvier ones probably double check against Zillow.
I'd say we're a highly anomalous bunch.
Cara, I don't know, but I think that's a pretty sanguine look at what seems to me to be a pretty tough situation of renting out your condo for a $1000 monthly loss.
I ran some calculations and if you start out with a $1000 monthly loss in Year 1 which with rent increases decreases by $50 a month after 5 years you've lost $54k and after 10 years you've lost $93k.
Some of that does go to principal but not enough if you are underwater by $100k which probably means you'll still be underwater at year 5 and maybe okay by year 10.
Factoring in the hassle of being a landlord, I'd probably send the bank the keys.
Jason,
Not off hand. But it was certainly well under the 20x yearly rent cited in this report for the current imbalance.
CRT/I think that certain areas within DC will permanently separate from historic rent-to-buy ratios and that this separation was facilitated by the current boom/bust cycle. However, I think most of the DC metro area will still have good affordability, on the order of 2.8x median income or 12-15x monthly rent. But certain areas of posh-ness will maintain their new found barrier to entry. (which is not to say they won't erode a bit more from here).
Rents so far have been pretty resilient here. But if you're happy renting, there's absolutely no impetous to not wait this out longer and see what happens, while scoping out other areas that have whatever it is that you in particular like and that are good values. Keeping an open mind is probably the most important factor in minimizing your housing cost. IMO.
Clarification: My wording was a little unclear. My assumption was that the rent would increase by $50 a month which would decrease the landlord's monthly loss by that amount.
Thinking about that some more, since the base rent is $1900 at least after the first year or 2 the rent increases might be more like $100 a month, so that could change things a little. But I think in the situation housebuyer cited the initial monthly loss is probably over $1000 -- maybe $1200.
Anon412,
Which calculation? The one I ran on the WaPo's rent or own calculator for a huge downpayment or housebuyer's own landlords?
If you have the income to cover both mortgages, but not the cash to get out of your condo (if you could even sell it at all), then how much your losing is practically irrelevant. And $50/month/year on 1900/month is a pretty tiny increase for a condo next to an orange line metro stop.
The current owners are clearly counting on inflation, both for rents and house prices, to dig them out of this hole. For a $12k yearly bet, on the DC metro area, that's not necessarily that bad of an idea. If the inflation gives you back $50k of that loss after 5 years, then you've broken even nominally even if your real losses are larger. And sense most people can't do real-loss calculations in their heads (myself included) the nominal loss is what they are likely to look at. They're hoping for 4% yearly price appreciation to break even (i.e. not do any worse than now) without rent increases. The average joe in DC thinks that's typical standard growth. These folks may be sorely dissapointed in condo appreciation which could be flat to negative going forward. But they may feel they have no choice but to make that bet.
Anon412,
Do you really think that people who can shoulder the negative will mail their keys back? I believe a foreclosure stays on (wrecks) your credit for 7+ yrs.
Some have security clearances to consider while others (in addition?) have assets that can be attached.
Unless one truly can't afford it, I just don't see people "walking" en mass.
$1000K lost per month is $1000K lost per month and nothing to sneeze at. Further, opportunity costs must be factored in when judging how "bad" losses are. If one invests $100K as a down payment on a house or condo, that is $100K that could have been earning income elsewhere, including in tax-sheltered investments or low interest but very safe CDs. Conservative "products" don't lose the $1000K per month, they yield income AND possibly capital gains over time. While the awful performance of the stock (and to a less extent, bond) markets of the past few years means that opportunity costs are lower than in typical years, even a 3% CD is a lot better than losing $1000 per month, particularly in a declining market.
So while I don't feel much sympathy for flippers and investors who rolled the dice (since they may have enjoyed offsetting gains in other years and should know what they are getting into), I do feel some sympathy for most people who were simply buying a home for themselves or family, lost $$$ due to extraordinarily bad Wall Street behavior, had to move before they expected, etc.
Yeah, on 2nd thought I realized the rent increase would probably be more like $100 month (after I think a year or 2 of rents staying flat). But that actually doesn't change things that much. It would mean that they'd lost $48k after 5 years, and after ten it's $66k. And if they bought the condo for $450k and it's currently worth $350k, it would take 7 years of 4% appreciation (and I think that's pretty optimistic) before the condo is worth what they paid for it. Granted they'd have also paid of some of the principal of the loan such that maybe they'd come close to breaking even but I'm still not sure it'd be worth it.
I'm just saying that, if it were me, I would hate to have such a high net loss on a place I wasn't living in, when I could use that money for my kids, or retirement, or vacations, so regardless of what the "right" thing to do is, it seems pretty rational to me to take the 7-year hit to your credit and foreclose. Maybe part of it for me is that I just have no interest in being a landlord.
