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Monday, November 16, 2009
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96 comments:
My favorite quote from Bernanke ever:
"The best thing we can say about the labor market right now is that it may be getting worse more slowly," he said, adding that he didn't hold out much immediate hope for an immediate turnaround.
Link
Some good thoughts on how RE investors are creating a bubble that will lead us to bust that's coming overdue...
http://finance.yahoo.com/tech-ticker/article/372877/House-Prices-Still-Have-A-Ways-To-Fall?tickers=xhb,tol,kbh,len,spy,dia&sec=topStories&pos=9&asset=&ccode=
offer's in. now we wait.
Kenneth Harney Pumping the 6,500 credit
word is leaking out, maybe there will be more inventory some day soon. Or maybe just more buyers, who can say.
Cara-
Cool I am glad to hear you found something. Hopefully you and the owner can find a price that works for both of you. Did you end up going with a SFH or TH?
I apologize that i'm covering DC as opposed to Nova, but this is a very lively board, and i wanted to discuss the effects of price deflation in markets I am following.
now as long time readers no doubt remember, I am interested in the neighborhoods near Union Station and Capital Hill.
So I've seen this property here.
http://franklymls.com/DC7202638
it's been on sale for a long time.
It has problems, it's not FHA compliant but nothing terminal is wrong with it. Fix a roof leak,
clean paint, replace the stove.
but note the price.
It's going to go above bid, but say it rolls for 165K.
Look at the picture, See the
one right next door to it?
it's also for sale
http://franklymls.com/DC7186260
it's got an offer for 237? maybe,
but if the unit next door moves at 165, the buyer o 1246 is instantly underwater. Instantly.
that block every hosue sold for 430K a few years back, what are all those people going to do?
All these folks need to get bankruptcy cramdown reform or they need to get the keys mailed to the bank.
housebuyer,
SFH, I put a description in Sunday's bucket.
pat,
I don't know what to make of those until we get the closed prices. I would guess one under and one over list, with the cost of the repairs priced in they might not be as far apart as they seem. Hard to say since they are available to different buyer pools.
As for all the underwater owners, with prices 50% off? House-agedon for a goodly chunk of them.
In related news, while I never went through the 60 relevant listings for 22015, I did go through the 15 for the specific neighborhood I'm putting a bid in. Of the 15 they were exactly evenly split three ways
5 already sold, 2 to Capital Inv. LLC, 3 to new owners or flippers, no way to tell.
5 bank owned 3!! in October alone, 1 in August 1 for over a year by a tiny bank in California....
5 pre-foreclosures, 3 peak purchasers and 2 refinancers. 1 of the 5 is not that far underwater, 4 are more than 75k underwater.
I know a sample of 15 is not what I had promised. For reference these are all SFHs, of which there are currently 5 listed for sale.
5,5,5,5 hmmmmm. In all honesty, the well-priced Capital Inv. LLC competition should be the biggest enemy of the current sellers, two of whom are amateur flippers who bought REOs a year ago.
that last bit wasn't clear, the neighborhood is SFHs, none of the bank owned are currently for sale, (given they mostly took possession October 20-30th no surprise), there are 5 normal sellers of other SFHs in the neighborhood.
One of them is listed at a short sale price, because they will be applying for the DOD HAP program to make the bank whole. It would be a good deal at the price, I just hated the kitchen layout, and the placement on the lot wasn't great.
It's a good deal though... if it's still active after our negotiations have ended one way or the other, I may post it for other takers. It's a painful case, because in 2005 at $462k, it was actually a screaming good deal, and yet they're still underwater. They'll just need a buyer who's not such a foodie.
spider - This is the Northern Virginia Housing Bubble Fallout blog. It is not the United States Housing Bubble Fallout blog. If you don't know the difference you shouldn't be posting here.
contrarian - you told me to sell gold this summer - the collapse was imminent. Any other tips?
According to the LA there are 2 other offers that she will also be presenting to the clients at 2 PM tomorrow. Hopefully at least one of those is a low-ball. We shall see. If someone else is prepared to pay more than us, so be it.
CARA
don't overpay
Think of it, for every house for sale in your market of interest, there are at least as many in foreclosure.
Mr Mortgage said last year "The Quickening" is here, when the number of forced sales began to dominate the organic sales.
I don't believe that local market here is immune to the national correction.
NoVA is actually in a bigger bubble than the national average and needs above average correction.
I respect your opinion and RE investments. But, only time will tell where we end up. On a similar note, great interview from one of the best analyst who predicted the crisis to begin with:
link
thanks Pat,
My dilemna is what we presented was an offer that left us negotiating room before reaching our highest amount we were willing to pay. (which is still on the conservative side, and an amount I think the neighborhood will clearly and quickly rebound back up to in 2-3 years once the REO's are washed through the system).
But I am trying to be sanguine about it all. If someone wants to pay more than us, there is (in my opinion) a 60/40 chance that we'll be thanking them 2-4 months from now.
She expects further 25% correction in housing market. Key point that relates to folks in this forum:
"The residential real estate market is likely to worsen and remains a much bigger threat problem than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added."
"If someone wants to pay more than us, there is (in my opinion) a 60/40 chance that we'll be thanking them 2-4 months from now."
