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Wednesday, January 6, 2010
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67 comments:
Northrop HQ could boost egos more than economics
And the headquarters will end up in Northern Virginia anyway. Nothing the District of Columbia or Maryland can do will change that.
Now pretend you are a top Northrop Grumman boss. You make millions of dollars a year. One probable reason you want to exit California is that state's personal income tax, whose top bracket of 10.55 percent is among the highest in the country.
Will you put the new home office in Maryland, where the top rate for combined state and local income tax is only a little less than California's? Or will you choose Virginia, where there is no "millionaire tax" and everybody pays 5.75 percent on income over $17,000?
On the other hand, AOL is laying off 2500 people, most from the Dulles campus.
Then what happens when the federal government loses the ability to borrow >$1T every year? Yikes.
The CEO can locate the HQ anywhere; it's where s/he lives that dictates what personal income tax s/he pays.
The CEO will probably make the decision based more on incentives *for the corporation* to locate in one place vs. another, as well as on the commute times.
I hope the communities drive a hard bargain about exactly what jobs or other financial advantages will be brought along with a new org., rather than giving away the store AND later getting stuck if the org. isn't required to do much, or reneges in a downturn.
Yeah, I figured NG wil be putting the headquarters in NOVA because of various tax incentives. But really, would anyone else do different?
Regarding the so called buyers bribe and its ability to pull demand forward, we all have wondered what will things look like once the bribe has ceased?
One possible indicator is the cash 4 clunkers program we saw last fall:
http://2.bp.blogspot.com/_pMscxxELHEg/S0OlINJkDhI/AAAAAAAAHL0/41bNeaW06zU/s1600-h/VehicleSales2.jpg
As you can see, that huge spike we saw in July & August was the effect of the C4C program. And it does look like C4C did "steal" some future demand from Sept.
However, take a look at sales in Oct, Nov & Dec. These are clearly in recovery mode and above sales seen any time in over a year.
So if C4C is any guide to how we will respond to the lapse of the buyer bribe, while there may be a brief period of slack sales, those looking for the price crash to resume as it did back in 08 might be SOL.
Anonymous, housebuyer,
I'm surprised that no one else followed up on housebuyer's link to pending home sales in November...
(or maybe I missed it).
As Calculated Risk points out:
CR on pending sales
Sure they were finally downwards MoM. Big deal. They were up 15% YoY. This November did not look like last November's doom and gloom we're going into the next great depression.
The Anonymous,
OT, but does it not prove that C4C is nothing but a big waste of money then?
Is this a flipped house? Or did they really put it that low back in Sept, take off the market and then recently put back for over $100k more?
http://franklymls.com/FX7222000
MM
YES, c4c was a big waste of money, of OUR money. I cost more than $20,000 per car that was bought, WAY more than any of the transactions should have cost. It's just a way the democrats are going to say that they did something, when in reality they probably messed more up than they helped...
Things should have been left alone. Banks should not have been helped, sometimes businesses fail, simple, period. Car companies should not have been helped either. At least banks might not be doling out money as much as they used to and people won't be allowed to buy houses that they simply cannot afford.
Or at least I hope that is the case.
"OT, but does it not prove that C4C is nothing but a big waste of money then?"
Sure looks like it doesnt it? Also reminds me of another axiom -- by the time the govt gets around to "fixing" something, its already more or less fixed itself.
wunderbar-
It is not a flipper. It is a short sale so the person is underwater on their house. They tried listing it for way less than it was worth and they probably found out their bank wouldn't accept the offer so they relisted it at a higher price.
Cara-
I agree that things look much better than the near depression of last November. I would think dropping 16% MoM was a big deal and not seasonality other than we know it was mostly due to tax credits so it is pretty meaningless. Obviously MoM are not good for regaining housing market momentum, but 1 month does not a trend make.
http://franklymls.com/DC7202638
this listed at 155, then dropped
to 143, then got into a bidders war
before closing at 220K
it's agreat little block, close to
H Street, 8 blocks from Union Station.
The schools blow, but, what can I say.