And Ace brings up a good point that "breaking even" only means getting your downpayment and your monthly loss from being a landlord back with 0% interest after 7 years.
Oh and to the question of what calculations I was using I was just crudely adding up the negative cash-flow ($12000 in year 1 + $10800 in year 2, etc.) not formally factoring in that in the meantime you are paying off the principal of the loan, which does matter, but I'm not sure you'd be paying it off fast enough to make it worth it.
Meshell,
Regarding condos . . . one thing the real estate industry has been careful about hiding is the fact that condos are a relatively new form of property ownership. Most states did not allow condos until the 1960s. Co-ops were allowed before then but are and were never that common.
So in the pre-WW2 days when more Americans lived in the cities -- they didn't own condos in the cities. There were no subdivided rowhouses. You either were able to own a parcel of land outright or you rented. Most people could only rent. Many people who could afford to own a whole mansion in NYC or DC etc sold it to a developer who made an apartment building.
So one thing often left out of the post-WW2 suburban boom is that people were not just getting more space but the opportunity to own instead of rent.
And these calculations don't factor in any increases in condo fees or having to pay for maintenance that the condo fees don't cover.
Leroy noted the following,
All CRT is saying is that he thinks there has a been a relative increase in the desirability of Arlington compared to the area in general, this is in no way inconsistent with the existence of the substitution effect. (You don't have to agree with him on the relative increase in desirability, but as a theory it is not inconsistent with the substitution effect.)
Here is the problem with CRT's argument. He is right that Arlington got nicer. But what locality in this area did not get nicer? I think we all agree DC is much nicer now. Those of you more familiar with Alexandria than I have pointed to a few neighborhoods that are nicer.
Fairfax County got nicer -- Franconia-Springfield Metro opened 1997, Mixing Bowl revamp finished 2007, growth of Tysons area, growth of Reston Town Center area, Lorton prison closed 2002 [etc]
Loudoun County got nicer -- many new very nice subdivisions, South Riding, Ashburn area, plans for Silver Line extension, now #1 or #2 in median HH income, many new jobs, etc
Prince William County got nicer -- Potomac Mills renovated, widening of I-66 near Gainesville, now the #7 richest county by median HH income, fancy new Catholic school (Pope John Paul II HS), completion of PW Parkway
I know some longtime residents of Loudoun and PWC are not enthralled with the massive growth that came to their counties (neither were some old timers in Fairfax County decades ago). Nonetheless I don't really think you can point to any locality in Northern Virginia that did not boom in the late 90s to the present and can point to promising future developments.
I posted a house a week or two ago that I had labeled a flip. Some people here objected since it was obvious there was some major renovations (though, that is what I classify a flip, spending tens of thousands to get much more than that back). Here is another one that I had saved with Frankly that came up yesterday:
http://franklymls.com/FX7099108
Sold for $407k after buying it for $237k in May. Not too bad.
Ace, Anon412
I'm just presenting the current decision tree, not what it would have been had they known better and not bought. They don't have the option to take that $150k and put it elsewhere.
Right now they have two options without foreclosure (1) rent it out and hope that inflation makes up for their monthly losses (2) sell now and take the full hit.
If they have the equity already invested through a large downpayment, then they won't be bleeding $1000/month, and the hope is to recoup some of the paper losses through inflation.
If they don't have the equity, they don't have the same options. Bringing another 50-100k to the table in order to realize the loss of your full downpayment is a lot more unpleasant than losing 12k/year. This is not about maximizing gains anymore it's about minimizing losses. If they have the money, VA is a recourse state and the bank can come after them. And they lose their credit, which may be important to them for the reasons Va_investor listed.
For these people it's well, it can't get any worse. (which for the reasons you listed is not true, condo fees and taxes will go up, prices could stay flat, rents might not go up as soon as they hope, etc.)
I make no distinction in who I find more sympathetic, those who put little down and those who put a lot. Both are facing tough decisions and large losses.
Fred,
Is this the one you posted before that we were asking about whether the addition itself was new? (to which the answer was no, I believe).
Quite a pretty penny they turned.
I'm not making a distinction by the amount of money down; I'm arguing just the opposite.
No question about lesser of evils or just simply bad outcomes, but the point is not to minimize how awful it is to lose money each month, especially multiple hundreds, indefinitely. It's a very bad outcome.
And it's definitely a situation from which everyone can learn going forward.
I found the first lost I have seen capital LLC take. They bought it for 309K and sold it 6 months later for 309K.
No wonder they took a loss: the walls are all bowed-out and stuff.