Cara - you did the right thing, time calls for a conservative behavior in RE market right now. BTW, there is probably a much better chance than 60/40.
Good luck whatever happens!!
spider,
Well there are definitely more price drops to come because incomes never rose enough to justify prices nor rents. However, that article talks about rent drops coming from RE investor activity. So far I have not seen it -- at least in the areas I look at apartments.
The housing bust and recession have minimized my rent increases to $50-75/month increases each year. My previous apt complex also has risen rents about that much each year.
I'm certainly hoping for flat or decreasing rents. But I would not hold my breath. Nonetheless current rents only justify about 2003 prices. But I do think they appear to be gradually going up (not crazy amounts like 2002-06) but still going up. So that does provide a floor for our local housing market. I'd love to see a Manhattan style 5-8% rent drop but so far it has not happened.
"Pat said...
Mr Mortgage said last year "The Quickening" is here, when the number of forced sales began to dominate the organic sales."
Pat - Mr. Mortgage also said the infamous "quickening" would result in a massive influx (i.e. tsunami) of inventory into the market, starting in Nov-Dec 2008. We all know how that prediction turned out...
http://www.recharts.com/nova/nova.html
The Quickening was one of his more infamous videos, and the only one where he made a specific prediction as to dates.
Curiously, he has now yanked that video, but left up all the other ones with more vague predictions...hmmmm
tbw,
I haven't seen much rent declines here either...however seems to have been flat in last 2 years. Having said that you are correct that, we need to hit 2002-2003 levels even to justify current rents. Unfortunately, we are far from it...
Va_Investor,
At the risk of being accused of needing another hug here is what I mean.
Have you ever seen the tv show "Flipping Out" on Bravo (or a million other shows like that)? That's the kind of flip I think is welcome by buyers and is beneficial to society. There might be an addition. Or a wall is torn down and the home feels more modern because it is more open instead of boxy (which was more the style in the 1960s). You didn't install just a new dishwasher but a whole new kitchen.
Maybe the 1960s home has a bathroom a 6'1" man would feel cramped in. The flipper makes it 25 sq ft larger. I could give a million examples. If that's what you were referencing then I think that's great. That's beneficial to society.
If they are just slapping a few renovations anyone can do -- new fridge, dishwasher, and pergo -- then they are just wasting everyone's time.
I just think people do not appreciate how modest 1950s homes were. These were built so the average person could have a home. Look at the Silas Burke historical home I posted the other day. Certainly that was a well to do man but look at how large his home was. People in 1900 who bought homes did not live in one story ramblers. We have such tiny homes in older communities because federal policy in the mid-20th century was to get very modest income people into single family homes. That meant substantially downsizing homes.
Spider, don't mind Robert. He doesn't believe we're in a bubble or that prices doubling/tripling in an eight year period is perfectly normal. I think that adjusted beyond inflation to take into account the household GDP increases in the region, we're going to correct just like the rest of the country. Higher unemployment outside of nova has hastened this correction in places like CA and Las Vegas, but its inevitability shouldn't be bet against.
The Anonymous,
It's clear that the foreclosure tsunami predictions people made about this year were incorrect.
However, it is clear from a million articles there are a lot of foreclosures that have yet to hit the market. At worst, there's a foreclosure tsunami and at best there's an above average number of foreclosures on the market the next 4-6 years (if the banks can spread them out that long). Either option is still bad for housing prices.
spider: "BTW, there is probably a much better chance than 60/40. "
Agreed, more like 90/10. Not saying that Cara will regret having bought it, but the chance of regret come six months from now if she doesn't will be near nil as far as I see it. If I thought otherwise, I wouldn't still be renting.
kevin,
Robert has basically been neutered by Ace's finding that Obama is ordering 5% budget cuts for FY 2011. He could not even come up with a substantive response to her find. His whole thesis was that Obama was going to expand federal spending every year during his presidency.
"However, it is clear from a million articles there are a lot of foreclosures that have yet to hit the market. At worst, there's a foreclosure tsunami and at best there's an above average number of foreclosures on the market the next 4-6 years (if the banks can spread them out that long). Either option is still bad for housing prices."
Agree TBW - thats why im not jumping on Robert's V train -- looks like a long slow L as far as im concerned.
I guess I have to address this as TBW is calling me out on it. Not one chance in a million. The biggest impediment would be Congress. One other thing - if there are cuts, no employees would be touched. No copiers, or no new police cruisers, but jobs? No way. And that is the lifeblood here - jobs.
This came out the same day.
Democrats are carefully testing the waters for another stimulus bill targeted specifically at job creation. But it probably won't be called a "stimulus."
"Last week's employment report seems to have changed sentiment in Washington," said Alec Phillips, an economist for Goldman Sachs, in a research note that's getting some attention in the fixed-income markets. "Momentum behind additional fiscal support for the economy appears to be building."
But I am trying to be sanguine about it all. If someone wants to pay more than us, there is (in my opinion) a 60/40 chance that we'll be thanking them 2-4 months from now.
90/10 chance you will be happy if you purchase. Also, 90% chance your rent will increase next year if you don't.
spider -
So, why haven't prices corrected yet? What are they waiting for?