This needed some work it was a non-FHA, but, it sets a price point of 250 for 3 BR, there is a 2 BR on this block for 274K which is now overpriced, it won't comp out,
and there is a 2 BR for 274K which
may not comp out either.
When i checked on trulia and looked at a map of sales prices for that street there were lots of 325K and 435K prices.
All those people are now underwater looking at 50-200K in depth.
Do they keep paying mortgages for 14 years waiting to rebuid equity?
Or do they walk and file bankruptcy?
The NY Times had a piece on people in japan paying mortgages for 14 years wildly underwater in the tokyo Exurbs, one guy would be paying the mortgage for 20 years before he could sell without a loss.
20 years of your life and nothing to show for it? Man, that's like doing a stretch in prison.
housebuyer,
Agreed, it's clearly more than seasonality. (from which I suppose they derived their absurd 2% drop prediction).
16% is a big drop, but if you steal some from each of August September and October, and pretend add it to November's pendings then it's not such a big deal, and might look a lot more like "normal". I.e. if you attempt to account for the stolen pulled forward demand... December has so few contracts normally anyway that I think we won't really know what has happened to demand nationally until February's pending numbers are out.
All the more reason to primarily concern oneself with the MRIS numbers.
Cara,
I think you need to modify the demand pulled forward contention. There were many sitting on the sidelines; either "priced-out" or astute enough to see a future correction.
This is especially true in the lower tier where the 8K was available and meaningful.
This board is an example. People are waiting for signs of stability in pricing and the economy in general. I think we are getting there.
In other words, there was a great deal of "pent-up" demand and the question is whether this carries over to the mid-range.
Va_Investor said...
"I heard that alot of mid-range reo's are coming up. Mid being 500-800K"
I hope your REO source is right. Even a 5% shock to prices in that price range is a good chunk of change. Mainly I'm just hoping for more sales, as I've pretty much picked out a select few neighborhoods that satisfy my commute and privacy constraints and my wife's school / family neighborhood constraints. One of those neighborhoods didn't have any sales in 2009 at all, and only 2 or 3 in each of '06,'07, and '08.
Va_investor,
Okay, call it time shifted then. You need to explain the 16% drop MoM. The demand sources are both pent-up from the years of being priced out and normal life-determined buying timing.
My assumption was that the normal life-time buyers would get shifted more than those that had already been waiting for price drops, but you're right, both could be convinced that now was better than later this past fall.
The point stands, people who otherwise would have put in a contract in November did so earlier. Thus November's demand was pulled forward.
VA_Investor,
certainly there is some pent-up demand, but most of these people had a chance to buy in 2009. Also it is a trivial point that homeownership rate has to go down to historical norm.
Cara,
I still contend that low-end was pulled forward. That, coupled with investors, may have given (probably) a skewed picture.
Now we will see more "fundamentals". This is why the spring will be interesting. I do believe that any sign of economic recovery will result in people (who have been waiting years) getting off the fence.
http://franklymls.com/DC7157293
this one was gorgeous, listed at 325K
sold at 330.
absolutely clean, no problems,
it sold for the High 300's and somebody dropped 100K into the place.
decent location, quiet enough street, cool other properties nearby.
four BR, plus a good basement apartment for income.
It sets a bound of 80K/BR on a clean property.
Yeah Pat I loved that Ledroit Park property and it went under contract so quickly. It would be nice if that became the new standard, but I've also seen people pay more for houses in worse shape in that hood. During the springtime people really lose their minds and are willing to pay anything (at least last spring) so I hope the low comps pile up this winter. I've also recently. noticed prices have come down significantly in Dean Baker's neighborhood (16th St Heights).
Kostantin,
I don't think I said anything about homeownership rates. We had a ton of totally unqualified people on the low end; and most are gone and back to renting.
As far as demand pulled forward; I still believe there are many too afraid to pull the trigger. Whether this is due to fear of job loss, fear of prices falling substantially further, fear of total economic implosion, I can't say. It's a combo of all.
I think we are back to a reasonable ownership level. But it is 6 of one/half dozen of the other. I don't think that renter's increase inventory of homes for sale.