Cara: When I bought my place in 2002, the place down the street was for rent. The rent was slightly less than my PITI (which made me nervous at the time).
the multiple? It was 14.5x yearly rent. I see no reason that it should be radically different from that (other than interest rate fluctuations, and my interest rate was 6% back then).
TBW - yes all areas got nicer, but some were "nice" before, "nicer" now.
Others like Arlington & Alexandria were "questionable" before, but are "nice" now.
Think of it this way. If a bunch of pawnshops and "se habla espanol" car dealerships set up shop in Bethesda, do you think prices there would rise as much as their "nice" before, "nicer" still counterparts, or will they underperform?
Likewise, once you remove those pawnshops and se habla espanol car dealerships, and replace them with Starbucks and Williams Sonoma, will Bethesda rise only just as much as their "nice" before "nicer" still counterparts? Or will they perhaps outperform?
Ace,
Fair enough.
My perspective of looking only at which decision to make now, does put the loss in the past, which allows one to go forward but doesn't fully dwell upon the magnitude of the financial calamity.
Either that or I really don't have that much inherent sympathy for either those who have $200k to plunk down on a condo (and hence aren't bleeding cash now, just opportunity cost) or those who make so much money that they were able to qualify to buy a larger place elsewhere while holding onto the condo with a ~$400k loan at a monthly loss. I have a hard time feeling sympathetic to the actually wealthy. I can try to give balanced advice for what to do next, but asking me to feel sorry for someone who's willing and able to put more than $3000/month towards housing costs (on the condo alone initially) is just too far above my pay grade.
Or put another way, for anyone who's in this situation and not in danger of foreclosure, what percentage of their monthly take-home is that $1000 loss?
Bet you it's a smaller percentage than I've paid out in interest in principle on consumer loan debt before we got that paid off.
It's only money. Some people pay it in interest, some people pay it in losses, some people pay it for unforeseen circumstances, but it's just money.
In terms of money lost to the greater economy, that's one thing, in terms of money lost to their retirement, that's one thing, in terms of looking at their options now, I can do that. Sympathy in terms of "ouch". Nope, life is like that, it's not fair. My sympathy only goes so far.
Novawatcher,
For most places in NoVa I think 15x rent is where it is heading. Burke's already there. I think even Reston's getting there for starter properties, (guessing based on VA_investor's comments, she'd have to verify numbers). I just don't think we can count on everything getting there. For condos with all the construction, one would guess we will even in the desirable areas, as the rents will reflect that desirability, and over-building should supply enough supply.
But SFH's? That traditionally are rarely rented out? I think in some places that may be another beast.
But what locality in this area did not get nicer?
Herndon, Sterling, and Woodbridge. I only know what I've seen since moving here in 2002, but those areas are definitely not getting nicer.
Cara, I don't really feel a lot in the way of sympathy, either.
The point that I was trying to make was more just that losing $1000 every month still sucks a whole lot. I know this obviously wasn't your intent, but I feel like someone could take your attitude of "Well, even if it's cash-flow negative in the beginning, it'll be okay because it will eventually break even" to justify buying a house / condo where the monthly ownership costs are significantly higher than what it would rent for. I was reacting to argue that to argue whether you're losing a lot at once or a "little" every month, it's still something you want to avoid. And, yeah, $1k is actually a lot of money to lose every month. If it were $100 or $200 I could definitely see sticking it out until rents catch up.
It's actually hard for me to conceive of someone who can really withstand that level of loss over a period of years, but I guess they are probably the type of person who would have the most to lose with a foreclosure, so maybe for them it's the best of a set of bad options. But I would also imagine that someone who could stand to lose $1k a month wouldn't have been the type buying a $450k Dunn Loring condo; they probably would have bought a $800k Arlington house originally instead.
Cara,
The 15x is definitely doable in nice areas of Reston; but it would have to be an reo or short(and a TH or condo). In lesser areas of Reston, the numbers are much better and were incredible last winter.
Jeremy,
I wouldn't lump everything together in the areas you cited.
to finish up my previous comment...
i believe the internet helps shorten the 'delay' between listing and closing (e.g. inventory) in today's market as buyers need less time to find the right house, as well as faster turnaround when working with a lender. So, if the MOI goes down because it's faster to pair up the buyer and the seller, that doesn't indicate the market is 'hotter,' it's merely a more efficient market. MOI of 3 or 4 might very well be 'normal' instead of 'hot,' and 6 could actually be 'cold.'
Xpovos said...
...I think most people still get their housing data the old fashioned way: Realtors. The savvier ones probably double check against Zillow...
strictly anecdotal evidence - every person I know who has recently bought or put in contracts on homes used either frankly or redfin or sawbuck. and on another non-RE board i frequent whenever a RE question comes up you'd see recommendations of these sites. so i do think it's quite popular.