Anonymous I agree with you. I think inflation adjusted housing prices need to come down substantially, but I think housing prices are fairly stubborn, so rather than falling they will stay flatish maybe down a couple of percent a year, but mostly we will just see inflation eat away at real housing prices. If this is the case you may as well buy now and take advantage of lower interest rates.
Although I say this I am still renting at least until September of this year. Hopefully at that point I will find something I like.
Robert,
They have corrected some as you know very well if you followed the region. Summer selling season and government bribe has just slowed down the correction. We got quite a bit of demand being pulled forward with 8k credit, this will accelerate the correction in the time to come.
The direction hasn't changed and won't until prices are at inflation adjusted levels and in line with income levels.
Robert,
Let's review the facts. Earlier you were claiming Obama would be matching FDR or LBJ or GWB in expanding federal spending. So that's probably 5+% budget increases each year.
Now we hear 5% decreases. I agree Congress might lessen the proposed cuts to 3-4% instead of 5%. But that's still dramatically different then what you predicted.
You bought into some dumb Republican talking points that Obama was some socialist who would expand the gov't in ways we've never before seen. And instead like so many of us pointed out he's much more moderate than the looney bin tea baggers think he is. You got this one wrong.
The stimulus you reference is likely to be some sort of tax cut, not gov't spending or new gov't positions. The tax cuts would be temporary and would be at best an attempt to push hiring from 2011 into 2010 (and at worst some tax cuts the corporations hoard for profit and not hire anyone new.)
Obama has shown zero interest in an WPA-type gov't jobs program.
You have it...the bolded part.
They have corrected some as you know very well if you followed the region.
The direction hasn't changed and won't until prices are at inflation adjusted levels and in line with income levels.
Prices can stay disconnected with fundamentals for long periods of time, even decades.
Since Robert denies everything and claim I make up his quotes here he is in October quoting Stephen Fuller who was implying Obama would be another LBJ:
Robert said...
All aboard.
The train has left the station, but there are still plenty of stops where you can get on.
Choice quotes:
Washington is a company town and its company happens to have very deep pockets and a determination to spend more money at exactly the moment the rest of the country cuts back. The Obama administration expects discretionary government spending to increase from 7.9 per cent of gross domestic product in 2008 to 9.8 per cent by 2010.
Down the street, the W, another luxury hotel, has opened next door to the Treasury. Ed Baten, its manager, says he is relieved to be there. “If I had to open a hotel in any city in the world right now, it would be in Washington,” he says. The average hotel occupancy rate in DC is down 1 per cent so far this year to 76 per cent, according to Smith Travel Group, against a national 10 per cent drop to 57 per cent.
Stephen Fuller, a professor at George Mason, says this period is bringing to mind the late 1960s when Lyndon B. Johnson, then president, was fighting an intractable war in Vietnam while expanding the government with his Great Society programmes. “Wash ington boomed, it just boomed,” he says.
10/13/09 11:43 AM
Prices can stay disconnected with fundamentals for long periods of time, even decades.
You agree they are disconnected with fundamentals - that's a good start...
Robert said
90/10 chance you will be happy if you purchase. Also, 90% chance your rent will increase next year if you don't.
GASP! Cara's rent might go up as much as $50/month next year. Over 12 months that is $600!!!!!
That's WAY worse than potentially losing five or six digits on a home!
[sarcasm]
We've seen some massive corrections in this region. I don't know how anyone can continue to justify the "moving inward" theory. What would spark this?
Cara,
It's hard to believe we are having multiple offers. It's crazy.
Va_Investor,
We are talking about areas that have not seen massive corrections. No one is saying Manassas has another shoe to drop.
tbw,
Why the lag? That's what I'd like to know. I've put out all my reasons why it hasn't/won't happen, I'd like to hear why it will.
VA Investor - it isn't a rocket science - market fundamentals.
I don't think a much of a drop will happen, but a good reason it could is that prices move very slowly without distress. There is very little distressed inventory in the inner areas so prices have fallen slowly(a couple of percent a year). You could believe this will continue to happen. So I see no reason that inner areas will fall quickly, but they could easily fall a couple of percent a year for another several years. I think the further out areas have probably fully corrected.
Spider-
That doesn't answer VA's question about the time lag. Why did it only fall a couple of percent a year for 3 years, but on year 4 it will fall 20%?
I think the answer is it will not. Both buyers and sellers will be stubborn and prices could fall another couple of percent a year for ~5 years.
I disagree that market has only fallen couple of % points a year in inward areas. It has fallen in double digits and corrected from 2007 to 2005 levels. Outward regions have corrected much more and are at close to 2003 levels - which will be supported by fundamentals to some extent.
My point is that there no new lag - it is just a continuation of downward trend we have noticed during last couple of years. Trend did get a little dose of painkiller by Washington which slowed the correction a bit.
Make no mistake a dose of advil only provides temporary relief and no cure for the eventual recovery in the health - which takes what it takes....
housebuyer,
I think almost everywhere in Fairfax County is down at least 20% from the peak. Recall the Dunn Loring home we were discussing that went for the $800s -- in 2006 it would've been listed at $1M+.