I doubt that there is too much left in the pipeline as far as new construction/inventory. It will take some time for builders (and lender's) to forget this lesson.
The jobs reports today are not the best, but show a turn.
Well, the reason we are waiting to buy has to do with home pricing and debt. We want to pay off my law school loans fully before we purchase a home. So we got a couple months of that, we are able to live off half of my husband's income and put the rest on the law loans.
The prices of the homes still are just too expensive for me to actually pull the trigger. I don't want to over-extend ourselves with a mortgage where we wouldn't be able to save enough money for the long-run. I am not looking at a home as merely an investment, but a place to actually live, raise children, all that stuff that I THOUGHT made a house a home?
sehrwunderbar,
Sounds to me as if you have the right idea. Pay off the school debt, then start putting 2/3rds or more of that monthly amount towards your downpayment and buy when you are good and ready. That puts you firmly in the category of "life-timing" not "pent-up". Yes, it's physically possible for you to by something modest now, even while paying down the debt, but why bother? You probably know this already, but you'll be amazed how quickly you can "build equity" before owning a home by simply saving a larger and larger downpayment, especially if you've gotten used to that standard of living by your aggressive repayment of the student debt. 2-3 years ahead of you seems like forever, 2-3 years in the past seems like nothing.
You're only reason to worry would be if you felt the local market segment you're interested in were poised to shoot up in value faster than you can save up. The general consensus on here is that you have nothing to worry about. But, not everyone thinks that, and the rest of us could be wrong...
Pat-
Houses prices do not work on a per bedroom basis. There is a lot of stuff that does not scale with bedrooms e.g. kitchens, parking spaces... If you look at most buildings that have 1 and 2 bedroom condos the one bedroom price is closer to 2/3s of the price rather than half of the price of the 2 bedroom. In most of the areas I am looking at a 4th bedroom for a TH adds 20-30K not 33%.
Here is a very specific prediction:
Northrup Grumman will locate its HQ in Rosslyn, between North Quinn, I-66, Highway 50 and the Potomac.
Most of the top tier C-levels will live in Va. At least one will be in D.C. proper, in a +4BDR Room Condo of fairly new construction. At least one will be in MD. None will live more than 15 miles from Rosslyn in their primary residences.
All done by Monday 10/31/2011.
TN - I don't think too many will challenge that.
(Bethesda-based) Lockheed Martin to cut 1200 jobs
http://finance.yahoo.com/news/Lockheed-Martin-to-cut-1200-apf-174220915.html?x=0&sec=topStories&pos=2&asset=&ccode=
I don't know a single person/couple in my circle of family, friends, work that can buy a house, but is waiting for prices to fall.
So, I don't think there are that many of you out there.
Robert-
I agree although there are many people on this blog waiting it is due to a huge selection bias.
All-
It looks like the fed has no idea if they should expand/reduce the mortgage buying program
MBS program
housebuyer,
Sounds like it'll come down to helicopter Ben.
Fed thinks housing won't hold the bottom without their support....hahahaha..we all knew that since this thing began.
Welcome to reality..ever heard of bear market rally?? Enjoy (or stay away) while it lasts...
housebuyer,
Well as of the last meeting there had been no definitive signs that house prices still needed continued support. So it was all academic at that point, and yet it was still discussed. This tells me that as Robert keeps pointing out to spider whenever he brings up national data, those hoping for price drops here, better hope for price stability nationally.
If the nation starts another serious leg down, the government intervention will continue. The question is, what market does the Fed care about? My guess is the bank balance sheets, and hence while CA prices don't effect most of the nation directly, they may end up dictating Fed policy....
Their logic (or post-facto rationalization/justification) could be that so long as buyers are underwritten using strict guidelines, any mini-bubbles reinflated by continued 5% mortgage rates will be "harmless" in that the new borrowers can afford the payments...
I hope they don't think this way, but I can picture it being said.
spider,
How do you picture this all ending? The Fed knowingly letting the bubble deflate in nominal terms? The government running out of money and tricks?
What exactly stops mortgage interest rates of 5% (or below 5.5%) continuing indefinitely?
