Continuing to examine and hold a lively discussion of the Northern Virginia Real Estate market.
Please post your local house search updates, MLS finds, on-topic ideas, and links here.
Pat -I don't agree with your premises that it is unhealthy for a market if all properties do not cash flow on year 1. I think that is missing two/three important benefits of ownership. First, it ignores that rents & housing prices will go up with inflation over the long run. This makes the effective cost of renting higher and of buying lower. Second, part of your payment as an owner is paying off the mortgage. This is an investment so I don't think that rent should have to cover it necessarily. Finally, it has always been a status symbol to own in some areas in, which case renters should not have to cover this benefit. I believe the argument for the first couple is much stronger than the argument for my last point. Either way if a rental is cashflowing from day one it is a much better investment than for the owner than the renter. I don't think by default this should have to be the case for the market to be healthy.
HB: The tax advantages of owning a rental property should also be mentioned, particularly the ability to write off a portion of maintenance costs. As to owning in status symbol areas, that type of area is generally within walking distance of a metro station. The renters will pay slightly more for this benefit, but the owner benefits in the long run by having a property that is more likely to rent and increase in value. Pat: Why don't you ask your landlord if the property you rent cash flowed in year 1 and how he/she is doing now.
buyer maybe-Good point. I also forgot to mention the tax benefit for a renter if they owned. If the rent cash flows, that means they are paying more than the mortgage. If the renter decided buy they would also be able to deduct the interest on the mortgage, so it would be significantly cheaper for them to own rather than rent.Obviously if you can find something that cash flows from day one you are in great shape and it will likely be a good investment, but just because you can't do this doesn't necessarily mean the markets are abnormal or long term the property is a bad investment
I think part of the issue too is Pat is looking in places like Arlington where the concept of "highest best use" comes in to play. Consider a somewhat run down SFH in the middle of clarendon. The cashflow buyer will look at it and say, "that house will rent for 2K a month, so the place is worth 360K...and since they are asking 500K for it, this market is very unhealthy and will crash!!!"What the cashflow buyer is not considering is that the value in that property is not in the shabby SFH but the underlying land. A developer with an eye toward highest best use will think, I can build a McMansion for 450K, and sell the whole thing for 1.1 million. Therefore, the property is worth 500K easily.Examples can be more extreme depending upon the character of the area, and the zoning potential. Thus, a shabby SFH that rents for 2K in the middle of a skyscraper district can be worth several million dollars easily.Still, the cashflow buyer will sit there looking at that high pricetag waiting for the CRASH he knows is coming. Sadly for him, that crash is never going to happen.
I posted about these issues on yesterday's thread. Should have read this thread first!
MM-It looks like someone agreed with us that the house was pretty and after the price reduction was worth bidding on. nice house bad location
hb,I agree. Nice house. Nice price. I don't think the street is a big issue.
VA_Investor: A few days back, you asked me for my opinion on the local/regional market. My participation on this board is sporadic and so I’m just seeing your question now. Government intervention in the real estate market has been nothing short of drastic and desperate, i.e.: • injecting billions upon billions upon billions of dollars into Fannie and Freddie; • becoming the lender of last resort and financing the overwhelming majority of private sales (let’s face it, but for FHA, VA and Fannie/Freddie – would 90% of the sales in the last 3 years occur?);• raising conforming loan limits to an astronomical level (the effect of this on our area cannot be overstated); • forgiving the borrower for taxes owed on short sales; • all of the various foreclosure prevention programs (too many to name – the latest involves giving hardship loans to unemployed people); • $8K loan for first time buyers; • $8K tax credit for first time buyers; • change in accounting rules so that banks don’t have to account for true value of property until/unless the property is sold/foreclosed;• letting investment banks park their bogus MBSs at the Fed so that they could participate at the Fed’s discount window, something that has never happened before• lending money to the banks at practically 0% so that these same banks can earn their way out of the huge hole they dug because of crappy real estate MBSs and CDOs; • Fed purchase of hundreds of billions of MBS in order to, among other things, keep interest rates and mortgage rates low; • Fed’s willingness to risk hyper-inflation in order to keep interest and mortgage rates low; and • Other schemes and mechanisms that don’t come immediately to mind or that we’ll only find-out years later, probably after they’re declassified and/or FOIA’d.But for the above, the local/regional real estate market would be awful. I’ve seen you deny or make light of the above in terms the effect it had on SAVING, yes SAVING, you and all other real estate owners in this area and every other area. A failure to acknowledge this is a credibility failure. OK, so given the above, where are we going? I have no idea. I don’t see “happy days” ahead over the short to mid-term. I’m not predicting a precipitous CRASH. But, anyone looking at the larger macro-economic factors facing the nation cannot seriously think that DC’s next big real-estate boom is right around the corner. Instead, I see storm clouds . . . I think government contracting in this area will decline enough over the next few years that it will impact the real estate market. I think unemployment rates in this area will remain high enough that it will impact this area’s real estate market. I think the government salary freezes will not help, and will likely hurt, this area’s real estate market. I think government hiring freezes and reductions in budgets are just around the corner . . . . stay tuned. I think the number of people upside down on their house will grow and people will continue to walk-away . . . perhaps not a tsunami, but enough that it places downward pressure on the market. On the other hand, I think mortgage rates will remain low for as long as the Fed can keep them there. They have very few tools left in their belt, so no more tax credits. Moody’s is already threatening to downgrade the US. With this in mind, is now a “good time to buy?” Maybe, maybe not. Will late 2011/2012 be a better time … probably. If I had to put a “number” on it, which I’m not inclined to do, I’d say 5-10% better. Is it cheaper to rent for now … for me, yes, there is absolutely no question about that.