I'm sure someone can find a few outliers but I think you'll find the average Fairfax County home is down at least 20%.
I don't think prices will go down 20% in 2010. I would guess about 5-7% each year between 2010-12.
(1) Eventually the housing credit expires. Or if it's renewed for a fourth time most buyers will assume it's a permanent part of the tax code. It stops being stimulative.
(2) Mortgage interest rates are not staying in the 4.75-5% range forever. The Mortgage Banking Association predicts a 1% increase when the MBS program ends. The Fed has to raise rates at some point in the future when the economy is stronger lest we face Zimbabwe-esque hyperinflation.
Higher interest rates lowers what the median buyer can offer on a home. Mortgages are not assumable like the 1980s (as you taught us) so this is going to have more of an impact than it did back then.
(3) I know some of you disagree but I feel buyers are looking at county assessments. And looking at them as a price ceiling. Fairfax County (and every other county) has admitted next year's assessments will be lower -- hence a ton of budget cuts.
The median buyer will feel a lot different about bidding $400k on a home assessed at $405k in 2009 than bidding $400k on a home assessed at $385k.
We will see a day when it goes back to normal and people see assessments as price floors. But I don't think we are there for another 3+ years. Localities are lowering these assessments as little as possible to minimize the pain.
A few of the bulls here have argued "it's different here" with here being the Washington, DC area or Northern Virginia. Actually, no it's not. It's the same everywhere.
NY Times: Bidding Wars Resume
Article notes the high number of all cash offers.
I've also seen tons of articles discussing bidding wars and all-cash offers by investors in Phoenix, Vegas, and Miami.
Just like 2000-06 there is nothing special about what's going on in this area. We are having the same boom-bust-fake boom that every area is having.
My 9:07 comment should say as Va_Investor taught us about mortgage assumption
The Anon
Um, Mr Mortgage mostly focuses on
Califronia real estate, and the
stats there are almost 40% of all
houses sold are foreclosures.
That's with the feds and treasury trying to keep the banks from dumping property.
I looked at one today where the bank had a decent offer 6 months ago, but didn't want totake the loss, so instead it's going up now at 18% less.
walk around look, it's stunning how much empty inventory there is.
Drive Clarendon blvd and look at the empty condo's, look around mass ave at the empty condo projects.
when all those condo's wash out there will be lots of housing cheap and for those who overpaid on small houses, they will be moaning as condos go for 130K in arlington.
Seems to me we've seen most of the spectacular foreclosures and investor mania flush through, but the lack of inventory and the relatively high prices given the situation makes me wonder if there aren't just a whole lot of homeowners out there who simply can't sell because any reasonable selling price would effectively make it a short sale for them. They can still afford to pay their mortgages thanks to the high-paying job market here, but their lender won't go for a short sale under those circumstances-or am I missing something? Eventually these people will have to sell for whatever reason. How will they do that if prices haven't risen to the level that puts them above a short sale? Are short sales or some variation going to become the norm? There's only so much that granite and stainless can do despite the nearly mythical belief in their power. Or maybe all these people really did put down big downpayments and they're just waiting for higher prices, as some here have continually suggested- I find that hard to believe, given the mentality of a few years ago (get more with less). I just don't see the fundamentals there to push prices broadly back to bubble levels anytime soon, so I wonder if we're not in for a very long relatively stagnant market that benefits neither sellers nor buyers. And of course, there's always the possibility of a major unforeseen event or force impacting the situation (which is why so many predictions end up being wrong).
vanka
the real problem is all the underwater borrowers sitting in Option ARMS and 5/25 IO's.
As soon as the REcast wave starts, and
it's nothing but bad news for the next two years, these folks are in serious trouble.
50% of all mortgages in 2005 were IO's or ARMs.
once the IO's switch to fully amortizing monthly payments will go up 30%. That's why people aren't spending. they see the wall headed their way and are worried.
for people who bought places for 450K and are now down 40%, then
it can be 10 or 15 years before they are back above water.
these are the ones who will ultimately walk.
maybe DC wasn't a hotbed of option ARMS but there were lots of IO's.
an IO is essentially a put.
va_investor,
It's not that surprising really, there are 5 on the market, very closely packed in list price, and this was the one I thought was the best. Only 3 offers means there's more than enough houses to go around if we all bid on the same house first.
A good house with lots of curb appeal gets offers. Nothing surprising about that.
TBW-
I don't think we are far off with our predictions. I was talking more about Arlington than Fairfax. I think Arlington is down ~10-15% and agree inner Fairfax is down ~20%. I think prices will fall more like 2-4% vs. your 5-7% per year prediction. A couple people were making it sound like they were expecting a 10-20% drop in prices next year. I think there is virtually no chance of this baring something catastrophic happening.
Pat-
I am pretty sure that there were not many IOs in this area. Do you have any data to claim otherwise? As for ARMs, resets will help buyers. The fed is going to keep rates low for a long time to help the economy, so when there rates reset to something like LIBOR + 3 their rates will actually fall. The only buyers that are in trouble are those who bought in 2005-2007, because prices are around 2004 levels and if you have owned a house that long you have paid down some of the principle. Do you really think that that many people are underwater when it is only buyers from a 3 year period?
housebuyer, Pat,
It's not who you think it is. It's the refinances. Yes, not that many people bought between 2005-2007, and many of those can actually afford their homes. It's the people who bought earlier, need the cash, saw the opportunity for cash or whatever, and took out the paper equity without ever selling the home. When the fair market value of your home determines the loan amount you can get, but a majority of homes with new finances aren't ones that are actually changing hands? That's a problem.