Anon412,
Indeed it's definitely something to avoid if at all possible.
In relation to housebuyer's question one can however do the math that while 12x rent or 13x rent is not what the condos might bottom at, since it's cheaper than renting it still might make sense to buy one to live in for 5 years and then plan to rent it out later once rents move up such that it's cash-flow positive.
As for who can afford to sneeze at a $1000/month loss? And what choice they'd make? Who knows, depends on the individual and their life history before and after buying. I guess my point is $450k is still a lot of money for a home, no matter how much this area has tried to distort our perception of half a million dollars. And these folks didn't just buy a $450k condo, 3 years later they had the means to go buy something bigger without selling said condo. Either they're delusional on how the cash-flow is going to work out, or this has them pretty darned strapped (in which case they should have bought something less expensive the second time around) or this is just a small temporary snag that can be recovered from with time.
I don't have a lot of sympathy for the delusional, or those who take a bad situation and make it worse, or those who have so much money that this is not a big deal. Today. Some days I'm more sympathetic. I guess it depends on whether I know the person and their story.
Anon412,
I should clarify, I agreed fully with everything you said, and I do think it's good to put that caveat on my characterization because it could be read that way.
Don't know why I'm in such a sour mood today. I should probably stop commenting.
Jeremy,
I wouldn't lump everything together in the areas you cited.
Normally I'd agree, but we were already lumping all of Arlington, Fairfax, Loudon, PW counties together - so I figured listing cities was an adequate response without offending anyone by listing specific zip codes.
"cities" = municipalities or whatever they really mean when they ask for your city on an address form.
CRT,
Plenty of shopping centers in Fairfax, Loudoun, and PWC have gotten similar upgrades. This is not unique to Arlington. I can point to strip malls in unincorporated Falls Church, the City of Fairfax, and Merrifield that have similarly upgraded.
Also, as detailed on this blog before, I think people view a lot of the changes in Arlington as a mixed bag. There were a lot of independent restaurants that are missed in Clarendon and elsewhere.
Once thing we didn't consider is they were neither rich nor poor. They could have put 20% down. In which case they would be losing about half as much and some of that is going to pay down the principle. So in this case they would only be losing a couple hundred a month and I could see keeping it and hoping for a housing recovery.
Don't forget that most of the population thinks the recession caused housing to go down not vice versa. The opinions on this board are by no means the consensus of the average person.
So they may think if they wait 3 or 4 years they will be able to sell it. Although many of us disagree I do think at that point they would likely be able to rent it at a flat cash flow.
CRT,
Oh and Bailey's Crossroads is MUCH nicer. The shopping center with the Petco, Trader Joe's, Bed, Bath, and Beyond, etc? They really revamped that shopping area this decade.
TBW - thats fine. And if those areas have seen the corresponding demographic shifts like we saw in Arl & Alex, my assumption is those areas will overperform too.
Yeah, I also think $450k is a lot of money for a home, but I think in this area people spend up to or pretty close to the limit of what they can afford, so I'm surprised that there's someone who bought a $450k condo 3 years ago and can now part with $1k a month that easily since even with a $150k income I think that would be a lot of money.
The other thing is that I think a lot of people were renting out their places in 2007 and 2008 with the idea of doing so "until the market recovered" and while hindsight is 20/20, in highsight, that was really dumb as in most places they could have sold for a lot more then.
But anyway, no worries. We're mostly in agreement and it's all in good fun.
Manassas did not get nicer. Agreeance on Sterling and Herndon getting crappier too.
housebuyer, did you say you would estimate the expenses to be $2900 and the rent is $1900?
Just curious... if so it would take 5 years of 9% yearly rent increases for that to happen.
Anon-
I think it is close to 2900 if they put little to nothing down. I was then saying if they put 20% down. The payments would be in the 2400 range. If you ignore the part that is paying down your debt the payments are 2200ish so I could see them saying that these numbers are reasonable and will improve
Ah, I see. If the gap is "only" ~$500 a month, yeah, I can see that closing within a reasonable timeframe.
Using the power of the internet! ;) I looked up 2655 Prosperity Ave (Halstead condo) in the Fairfax County tax records. There are a decent amount that were bought in 2006 and have not yet been sold or foreclosed.
It appears all the 2006 sales are listed as an "unrepresentative sales date." I assume that means they bought pre-construction and so got a "discount"?
A few smart people bought early 2006 and flipped right away. They made out. Everyone else is screwed.
Cara,
If it were a relative or friend, I would have sympathy but still think it was a pretty stupid move.