Mike,I just responded on yesterday's thread.
VA-I wasn't worried about the street. I was worried that less than 100 feet away there is a massive parking lot/landscaping business. Mike-I could probably argue a lot of the points, but the one I find most striking is the comment about the fed's willingness to risk hyperinflation to keep rates at 0%. The fed/me think the risk is the opposite. Keeping rates at 0% will likely keep inflation positive, but low. If they had rates at a normal level ~5%, unemployment would be higher and we would have deflation not inflation. Even with rates at 0% inflation has been very weak for the last couple of years. Inflation is usually caused by a shortage of supply of goods. With 10% unemployment and industrial utilization way below normal levels there is no shortage of supply.
hb,I doubt landscaping and parking lot is the highest and best use for that parcel. I guess I'd want to know zoning/master plan, but I'd think any future use would be an upgrade. jmo.
HB, I am not an economist, but I've heard them debate causes of inflation. Some of them believe it's a function of the money supply, not shortages of goods. There is usually a somewhat inverse relationship between unemployment and inflation, though there have been periods (e.g., in the 70s) where both are high.
Ace-Agreed there are many possible causes of inflation. For example the oil shock in the 70s caused inflation. During the 70s & 80s inflation was higher when unemployment was low & vice versa. There is also a little bit of a lag between unemployment and inflation.Although some economist claim that inflation is related to money supply there is little to no empirical evidence of this (when things get totally out of control e.g. Zimbabwe a relationship appears). If you look at all of the data over the last 50 years money supply growth actually has a negative correlation to inflation. The main problem is the fed increases the money supply faster when times are bad and inflation is usually low both during and after bad economic times. The problem is inflation is based on volume of money * speed the money moves. So although the fed is increasing the supply it is all sitting in bank reserves and not going anywhere so we don't get higher inflation. I assume that if/once money starts moving the fed will start reducing the money supply
Cheryl"Higher priced places do not cash-flow and haven't in the 30yrs I've been investing in NoVa. I feel like I am talking to a brick wall."it's a different of opinion and conclusion.I remember very clearly in 1997 talking to high power investors about stocks, and their statementwas "Tech stocks don't pay dividends, you can't assess them by yield".And i remembered a very severe ache in my kidneys as i watched the NASDAQ.stocks move faster then real estate, but, I believe that the fundamentals of all investing are similiar. Cash Flow matters, yield matters, buying for appreciation can be a variation on speculation.some things clearly affect prices positively. (Schools, metro, population growth, income growth) but some stuff wn't change.the blue line in anacostia? no joy there. The Green Line on U Street. Lots of joy. Cheryl has made a lot of money in real estate. Shes' also investing in areas, i can't invest in. I have a medical condition that makes it hard to drive and almost dangerous to drive in close order traffic for extended periods of time. it's why i focus on the areas where I can take the metro.I'll tell you why i dislike negative cash flow. My dad made a lot of money in real estate investing. His comment was "Kid, the first time you go over to unstick a toilet at 11 PM and realize you spent $400 for the privelige, you will cut your wrists". Now maybe it's just hard to do that around here, and the fact i haven't been able to do so, is data, but, warren buffet says "It isn't until the tide goes out you see who is swimming naked". I'm not totally insane, i share some of my favorites with Cheryl offline, i think she's liked some of them too. It's not easy, and it's a substantial piece of my portfolio to buy a property, and i'd like to make a decision i won't regret. Am I moving cautiously. Yes. But, at the end of the day, I want to be happy with my decision.