In my picture, it's the economy turning around, and moderate inflation returning, along with the confidence and jobs that stabilize nominal house prices. What's yours?
Robert said...
"I don't know a single person/couple in my circle of family, friends, work that can buy a house, but is waiting for prices to fall. So, I don't think there are that many of you out there."
Does that mean there is no pent up demand after all?
Cara,
You are spot on with that analysis. In a way spider is right - if home prices fall another 20% nationally we are going into a depression. The Fed will not let that happen.
And the world's largest bond fund, Pimco, which has traditionally assessed the risk of any new investment according to five financial criteria, recently added one more: the impact of any change in federal policy.
So, if professional investors are gauging the impact of policies out of Washington, it seems, perhaps unfortunately, residential real estate buyers might want to pay attention as well.
I personally work with two other people who are like me and have a down payment saved up but have been waiting for more reasonable prices to pull the trigger. I know two other couples who don't necessarily have a down payment, but are waiting to buy due to prices. These couples are the likely FHA 3.5% down candidates and would have been regardless of the bubble. Just because you don't know anyone doesn't mean we aren't out there. I would guess that if your circle of friends included more 25-35 year olds you might know someone waiting out the bubble.
Does that mean there is no pent up demand after all?
My anecdotal experience is there are zero of you guys.
Just because you don't know anyone doesn't mean we aren't out there. I would guess that if your circle of friends included more 25-35 year olds you might know someone waiting out the bubble.
Right.
i'll make a bet, that NGC sets up
near Dulles, either close to the Silver line or on the edge of Loudon.
Odds are they grab some of the old AOL buildings while they have a campus built.
Dulles makes it easy for their managers to fly around, but it's not crazy far to go visit their friends at the pentagon.
Cara,
Here is my take:
Fed knows quite well housing is overpriced across the board. Once they are confident depression is completely off the table - they will let the prices slide in a rising interest rate scenario. Inflation won't be enough by itself. I suspect nominal will come at least half way down, while the rest will get adjusted by many years of mild inflation.
By half way down - I meant half way down to the inflation-adjusted trend....
spider,
Fair enough. Not that different from me except on the timing and extent. Our trigger is the same though.
The question really then is, at what point are the remaining banks in good enough health that depression is fully off the table? Can banks afford another X% national decline and the resultant walk-aways? Or more specifically, can banks afford another 20-30% drop for the high end in the high priced areas of California?
I guess it boils down to me being more pessimistic than you on the $750k+ market of Californinia. That's where the ARMs are, that's where the damage will be concentrated if the Fed doesn't keep mortgage rates low for long enough.
Or maybe you think the rest of the country can recover without California?
Spider-
I am not convinced that housing is that expensive nationally. I thought that nationally housing is up something like 30-40% over the past decade, this is a little more than inflation, but not much. In most reasons a bad job picture is offsetting the fact that interest rates are low making monthly payments very low for new buyers with jobs. DC has just dramatically beaten the rest of the country. So I would be surprised if they thought housing needed to fall nationally. Instead they probably think low rates are needed until people start getting jobs.
Cara-
California is 13% of the countries GDP, I think it will be hard to recover without CA being at least flat.
I do think one reason that we may trend down a little even if the country stays flat is that we are using pent up demand faster. Because people here are less worried about their jobs they are buying houses, because mortgage payments aren't bad. As the economy improves and interest rates go up nationally the job situation will be better and pent up demand can make up for changes in interest rates. Since our pent up demand will have been used price reductions would be needed.
I don't see this happening quickly and I don't expect it to cause more than a 10% price drop. So if you are planning on staying a while low mortgage rates may make it a reasonable time to buy even if you lose 10% in house value over the next couple of years.
housebuyer,
prices increased nationally by more than 30% in 1996-2001. After that it was much much more than that.
well, currently the prices corrected to something like 30-40% of 1999 prices, agreed. but the problem is not really in the new acquistions, but in mark-to-market ltvs of the existing loans.