People who stretched in 05 or later to buy that house, are only half or less of the problem now, it's the debt-addicted who used their bubble-valued home as collateral to get more debt than they could have ever imagined possible that have been and will be the ongoing problem.
A few of the bulls here have argued "it's different here" with here being the Washington, DC area or Northern Virginia. Actually, no it's not. It's the same everywhere.
Bizarre comment for someone so focused on the unemployment rate. It is different here - look at the unemployment rate.
I've seen at least two homes in Vienna recently, that, although not technically short sales, the owners are still taking a bath:
Last list price is 84% of 2005 sales price
http://franklymls.com/FX7189399
Last list is 95% of 2005 sales price. Actually, we went to the open house this last weekend and it's overpriced compared to comps -- I wouldn't pay more than $700k.
http://franklymls.com/FX7162586
"Pat said...
Um, Mr Mortgage mostly focuses on
Califronia real estate, and the
stats there are almost 40% of all
houses sold are foreclosures."
All the more reason "the Quickening" has little or no relevance to this area.
"walk around look, it's stunning how much empty inventory there is.
Drive Clarendon blvd and look at the empty condo's, look around mass ave at the empty condo projects."
No -- whats stunning is how much inventory there was in 2006
http://www.recharts.com/nova/nova.html
Also, I second homebuyer's request for stats on the IO loans that you claim were abundant in this area. We have discussed these numbers in years passed and I will be happy to pull out some old data if necessary, I just want to see what your idea of "lots of IOs".
Robert said...
"So, why haven't prices corrected yet? What are they waiting for?"
It's called price stickiness, Robert. They teach it in even the most introductory of economic courses. A high-rolling investor such as yourself should know this. It took Japan 17 years to hit bottom.
And so what if Cara's rent goes up before she buys? So she'll pay maybe a few hundred bucks more and save $40k. You're an idiot if you think that's equivalent.
TBW -
Obama is posturing. He's trying to appease the Chinese to keep buying our debt.
Did you see the health care bill - $1T over 10 years? That sounds like LBJ to me. What about the Stimulus which has grown from $800B to $1T if you add in the latest extension of unemployment benefits and expansion of the tax credit? Sounds a lot like FDR.
Everything Obama has DONE, suggests he is like LBJ.
So, it's FDR, LBJ, BHO, until proven otherwise. And no, a trial balloon out of the WH doesn't count as proof.
Va_Investor said...
" Why the lag? That's what I'd like to know. I've put out all my reasons why it hasn't/won't happen, I'd like to hear why it will."
What, you think houses are like stocks and can just double or fall by half in a day?
Price Stickiness
Price Stickiness
Price Stickiness
There have been countless articles over the years about the price-stickiness of housing. Foreclosures seem to abate this phenomenon as they introduce a more motivated seller to the market. Areas like Manassas has had a LOT of foreclosures, hence a faster price correction. Areas like Vienna and Oakton have not, therefore their losses have largely yet to come.
Housing prices are like salaries. That is, they are downwardly inflexible. The fundamentals do not support their currently-high levels, but their inflexibility will do nothing to stop the inevitable, just slow it down.
kevin,
Unless you rely on the questionable Alt-A and Option guesscast, your argument simply reinforces why certain areas may not drop more in any significant way.
I've long held the opinion that the market will drift lower and remain flat. We may, in fact, have already seen much of the "drifting". You are aware of my theory about turnover (loans originated in the past few years) and demographics (I have neighbors that put several hundred down).
Condo's are always hit hardest - these are mainly first time buyers and prices got ridiculous and builders got caught in the downturn with alot of excess inventory.
Areas that draw destination buyers (SFD in Arlington, for example) tend to be move-up and financially secure. They are there for the duration to raise families and make a home. Of course, there are always exceptions and always foreclosures - just don't expect the massive carnage of PWC and Loudoun.
For many in established neighborhoods with a considerable number of long-term owners, a significant price drop is simply not in the cards.
imho.
So you're saying that any data or charts that paint a macro picture of the housing market are questionable, but your anecdotal examples state the aggregate facts? Uh huh...
Those arguments for why "nicer" areas won't fall are ridiculous. Wealthier people lived in them prior to the bubble, and all current conditions that make them special were pre-existing. That is, the fundamentals are largely unchanged. Say incomes in Oakton went up 20% during the time that housing prices went up 150%. And you think that's sustainable???
Again, you're missing the point about price stickiness (how as an econ major you're doing this is anybody's guess). Foreclosures lead to a faster price discovery because the sellers are truly motivated. Oakton doesn't have many foreclosures. My dad lives in Oakton and has scores of neighbors that list their houses and end up taking them off the market because they're unsatisfied with the offers they're getting. Sellers aren't motivated. They're like you: delusional, believing that their house is worth 2.5 times its pre-bubble value because "the area is nice and everybody makes six figures". Price discovery is inevitable.