Mike & Contrarian-The problem is the government is going to continue to do these actions until the market is stable on its own. I agree housing would be much lower if the government hadn't acted, but why would you think they will abandon all of their programs immediately. They have shown multiple times they don't want housing to fall much further and they will do whatever is necessary to ensure this happens. Personally I don't think they will need to do many new programs, but if housing falls apart I think they will start trying to reinflate it.
Contrarian-The difference is housing nationally is very close to its long term historical fundamental value. So if it is off they only need to keep prices flat for a few years with a normal amount of inflation. I think you are underestimating how much healthier the banks are compared to a few years ago. They are not in amazing shape yet, but the large banks have all reduced their leverage by 50% and continue to reduce it. Perhaps you are right and their will be a collapse at some point, but with investing timing matters. I think we are at least a few years from a very bad event (unless we havea huge war, pandemic...) In which case I plan on trying to create good returns during this period and start removing risk if it becomes clear banks will be in trouble.
Contrarian-Also aren't both the housing and stock market up ~30% since the lows of 2001. Obviously they both have been very volatile, but if you are trying to tell me either of these are below 2001 levels I disagree. Obviously 30% for stocks in 10 years is bad, but it took them time to recover from their extreme valuations. So as many of us have said we think housing will recover from being slightly over valued by modest declines followed by 5-10 years of staying flat.
pat,My parents had alot of re as well. Back in the early 80's I was talking to my dad about some houses we were looking at in Silver Spring and I mentioned "negative cash-flow". He did a double-take. Had never heard of it.Those basic brick colonials around Sligo were going for a 100k or so. Due to the interest rates, the negatives would have been 4 or 500 per month.Anyway, this area is expensive but I doubt anywhere you go that you would find good cash-flow on any property costing more than 2/3rds of median.Here is an example of a recent purchase:price 115kdp 25Kfix-up 5Kcash-in 30Krent $1,200piti plus condo $1,000so, I get $200 plus principal paydown of $130(? 20 yr am - sorry I don't have the numbers in front of me). $330/per month on my 30K.Sure, there will be some repairs, etc. down the road but I am quite sure my tenants aren't going anywhere.Check Reston 20190 for rentals under $1,200. I expect to be at $1,400 in 3 or 4 yrs.Where can you get a condo for 115K? It's not a slum (it's 1/2 mile from my house), simply a blue collar "bread and butter" rental.It's a block from the bus to metro (less than a mile away) that will open in 4 or 5yrs.Any appreciation will be magnified by the leverage. An increase of 5% is over 5K. 5K on my 30K is pretty darn good.
"Contrarian said...You really think they can stop it from falling forever? I doubt it. They can only delay it, but ultimately, there will be a credit collapse, another banking crisis and a price collapse."Stop it from falling forever? No.Longer than you (personally) can imagine? Yes, clearly.Longer than the rest of us can imagine? Yes, mostly.Longer than any of us can stay alive? Yes, maybe. Fact of the matter is some permabear types have always thought that the govt can no longer "kick the can" and this time is "different" -- this time, there will be collapse.Senator Fred Stewier used to rail against the price supports for agriculture & the like. He was convinced these measures would bankrupt this country, and we could only kick the can down the road so far. That was 70 years ago. The agriculture price supports are still alive and kicking. Those waiting for the govt to relax those controls, as well as those waiting for this to cause the govt to collapse are all dead.23 years ago, Prechter & Frost were convinced that the can kicking can go no further, and that great depression II is upon us. 23 years later, the Dow is thousands upon thousands of points higher, Frost is (I think) dead, and Prechter would be bankrupt had he not made a living peddling doom vs putting his money into the market.The point is, can kicking has been going on since day 1 in this country, and can continue much longer than any of us can fathom. If history is any guide, the average lifespan for an empire with as many resources as the USA is somewhere between 700 and 2000 years. As we are 250 years in, its still early, relatively speaking. While I have no doubt the US will eventually swing at the can and whiff, I have no idea when that will be. Thus given how long can kicking can work, its incredibly naive to think this is the "big one" from which there is no turning back, and will finally cause the world to crumble.Fact of the matter is anyone who suggests they KNOW that this time the govt can kick the can no further has not been looking at history. Every few years, some expert comes around saying "this time" the can kicking stops, and every single time they have been wrong. Thus anyone now suggesting this time the can kicking must stop is in essence saying its "different this time". Eventually, one of them will get it right -- however just like it is when someone says its "different this time" its best to assume they too will be wrong.