Konstantin-
I agree that the housing markets problem is underwater mortgages. I was just talking towards Spiders point. He said that the fed knows housing is inflated and needs to come down. This implies that current housing prices nationally are out of wack. I agree they may be slightly overvalued although they are not significantly above trend. So I doubt the fed thinks housing is overvalued. I think the problem is he is looking at places like Vienna where many places are listed for double to tripple what they sold for in 2000. These areas are way above trend, but nationally few areas look like this so all of the feds policy will be to protect the housing market nationally and hope that bubbles in some areas don't get too bad.
well, fed certainly has both national policies (interest rates, tax credit, etc) tools to manage housing prices as well as local ---via modifications.
but in the end it's all about how the mortgage market should function long-term (does fixed-rate 30-year mortgage make sense anymore?), how much of the total housing value is concentrated in bubbly areas (a lot), by how much national prices will drop if bubbly areas drop to normal levels?
how much money will be sucked from economy via these losses?
Konstantin,
Your analysis re: price increases completely disregards the flat years of the 90's (almost 8, give or take).
I gave an example of a neighborhood in Vienna that has done a double in 20yrs. I'd hardly call that "bubbly".
Was it Jeremy that talked of the dearth of sales in his target neighborhoods? I have maintained for quite some time that it was (IMO) the lower tier and the new construction that were at most risk for a big correction.
I won't go into all the reasons again, but we had housekeeper's and construction workers paying 300K for junk TH's in 'hoods' and we had investor/flippers and liar loans homeowners on the new construction.
It's my belief that the better (established) areas have many more long term owners and move-up buyers with plenty of equity. Yes, there will be some fall-out but nothing on the scale of the marginal areas.
I see an L in this price range (500-900) but no big decline. Unless something major happens, I don't see more than a worst case of 10% more down.
I don't have any stats, charts, graphs, guess on gov't intervention, etc.; so take it as pure opinion.
People settled in their homes will not "bail" due to paper losses. Again, my thoughts. Would any normal person (who can afford their mortgage) tell their wife and kids and relatives that they are going to go into foreclosure because the house is worth less than it was 3 or 4yrs ago?
Va_Investor,
all the points about new construction and people who shouldn't buy any home are valid, but the thing is --- loan size is not a significant factor that defines mortgage defaults. it could be for strategic defaults though.
people with expensive houses may have loans that are pretty large and more expensive then smaller loans, they could have stretched themselves debt-to-income wise in the same manner as people in the lower tier. i know a lot of people like that. people who used their homes as ATMs or bought a new home in 2005-2007.
i can very well see them defaulting if they have to relocate, lose a job, or just struggle to make the payment. a lot of people i know pay something like 5-6k monthly for a house that is too large for them. can very well rent something for 3k and have so much more disposable income.
Robert said...
"I don't know a single person/couple in my circle of family, friends, work that can buy a house, but is waiting for prices to fall."
...
"My anecdotal experience is there are zero of you guys."
...
"Right"
-------
I'm afraid I don't get what you're trying to say with these posts. That there aren't many people in a position to buy that haven't yet? Or just that you don't have many young adult friends/family? The first doesn't make sense for a housing bull, and the second is pretty random.
K,
Lose a job, get relocated or struggle, makes my point. Except for the "struggle" factor. The question is what the numbers will be. I don't know, but I'd more than guess it's far less than what has already washed out.
I don't know anyone who is merely struggling that would walk. Perhaps it's a generational thing.
Va_investor,
i don't know about generational thing, most of the people who have these $1 million houses tend to belong to your generation, not mine. most of them live a little bit above their means in terms of real estate, which can be a good idea in normal times. pretty bad idea now. i would say quite a few people bought their expensive houses saying that the equity they'll gain in five years will pay for their kids education. well, they do not have their downpayment now and it's their 401k plans that pay for college.
i am not saying that they'll default, hopefully not. but you do not need many foreclosures in the neighborhood to start a chain reaction. and there is almost no probability of price increases in the higher tiers. so it is L-shaped price pattern in the best-case scenario. does not make sense to buy such a house unless you are uber-rich, too much downside with no upside.
K,
I guess we run with different crowds. A majority of our friends already have kids in college and have owned for quite some time. Granted, I don't know most of their "personal" finances. I have not heard of any foreclosures.