Kevin,
Let's just agree to disagree.
p.s. I can't remember calculus either. Just plain dumb.
Kevin-
I agree that the fundamentals will match with housing prices in the future, I just don't think this has to be through huge or quick drops in prices. There is always the option that prices stay flat for 10+ years and inflation just nibbles away at the fundamentals until they are back in line. You could also see housing prices continue to fall at a couple of percent a year.
If you believe interest rates are going up, it may be better to buy now and start paying down your house rather than waiting 10 years for fundamentals to realign. With low interest rates you start paying down your principle at ~2%/year so unless you really think housing drops will accelerate than buying now is not that bad.
kevin: I saw 2 foreclosures and 2 shortsales (or was it 1?) in the same neighborhood in Oakton. The neighborhood is called "Clarkes Landing." The streets were Linda Marie and Timberline.
One of the shortsales was from an SAIC employee.
Va_Investor said...
" Let's just agree to disagree.
p.s. I can't remember calculus either. Just plain dumb."
1. You cannot disagree with the concept of price stickiness. That's like disagreeing with gravity. Read the links I posted, it's not a new or even controversial phenomenon.
2. I thought I forgot Calculus too, but I took a Calc II class this spring and aced it, realizing I remembered almost everything. You remember, it's just not fresh in your memory. And I'm not saying you are dumb, but for an econ major to not have heard of - let alone disagree with - the concept of price stickiness is just bizarre. It took several years for prices to climb to their bubble peak, so why should we not expect several years for them to fall?
housebuyer said...
"If you believe interest rates are going up, it may be better to buy now and start paying down your house rather than waiting 10 years for fundamentals to realign."
Buying when rates are low is a dangerously misunderstood investment strategy. If you buy when rates are high, then when they drop it will cause a near-immediate increase in the value of your house which you can then refinance at a lower rate. The reverse is true about when rates rise however, though not nearly as reactive in price declines because of price stickiness. But the steep decline is inevitable if rates rise. That's risky.
Kevin-
I agree the opposite could happen, but as you said prices will remain sticky. If you believe that all of a sudden prices will no longer be sticky than you shouldn't buy. But if prices will remain sticky and only fall a couple of percent a year, than you are better off buying when rates are low. I agree for most thinks(bonds, stocks...) it is better to buy when rates are high and coming down but because of sticky pricing it is fine to buy when rates are low for houses. Particularly if you get an assumable loan.
housebuyer said...
"I agree the opposite could happen, but as you said prices will remain sticky. If you believe that all of a sudden prices will no longer be sticky than you shouldn't buy."
Being sticky doesn't mean they won't fall, it just means a prolonged decline. Price stickiness doesn't do anything good for the value of one's house in the long term. Just like having a high paying obsolete job doesn't assure that you will continue to make that same amount or more over the long term.
VA_Investor, no need to be nasty. You're disagreeing with a well-known fundamental economic concept. That's akin to a physics major arguing against gravity, and because I am young my opinion on it doesn't count. I just can't tell if you're trying to be antagonistic or really can't understand how prices are naturally inflexible downwards.
We were hauling down 200K at age thirty (20 yrs ago), how you doin'?
Wow, what an asshole.
Ok, comment deleted. Some posts aren't worth responding to. Sorry you are so jealous NoVa. And kevin, I'm sure you are quite the success.
VA_Investor -
If you look at Stephen Fuller's slide show on his website, you'll see that there have been massive job losses in retail and construction. At the same time we have job gains in Professional and Business Services, Federal Government, and Education and Health Services.
Just a coincidence that smaller and further out housing units have crashed, while closer in prices haven't, when given the above employment data? Or is there a correlation?
Va_Investor said...
"Ok, comment deleted. Some posts aren't worth responding to. Sorry you are so jealous NoVa. And kevin, I'm sure you are quite the success."
Get over yourself. I don't care about your age, your accomplishments, or how much you were making when you were my age. That's a bunch of childish drivel and it's pathetic. Bottom line is that despite your years of investments, you really don't know jack shit about the housing market. You don't understand price stickiness or supply and demand. You scoff at any data point I've ever shown, and refuse to believe any circumstantial examples except the ones you've shown.
You know, it doesn't take a market genius to buy and sell houses. It's just signing your name to the paperwork and then reaping the benefits when the house appreciates. That was how it used to be, but now it's like a game of roulette. Us "younger" folks that don't want to make such a risky venture without a lot of analysis and reasoning have some pretty solid reasons to still doubt this market. Obviously we want to buy or we wouldn't be on this blog every day. But your simplistic "buy now, prices will only go up" bullshit has been heard by me for years, and it's nauseating. You're no authority on the market and haven't to this day provided one compelling economic or financial argument to back your ludicrous claims such as "the market has corrected" or "in three years, you'll be so glad you bought". You sound like a RE agent: completely full of shit, arrogant, and condescending.
Robert said...
"Just a coincidence that smaller and further out housing units have crashed, while closer in prices haven't, when given the above employment data? Or is there a correlation?"