A good one for doing this calculation is Irvine Housing Blog's calculator
It allows you to zero out the tax benefit, add in the condo fees, zero out maintanence (because it's new and most of that will be in the condo fees), and play with the effect of different assumptions on the interest rate and the rate one might have gotten by putting the DP in CD's.
Under 1% return (my current savings account rate) it takes a 50% down payment to get within $100/month of housebuyer's rent. 30% down to get within $500. 20% down is still quite a bleeder... even if you assume the DP is just gone, so stop counting its opportunity cost.
For every question there is a calculator...
It's tough to have sympathy when all those people who paid too much extended the bubble forcing the rest of us to wait that much longer before buying makes sense. At least those who mail in their keys are expediting the return to normal prices. Holdouts like the ones discussed here, well they got exactly what they signed the contract for so they can't complain.
quick poll -
yard or pool or thanks but no thanks
Cara,
I think rents have gone down but it's being masked by "two free months!"
Many landlords appear to try to take advantage of people's desire not to move so they only offer new tenants these deals. That means they can charge existing tenants a fake market rent.
I'll be moving when my lease next comes up because the difference between renewing my lease and moving to a comparable place would provide me with the opportunity to pay for a moving company to handwrap everything I own and move it one by one (no matter how small the item). ;) But seriously, I'm looking to save at least $1,000-2,000 by moving.
And the vacancy rate is going up. We used to average 4 vacant units. Now we average about 11 vacant units.
Jeremy,
I also do not have much sympathy because the condo craze led to many apartment buildings going condo, lowering the number of available apartments in Arlington and DC, and that scarcity leading to higher rents.
But that too appears to be slowly fixing itself via "two free months" of rent and individual landlords not raising tenant's rent or decreasing it.
MM,
That's awesome!!!
How does one even get to the backyard pool? There's only the front door that I can see. But they loved their pool so much they tiled and linoleoumed the entire house! Awesome.
Thanks but no thanks for me.
Cara said:
May I ask how long the second BofA/Countrywide short had been listed before you made your offer? Has it now gone under contract at the Bank's $50k higher list price, or is it still sitting?
It was only on the market for a few days. I believe your situation is quite different, so take heart. They just relisted it today at the bank's $50K higher list price.
MM,
The pool wasn't the first thing that stood out to me about that listing--it was the PINK! Pink carpet, pink tile, pink countertops! LOL.
MM,
Pool sucks and the tiny yard that existed before that sucked as well. But I was not interested by picture #1. So many homes in Arlington are so ugly.
TBW, just curious, did your landlord / mgmt co try to raise your rent or just not lower it? And I wonder if they would negotiate with you if you told them you were thinking about leaving. I read all these articles in the NYTimes about falling rents in NYC and I'm jealous because it's not happening to the same degree here. (Although, there it's like, "I was paying $3900 for my 2BR, now I'm only paying $3600!!" so I'm probably still better off in DC)
Aforementioned NYTimes article:
The Stay-Put Incentive
housebuyer, the people who put a lot down are still losing a great deal, because the amount they put down could have been earning income and/or gains if invested elsewhere. Otherwise (an extreme case simply to make the point), everyone including those with a lot of savings would put all of their savings on real estate. That's what's meant by opportunity costs.
The amount down matters only with respect to *where* the money is being lost and may, depending on what alternative investments were available at the time the money was put down and afterward, influence the magnitude. But there almost always is significant opportunity cost.
Ace,
Indeed even at the ridiculously modest rate of a 3% CD (hard to get right now, but for how much longer?) you're losing more to opportunity cost on the existing DP than you're "gaining" in terms of principle repaid. (this is at the 30% down level or higher that it takes for the monthly obvious cost to be potentially rationalizable)
The thing is, maybe housebuyer's landlords were one of the really early buyers who then didn't pay $450k?
Anon412,
Landlord attempting to raise the rent 8%. Landlord must hold Robert's view of where the local economy is going and thinks the high number of vacancies in the building is temporary and that this fall/winter will not be as slow as it is most years.
I negotiated down a rent hike last year. I just feel it is beneath me to do this again. She also has slowly made the building worse. What few nice amenities we have are being nickel and dimed away.
Part of all this though is that I think I have another three years left to rent instead of one so I don't feel as much need to stay put.
Cara,
Add in that between 2006-08 you could have gotten 5-6% on a CD and still could be getting that had you locked in a long one (or at least 4%).
It would be nice to see FOMC raise rates tomorrow but I'm not holding my breath.
After the two-day meeting, the monetary policymaking body of the Fed would announce any decision it makes on short-term interest rates and issue an accompanying statement on the economy at about 2:15 p.m. ET Wednesday.