The two sales in our neighborhood last year (around 1 million) were to the younger generation - early to mid-30's. Perhaps they will default?
Basically, I think you miss my point about established, destination neighborhoods.
housebuyer,
There are many reasons why housing is overvalued even after this correction. I will not go into all of them again.
Let me just provide one data point: Ownership rate is currently around 68%. Historically, this has been about 64%. We built too many houses, too fast. As we slide back, prices will have to adjust.
Linky
Granted, markets such as FL and NV may already have corrected completely - to your point. This is exactly why I think the markets still holding to their bubble gains such as NY, DC are the riskiest to buy into.
If we get a double-dip recession, it will result in severe deflation - in that case, we fall quite a bit more than I expect.
VA_Investor,
Certainly some neighborhoods can be more bubbly than others.
But even though there are less speculators in some neighborhoods if their mark-to-market loan-to-value levels are greater than 100%, and especially 120% --- foreclosures will definitely be abound. Those who purchased or cash-out refinanced at the peak have this problem.
Another thing is the substitution effect. Say someone was ready to pay a million dollars for a brand new huge 5-bedroom house on .25 acre in south riding in 2006. at the same time you could buy a 4-bedroom old colonial in north arlington for that amount of money. a lot of people decided to buy a south riding home. for many it was a huge mistake. these days a place in arlington still costs a million dollars, but south riding place is worth 700k at best. i'm pretty sure that creates some kind of competition for new buyers --- people are much more cautious with their money, they do not want to stretch too much, they are not buying extra bedrooms for investment purposes.
"Spider said...This is exactly why I think the markets still holding to their bubble gains such as NY, DC are the riskiest to buy into."
And applying this faulty (incomes dont matter - all revert to the mean) logic of Spiders, one has to think that Detroit (which is at 1994 values or thereabouts) will EXPLODE upward.
Glug, glug, glug...
By the way Florida, California, Nevada and Michigan will have many more foreclosures in the next five years than most of other places. So I'm not sure they have corrected.
K - The number of homes in South Riding that ever sold for over a million is very small, so it appears you're likely overstating the extent to which values there declined relative to Arlington.
Mozart,
You are right about $1 million figure, but I know people who got places more expensive than 900k and I also saw transactions for similar places in 600-700k range.
Not many though.
Again, this is a problem with data, you can talk about national stats easily, can discuss local anecdotes as well, but it is very difficult to talk about any level of granularity between these two.
K, values have declined in most parts of Arlington too, according to Zillow and other sources. We'll know more when the January assessments come out.
But the decline appears to have been more gradual and may not be more than 20% over the past 4 years, and it's possible that prices have hit bottom. On the other hand, in some ranges, prices haven't changed much, but the number of sales is low, with many unsold houses still for sale or pulled for the market, so it's hard to say what the current market prices are.
Your point is still valid, it's just that the reality may not be quite as extreme as your example.
spider said...We built too many houses, too fast. As we slide back, prices will have to adjust.
Again with your national housing statistics. Here's what's going on locally:
Demand for new homes is growing faster in the Washington area than in any other major U.S. city as existing inventory shrinks and a record $3.52 trillion federal budget fuels the local economy.
Builders took out construction permits on 4,442 single- family homes in the Washington metropolitan area in the third quarter, up 11 percent from a year earlier, according to the Census Bureau. Nationwide, permits fell 17 percent.
Refuted again. When will you give up.
Robert,
do you know how long is the horizon of a builder/banker?
it is from bonus season to bonus season. they cannot completely shut down operations, it is expensive unless they fire all their office folks. so they build something hoping for a sustained recovery. again, we are not in area, where you'll need to bulldoze a lot of homes to support prices, no doubt about that.
for example i know some folks who built some luxury townhomes in herndon. they were selling from something like 700k at the peak. there were 30 planned and 20 build by the time prices tanked. they finished the project and sold remaining 10 new townhomes for 450k. made the original buyers extremely happy.
K,
From what I know of the current environment of lending on spec housing (which I imagine your example is, given the total number of units) it is dead.
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