I don't think that has too much to do with it. Prices in the outer areas were crashing long before job losses were occurring. Plus, not many people in this area work and live in the same town.
Again, I think it has to do with the foreclosure rates. They are much higher in PWC, so the prices are/were falling faster. Prices there have either fully corrected or are close, thanks to the foreclosures, so it's not a risky buy. Sans as many foreclosures in the inner areas, price discovery is delayed, but still coming in one form or another.
I'm no housing guru by any means but if you look at other markets I don't believe you will see 30 to 40% price differences. I sure didn't see it in Ar. The bottom line on pricing is in because there are plenty of buyers at the current prices. Its when there aren't any takers that you see decline or stickiness or whatever. That tax give away wasn't a siginifcant factor or a factor when the bottom fell out in PWC late last year. It was massive foreclosure inventory and the buyers appeared in droves when the word got out on a 20 to 40% drop in price. Those days are gone. It took everyone off guard and was a once in a lifetime deal.
Kevin, you need to decide if you want to buy a home or an investment. I've never bought thinking of it as an investment but as a home. I've sold some for a profit and some at a loss. If you are looking to buy a home risk free, you will be waiting all your life. I think that is all investor is trying point out. If your employment is such that you don't have to worry about a quick sale you can pick and choose when you want to list. You don't have to sell in a down cycle, its a choice.
kevin -
I say that because employment appears closely correlated around the country with home prices. It's not 1:1, but I think if you graph only employment against home prices in various localities you will see a strong connection.
Another subject:
I found this data interesting.
arkey,
Oh yes, I forgot to say congratulations, Arkey. You're under contract on a new house too, right? Sorry, I'm kinda wrapped up in my own little world right now....
We might win. Even with our very conservative offer. If so, thank you low-ball bidders, for making us look sane and reasonable.
Arkey said...
"Kevin, you need to decide if you want to buy a home or an investment. I've never bought thinking of it as an investment but as a home"
It's both, but of course first it's a home then an investment. It's going to be the biggest sink of my money. I don't want to buy something and watch its value tumble 80 grand, then have to sell in a few years if something drastic changes in my life (though the plan is to own it for 10+ years).
Robert said...
"I say that because employment appears closely correlated around the country with home prices. "
That's a good point, something I'll definitely consider and think about. But given the market corrections around the country, prices were tumbling long before unemployment reared its ugly head. Plus the spillover effects from one town to another don't seem to be relevant here, so I'm less inclined to believe that PWC corrected because of unemployment than I am their REO rate. Plus, given the price increases in areas where unemployment has risen, I think it is a secondary causation. Not saying it doesn't matter, just a smaller impact than foreclosures (which, of course, are probably correlated as well since the three are all related).
Kevin-
I wasn't saying that prices will not go down. Instead I was saying that you are paying down your loan at a couple of percent a year so that your mortgage may go down at a similar speed to your houses value. As for waiting you will end up with similar payments, because as the prices falls a couple of percent a year mortgage rates will likely go up making the final payment similar. So unless you think declines will increase from ~4-5% a year to something significantly higher than it is not a huge deal. It is also fine to wait. You keep on claiming Cara could tens of thousands possibly even $100K. For this to happen her house would need to fall 30+%. If that happened it would likely be a long process and she would have paid off a lot of the mortgage. Also at some point you are forgetting that if this took 10 years there would likely be a significant amount of inflation to help the fundamental argument.
I wasn't making that prediction about Cara, at least I don't think I was. She knows what she's doing and the market she's buying in, I don't. I'm speaking personally, from the areas I'm looking at (22030, 22031, 22180, 22182), that if I were to buy something there right now, I would see a significant drop in value over the next few years. It could come mostly in the spring, or it could be spread out over time, I don't know. I'm not completely intolerant to risk, but that's an inevitability that I think will be brought out in the coming months. We'll just have to wait and see, but I've been fairly accurate in assessing the market up to this point. Foresaw the previous price drops, foresaw the "stabilization" this summer/spring, and now foresee the market taking a pounding now that they've sapped up a lot of the future demand. I do think that down the road if they were going to raise rates from 5% to 8% it would cause a downward pressure on prices of up to 25%, though due to price stickiness this could be spread out over several years and diminished by inflation. Still a real drop though.
Kevin, I'll go check out those zips, my gut says you are right, tho. I honestly can't see the closer in places in Arlington holding their value, either. I eliminated alot of Fairfax and Arlington when we moved back in 97. They couldn't compete then for the "family" buyer and before anyone blows a gasket, look where young families have been moving to, PWC or Loudon in droves for quiet a while.
Kevin, one trick to see where values will hold and probably rise is new school construction. Its a dead give away to highly desirable areas.
Arkey, that's a good point. Again, it's all about values that are fundamentally supportable. A new town center or metro stop opens 500m away and the price will go up for sure. Same with new schools.
It's the notion though that "good" areas won't go down because they're "good" and everybody that lives there can afford their houses that I find absurd. I have had this debate with my dad who thinks Oakton can't go down because it's nice (meanwhile none of his delusional neighbors can sell their houses at prices "they want"). They were good areas with high incomes before the bubble just as they were after it, so take away the bubble inflation and prices have to go much lower.
kevin,
I know it may or may not be a "real" economics term, but ever stumble across the concept of "baked in"?