TBW,
Yikes. Yeah, you probably could negotiate that down but if you're also just looking to find a place you like better, then you might as well move.
Luckily my lease is up in February so that will hopefully leave me with more leverage. (I think I'm already getting a fair deal so I'll be happy if it stays the same or just barely goes up.)
According to this piece on cnn, the 15 year average price/rent ratio for the DC area is 15.9
http://money.cnn.com/magazines/fortune/price_rent_ratios/
I realize that in certain neighborhoods there might already be price/rental parity, but overall I'd still say we are in solid bubble territory, although making progress going from 26 in 2007 to 21.5 in 2009.
Anon412,
My lease ends during the winter which is part of my what planet do you live on reaction.
Ace,
How much would have been lost in the Stock Market (the most likely alternative)? Hindsight is 20/20. I wish some of my stuff had been in CD's too.
Ace-
I understand opportunity cost. I am just talking about cash flow. There is no way around the fact that they have lost ~150K on their property. But that is in the past and the question is what to do in future. My comment was if they have 20% their cash flow situation isn't that bad and it may be worth protecting their credit.
Also from 2006 through the present the opportunity cost of money was very low. Realistically if they did not put the money in a house they would have put it in stocks and bonds which have both performed very poorly.
I guess it is possible they could have kept the 100K in a bank account, but not that many people had all there cash in a bank account back then.
I guess they could have been brilliant and bought tons of 30 years bonds in 2006 they would have made a killing if they did that and sold them a couple of months ago :)
Some positive news. I know it's not for everyone.
US News and World Report
10 Cities Primed for a Real Estate Recovery
District of Columbia (11 percent, up 3.2 points). The federal government is one of the few big national employers that hasn't been cutting jobs, and Washington has reaped the benefits. There's even evidence that President Obama's activist agenda has helped increase the demand for D.C. office space in 2009. Vacancies will rise a bit in 2010 and rents will drift slightly lower, but with an unemployment rate of less than 7 percent there's barely a recession in Washington.
And since commercial and residential real estate markets are linked, a mild office and retail downturn could signal an imminent improvement in the housing market and the overall economy.
Jason-
That's an interesting link. I would actually expect DCs average rent to price ratio to be higher. It looks like nicer/wealthier areas historically had higher price to rent ratios. Seeing that DC is considered a nice and wealthy city I am surprised to see it had an average price to rent ratio.
Robert,
Interesting article. The article seems to imply that all areas will have HIGHER commercial real estate vacancies in 2010 than in 2008. However, DC (and the other "good" cities) rate will INCREASE less than it will in the "bad cities."
So it notes, for example, that CRE will be 3.2% HIGHER in DC in 2010 than 2008. His argument is that is better than the NYC market which will rise 5.9%.
Both CRE markets are projected to suffer between now and 2010. DC is projected to suffer less. It's a stretch to say they are projecting good news for DC.
Btw I'd rather buy CRE in "bad city" NYC in 2010 with its 12% vacancy rate than "good city" Pittsburgh with its 17.3% vacancy rate in 2010. 2010 will probably be a bargain year for NYC. Does anyone doubt that after the recovery it will head back toward its very low CRE vacancy rate? If 9/11 could not kill desire for CRE in Manhattan then I find it hard to believe this recession will.
Analysis of available law enforcement and industry information indicates the top states for mortgage fraud during 2008 were California, Florida, Georgia, Illinois, Michigan, Arizona, Texas, Maryland, Missouri, New Jersey, New York, Ohio, Colorado, Nevada, Minnesota, Rhode Island, Massachusetts, Pennsylvania, Virginia, and the District of Columbia.
http://www.fbi.gov/publications/fraud/mortgage_fraud08.htm
All three jurisdictions made the FBI's top 20 highest mortgage fraud states.
Just checking to make sure you are counting increases in property taxes and condo fees when calculating the return on rentals. I moved to the area in 1992 to work as a nurse practitoner at Children's. Because my fiance was in grad school in New York I worked double shifts and weekends and saved a good deal of money. I bought a one bedroom condo at a new building in Courthouse area of Arlington in 1993 for $110,000 (who knew?). After we were married we lived there for about 2 years and then bought our house. We could not sell the condo for what I paid for it, so we kept it and rented it. Rents were flat until about 1999 and then they went up a good deal, and I currently rent it for $1800 per month. Until that time we usually rented it to young singles but starting in 2000 a series of empty nesters have rented the property. The last time I was at the building, the manager told me that most of the people buying there are older people moving from houses in Arlington. So I think that condos, at least in Arlington, might appeal to older people too. These people have been great tenants, too.