HB, by what measure are you saying that the stock market is up 30% since 2001? When I look at the S&P 500 graph on Yahoo.com, it appears to me that the index is about = where it was in 2001.
Ace-Bush didn't really start trying to pump up the economy/stock market until 9/11. So I looked at where the markets were just after 9/11 vs. where they are now. The Dow & Russell 3000 are up ~40% the S&P 500 is up just under 30%, and the Nasdaq is up over 80%. I agree with you that markets are roughly flat compared to the start of 2001, but I don't think that is the time period contrarian was talking about.
Cheryl Says"Anyway, this area is expensive but I doubt anywhere you go that you would find good cash-flow on any property costing more than 2/3rds of median."And people give me shit for looking at dumpy properties? I'm out there bottom fishing, and it's hard, and people give me heat?
In the interest of chasing data.http://www.newyorkfed.org/creditconditions/go to new delinquincies by type.Gee $400 Billion in deliquencies and the entire system almost exploded?a year later a 4 billion dollar sell order trips off a trillion dollar stock crash?now you go over to the tab marked mortgages.go to Arlington, pull down jumbo mortgages, go to % ARMS.it says +32%.now is that an increase or is that just 32% are Jumbo ARMS?
http://franklymls.com/DC7438046assessed 543Ksells for 299K i saw this one, real clean.
what is the general take on semi-detached houses?I worry about how well the common wall agreement works.
HB Says"The problem is the government is going to continue to do these actions until the market is stable on its own."That's the problem.These actions don't stabilize the market. Ask the Japanese.instead of letting People file Bankruptcy and do Cramdowns.Instead of Liquidating Banks and making their depositors take haircuts.Instead of firing the people who screwed all this up, they got huge bonuses.
pat, I don't think anyone is giving you heat for bottom fishing, it's just that your expectations may be unattainable.The transition area DC properties seem to fit your numbers criteria. They seem quite low-cost compared to median prices. Since I know nothing of DC, I really can't comment on the listings you post.Arms have proven to have been a good gamble over the past 5-8 yrs. I guess the question is how much longer will the indices remain low and whether equity exists (or other assets) to make a refi possible. Another factor is the ability to take on a higher adjustment.p.s. I owned a duplex with a shared wall for almost 15yrs. It was built in the early 40's as a duplex. I never heard a complaint from either side about noise.I owned both sides, so I could control the maintenance of the entire place. My concern in owning one side would be exterior appearance (different roofing, lack of maintenance, ugly additions, etc.).
contrarian,There was a Forbes article 11/30, also citing 2009 data, that showed that the DC region was the only region nationwide to experience an increase in median income.
Interest rates are up.a) tax cut packageb) central banks diversifyingc) growth scared) all of the abovee) none of the aboveI didn't see too many analysts predicting a 100 basis point move in the 10 year yield a month ago, but for some reason they all can explain it in hindsight.I'm not predicting this, but the credit markets could force our hand into austerity and recession, just like they did in Ireland.This is what it would look like at the beginning, at least.
Possibly two causes of long-term bond rates increasing:1. Stronger growth outlook.2. Tax compromise will lead to higher deficits than were expected.Short-term are basically flat.
Robert-I agree it could be any of those things. Surprisingly there is no historical relationship between countries deficits and interest rates (e.g. countries like Japan have had high deficits and low interest rates forever, while while Brazil has low deficits and high interest rates)That said I think a big part of it is that people were pushing yields lower because of the expectation of QE2. Now that the announcement happened some people started selling, which caused it to trip some technical levels. If you look at what happened to interest rates before and after the first QE it looks similar to now. Either way it is really hard to say what caused it or if it will continue. My best guess is that rates will not go up that much more, and could come down over the next 6 months, but who knows...
I wouldn't worry about credit markets forcing austerity. The difference between us and the European countries is that we can print our own money and buy treasuries to reduce the yield. In Europe their debt is in Euros and individual countries don't have the ability to print money as a backstop if necessary. Although I'm not predicting this happens, just saying we have the option.
HB,I agree with you about the technical levels.Also, I understand about traders trying to get in front of the Fed on QE2.The rout continues today.
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