Kevin, this looks good to my internet eye. Expensive brick work and 4/3 on almost an acre
http://franklymls.com/FX7184255
Cara, not familiar with "baked in". What's that?
Arkey, saw that one last week and agree it's probably not a bad deal. Killer yard, but way out of my price range.
kevin,
In case you're serious...
What I mean is something like Boston. If you look up the CS graphs for Boston, it had an extended 10 year period where every year prices went up by over 7% but less than 12%. This resulted in just as much unaffordability relative to incomes as here (approximately) but theire crash so far isn't anywhere near as large. Why? Because buyers who bought 8 years ago have lots of equity. When a larger and larger percentage of buyers all qualified and have been paying an increasing percentage of their income towards housing for a long time it gets baked in. Baked into people's financial decisions, baked into the culture. When people do move-up, that extracted equity then doesn't need to be financed on the next house.
The equity cushion of long time ownership, or through previously liquidated equity can to some extent get baked in. Just like prices have long since adjusted to the existence of the 30 year mortgage, and to the interest deduction, or any other long-standing accepted phenomenon.
Price increases that are too fast, like Phoenix crash like gravity, because too large of a percentage of the total equity is held in debt. Slow, obnoxiously pernicious price inceases end up in un-encumbered hands, because people do pay off their mortgages, and many didn't pay that high of a price.
Yes, Oakton Vienna etc have the potential to fall to fundamentally supportable levels, where prices would then be supported by the incomes of new buyers, but they don't "have" to. Some of those gains can _nominally_ be baked in.
And given that rich folk flock to perceptions of strength and wealth and cachet, they just might get baked in in real terms too. Might. I kinda doubt it for Vienna, but I'm new to the area relatively speaking.
Cara, don't disagree with that. When I say they have to, I say it with the caveat "one way or another". That can be spread out over a decade of completely stagnant nominal prices, or falling real prices.
Sorry you are so jealous NoVa
You're still acting like an asshole. Learn some social skills, and stop trying to project onto others. Your antisocial behavior is your doing, and to blame it as perceptual problem of others is to skirt responsibility.
Cara -- thats pretty much my concern -- the baking in process leads to stagnation as inflation provides the support (i.e. "real" prices decline, inflation adjusted prices stagnate). Such is one of the problems with stickiness.
I can almost imagine a bunch of speculators sitting around watching case shiller during the 1990s bust.
The nominal declines pretty much stopped in Sept 1992 at 89.03 -- this was far above the pre bubble 1988 price of 64.11. I can imagine the rest of the decade went like this.
Sept 1992 -- CS is now at 89.03...Prices are still too high, one way or another they are coming down.
Sept 1993 -- CS is now at 89.18...Prices are still too high, one way or another they are coming down.
Sept 1994 -- CS is now at 90.52...Prices are still too high, one way or another they are coming down.
Sept 1995 -- CS is now at 89.32...Prices are still too high, one way or another they are coming down.
Sept 1996 -- CS is now at 89.29...Prices are still too high, one way or another they are coming down.
Sept 1997 -- CS is now at 89.93...Prices are still too high, one way or another they are coming down.
Sept 1998 & beyond, we all know where prices went after that...
I'm sorry Keving, I thought you were looking in that price range. Are you looking for a 4/2 or 3/2 with a 1/2 acre SFM or do you prefer a townhouse? Do you want to stay below 400 or below 300? I'll start keeping an eye and ear open.
3/2 on a quarter acre, or two car garage townhouse. I can go above $300k, but definitely no more than $350k. On my more conservative days I tell myself that $280k is the max.
Kevin,
You are joking, right?
No, why?
Cara - one of the key indicator I look at is P/R (Price-rent) ratio.
Historically the price-rent ratio in equilibrium is 15-to-1. During the peak of the bubble a couple years ago, the ratio ballooned to 25-to-1 in many local markets.
In April, the price-rent ratio for the Washington, D.C. region was 21.5 (Metro areas including Arlington/Alexandria)
Hitting Bottom?
Also, vacancy rates on rental properties is still rising across the board. Rents are under pressure. This makes the ratio look even more out of whack.
Another thing I look at to analyze any property is inflation adjusted prices from the sane days (prior to 2001) in the given neighborhood.
I see double digit decline from here to get to levels that would make sense. Given enough time, inflation will help the matter a bit. However, I don't see it on the horizon including ability to increase rents in the near future.
spider,
But there's a reason behind 15 p/r. It's not just a rule of thumb, it's causally related to whether it costs more to rent or to own. So, using just 15 neglects the importance of interest rates in the buying decision. These are unprecedented times interest-rate wise....
If you can buy for the same monthly cost as renting and you would prefer to own than rent, you will go ahead and buy. If you're worried about price declines limiting your flexibility then the option to rent our your home on a minimally cash-flow positive basis is an important financial back-stop.
Around here, we have yet to see the widespread downturn in rents that other markets have seen. Some individuals have gotten minor rent reductions or a lack of increases, but metro-wide I don't think anyone has proven a true slack in the local rental market. (outside of anecdotal level data in PG county or Manassas).
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