District of Columbia (11 percent, up 3.2 points)
Explain to us how exactly a 3.2 point rise in CRE vacancies is good news? Technically, going up 3.2 points to get from 7.8 to 11% vacant is a faster rise percentage-wise than Raleigh's 3.6 going from 11.1 to 14.7. That's a 41% increase in vacancy rate of change in DC versus a 32% increase in Raleigh. It seems more like bad news to me.
Meshell--
(OT yet again!)
my doula's youngest is seven, so maybe they are not the same, but i have yet to hear of a bad doula experience. if only all women knew about how wonderful birth can be!
back to financial-type talk:
my bank is offering 5% on our checking account if we meet some basic standards. is that good, exceptionally good, or not a big deal? because i had intended to transfer our checking account to navy fed, which is much more accessible than marine fed, but if that is a good plan, maybe i will stay with marine fed.
Tabitha-
Right now 5% is very very good. Virtually no one is offering that on any sort of investment, particularly a checking account.
homeowner- I don't think people put increases in condo fees or taxes. In some sense an increase in taxes is a good thing for these people, because it meant the property went up in value. I don't really know how much condo fees will increase, I would think for a brand new building it will not need maintenance for a while so the condo fees might not change too much in the near future.
Housebuyer et al., I don't understand why opportunity cost is viewed as solely "in the past." I'm not talking (nor were the prior posters to whom I was reacting) simply about the decision at the time one chose to buy a home. Obviously, we would all agree that a buyer who can't sell a house without taking huge loss certainly wouldn't have bought it under any circumstances if we could have all foreseen that situation before the buying decision.
What we were originally talking about was calculating what money one is losing currently during ownership given that these sad events occurred. Every year that money is in Place A rather than Place B, including at the current time and in the future, one has to compare the relative costs and benefits of this WHEN CALCULATING how much the investor is losing.
What I am reacting to are statements that imply that somehow, a person who puts more money down isn't as bad off as someone who puts less down, when they are forced to rent out a place they can't sell. That ignores a major part of the real cost of the investment. Both these investors are in bad shape. To fully account for what the sunk $$$ are costing the big down payment person, you have to account for what that person has lost on the down payment, not just what the monthly expenses are.
I already noted (in a prior post in this thread) that the recent returns in the stock market were aberrant. But this doesn't change the point that any calculation of what one is losing or gaining by putting down a big down payment needs to consider the full picture.
housebuyer: Maintenance is not the major cost for increases in the condo fee at my building, the bigger cost is for employees, such as a front desk person or even the lifeguard contractor. Early on, the condo association decided not to have a 24 hour front desk person as planned by the developer. That made a huge difference in the building's condo fee in 1995. I think you should count the condo fees because the average fee increase is about 3-5% per year (mostly for increases in service contracts such as the trash haulers and buiding cleaners and common area utilities). Taxes probaby average about a 1% increase. Rents do not always increase by the same amount. We are making a good return on the unit and have a good tax write-off for the taxes and part of the condo fee, but those do have an effect on the return and how much underwater a new owner might be. Sorry, I don't usually blog this much, but my 4 children have left the premises with their aunt because our realtor is coming tonight at 7 for the final walk-through before our house goes on the market. I have worn myself to a frazzle getting things ready and I am afraid to touch anything before she arrives.
Jeremy and TBW, please read the article to understand why a slowing rise in vacancy rates indicates that DC will recover first from the recession. The author explains it much better than I could. And note he said the housing market recovery is imminent.
Robert, I read the blog entry (it is not a published article) and the author's 2-3 sentence opinions on each city. There is almost no data in his opinion piece to back up his claims, and after looking at his background I believe he is out of his element commenting on real estate issues. He seems to be a jack of many trades, none of them housing related.
Rick Newman's Expertise:
Globalization | Corporate downsizing | Offshoring | U.S. automobile industry | General Motors, Ford, Chrysler | Cars and SUVs | Hybrids | Gas prices | Alternative energy| Airlines | Defense industry
I was watching Greta and she had Bill Burnett, VP, NoVa Mortgage Brokers, on her show.
Mr. Burnett gave a very grim outlook for mortgage resets (5 year option ARMS) for 2010. He said it was going to be much worse than the last wave of foreclosures.
correction: VAMB (Virginia Association of Mortgage Brokers)
Robert,
I concur with Jeremy. The fact that the author thinks a 7% unemployment rate in the DC region means the recession is "barely here" shows that he is ignorant of the fact that 7% is very high compared to the region's normal rate of unemployment.
Robert - instead of you and me arguing where GSA will spend the stimulus money we can see for ourselves. Read the plans here - pdf file
Unfortunately I don't see GSA putting aside any money to buy up empty office buildings on Rt. 28 in Northern Virginia. :( Instead, I see this for Northern Virginia:
Greening federal courthouse in Alexandria - $1,699,000
Greening Reston Advanced Systems Center - $690,000
Greening Franconia Warehouse - $9,512,000
WHOOSH. Can you feel the softening of the NOVA CRE crisis with $11.9M in stimulus funds greening three federal office buildings in all of Northern Virginia? /sarcasm
And there will be plenty of harm to the Northern Virginia CRE real estate market when they finish the new DHS HQ at St. Elizabeth's. Currently DHS is leasing 70 buildings across the region including many in Northern Virginia. It's lucky for Northern Virginia that the moves are scheduled for between 2012-15! Let's hope things have recovered by then.
I see reasons to be optimistic about DC - the city - CRE market given stimulus spending and all the new GSA federal buildings being placed in newly emerging DC CRE submarkets. I don't see much in the way of federal gov't growth in Northern Virginia. Nor do I see reason to believe much contractor growth will occur at least while Obama and Gates are ramping it down.
This involves DC but is relevant given the notion of gentrifying areas.
This reviews the massive changes Abdo made to its plans for the NY Ave area near the Arboretum.
During the bubble years (2005) Abdo planned to only have eight percent of the units be subsidized. It's not 70% subsidized. As the comments point out this has the feel of "public housing" all over it.
I am skeptical there is such a thing as "market rate" when only 30% are going for that. I think if 70% of the units are subsidized you aren't going to attract 30% to pay a lot more. The "market rate"/"subsidized rate" only works when subsidized are so small a percentage that it does not affect the overall character of the development. Also unclear how you would attract quality retail with 70% subsidized housing.
Does this mean we will not see developers try to gentrify any more neighborhoods any time soon? What happens to areas like U St, Shaw, the Convention Center, and Columbia Heights if no more yuppie buildings come?
One more from the good Restonian blog. Here is a quote from the Reston Association President:
In 1965, fewer than half of the 227 townhomes in Lake Anne had been sold because Reston was considered “too isolated, too overpriced and too liberal.” Later, several real estate agents would say that Reston’s idea of community was ahead of its time. Back then, people only wanted location and price. A decade later, they wanted community.
After a 1982 survey by Mobil Oil showed that home shoppers thought Reston wasn’t warm and inviting. A marketing campaign helped drive home sales up from 537 to 738 the next year.
I recall (but maybe incorrectly) a few of you were puzzled when I said the problems faced by early Reston probably did a lot to harm dense growth in Fairfax County. Well here is confirmation from the RA President herself. Many Ffx Co residents had ambivalent to negative thoughts on Reston. IMHO it only got a really good vibe as (1) they went full blown suburban in the portion Va_Investor lives in and (2) the opening of Reston Town Center.
Also, I have one correction for the RA President: home buyers still care *a lot* about location and price. Reston's location became a strength not a weakness over the decades.
Link
"Never buy an investment property that isnt in
cash flow, kid. The first time you have to go over at midnight to deal with an overflowing toilet and you realize you paid $200 for that privelige you will shoot yourself" -- My Dad.
while there may be a lot of involuntary landlords desperately hoping they can buy time until they offset their loss, in reality, the first time they get a shitty tenant who trashes the place, or they go 3 months without a tenant, or they spend a saturday showing it to prospective tenants instead of at their kids birthday party, well, that's the day they put the SOB up for sale.
Pat awesome!! Good point.
homeowner, best of luck!!
Tabitha, 5% is an amazing rate I would stick with them until they drop it.
TBW, way way interesting find on the history of Reston. I do agree that it was ahead of it's time, and only works now because jobs have moved there. Maybe Burke which was planned similarly just a tad later just has to wait a few more years to get some jobs of its own. Not sure where they'd put them...
Ace, how do you price the opportunity cost on money that doesn't exist? The DP is gone if you had to mark to market, it's already booked as a loss. You only have future losses and potential gains to book. Now, one could argue that paying such an exorbinant mortgage in and of itself also has an opportunity cost. Or at the very least that the 100-1200/month should get multiplied by what it could be earning.
I was wondering why nobody pontificated upon the fact that the HVCC rule change May 1 caused quiet a bit of lost sales due to appraisal issues. I'm not surprised that solds are down YOY in PWC because we are literally out of inventory. I do not know how much that effected median costs but I believe most of the appraisal issues were on the upper end. I don't have a shred of evidence of that, just my opinion. If you look at statistics on REDFIN for 20111, it paints a completely different picture of the market.
5% is basically too good. Depending on how onerous those conditions are I'd be looking carefully at their balance sheet, and even if it looked pristine I'd be staying way below FDIC insurance levels on that account.
But while you can get it, go with it!
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