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Megan McArdle on refinancing. There are super-low rates right now, but it helps if you are in a position to buy or refinance. So many are still not.
Friday, August 5, 2011
Northern Virginia Bits Bucket 8/5/2011
Posted by Harriet at 12:18 PM
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16 comments:
This is a great time to refinance, if it makes financial sense for you. We are in the middle of refinancing our jumbo confirming loan to 4.375%.
I knew our appraisal would go up since we bought our N. Arlington SFH in Spring 2010. However, it went up about $72k or 12% - more than I thought.
I'm sure the bears on this board will argue that its another bubble.
Jewel, I don't think it's a bubble. A 12% YoY increase in one of the most overpriced areas in the region is totally natural and bound to keep happening. Prices only go up, now's the time to buy, if you don't buy now you'll be priced out forever, and renting = throwing money away. Sure wish I had jumped into the market sooner to enjoy a leveraged investment that would earn me double-digit interest compounded annually without capital gains taxes. You should refinance, add another $100k to your house with new granite countertops, go shopping, and enjoy your free money.
Wow Kev! You've outdone yourself here. Jewel was an informed, patient buyer who obviously landed a good property at a good price.
Appraisals are notoriosly conservative these days.
Jewel, the bitter jealously is palpable and I seriously doubt that Kev has any idea of your financials or fiscal philosophy.
Just an ad hominen attack. I congratulate you - both on your excellent purchase and taking full advantage of the current dip in rates.
Lighten up. Her comment was something I hadn't heard since back in the bubble when people were announcing how much instant equity they had. Maybe she was a smart buyer, but she's in the same mental state as those who salivated over their new "wealth" and couldn't help but announce to the world that they had it. Of course they mocked the idea of a housing bubble, and simply couldn't compute that their house being worth more than double what it was a decade ago ago despite incomes only going up a fractional amount as well as the rental prices which are a much better deal than buying.
But yeah, maybe I'm just being bitter and jealous, just like I was when I was in 2004 as I tried not to roll my eyes or open my mouth when the braggart couples I met during happy hours were talking on about almost the exact same things as she is right now.
I wasn't picking on her, I was pointing out how eerily familiar those comments were. The irony is that her last sentence was mocking anybody who dares to think that prices might go down there, or that a 12% increase in one year isn't a warning sign. Must be jealousy.
New poster -- I've been a long-time lurker, but finally feel compelled to chime in.
I wouldn't venture to guess what real estate prices will do in the next couple of years, because I believe it's tied to the general economy, what happens with the federal budget cuts, etc. etc.
However, regarding the argument that, all things being equal, real estate prices in the "Immunozones" must go down because the ratio of home price to income has changed over time represents a fundamental lack of understanding of the changes in demographics of these areas.
I know there were long discussions on this board in the past (complete with some excellent data) on the differences between these areas and the more recently developed outer 'burbs, that, in great part, explained why the outer areas were more dramatically affected by the crash.
I won't go back through those arguments in detail, but, as someone who has lived in these neighborhoods for the past 20 years, the bottom line is that the demographics have changed dramatically. When I first moved to Arlington around 1990, most of my neighbors were older "empty nesters" of relatively modest means living in unrenovated houses. Some have moved on and sold out to younger, wealthier people, and some still live there. For the ones that are still live there, their incomes are low, but their houses are paid off. It doesn't matter that they couldn't afford to buy today. A significant portion of the residents of the city of Alexandria live in public housing (right next to million dollar row houses). The average level of income for the neighborhood really doesn't tell you much.
However, I'm just restating things that have been debated before on this board ad nauseum. One point that I haven't seen discussed is whether average "income" is the right measure when you are talking about the higher end neighborhoods. Clearly, there are people who finance $800,000 to million dollar and up homes on the basis of their income. However, I would argue that a great number of people who are spending that much on a home have assets above and beyond their income.
Another blog I frequent had a recent discussion of inheritances, and virtually every poster mentioned that their inheritance had allowed them to buy a more expensive house than they would have been able to, based solely on their income. I personally know a great number of relatively young, as well as older, people in this area who either have inheritances or jobs that have allowed them to accumulate wealth (stock options, etc), or both. When people have invested wealth, they generally manage it so as to maximize growth, but minimize "income" (why would you pay income tax on money you don't plan to spend?). I have a relative who has a net worth in the millions that has about $90,000 in "income" each year. She has a beautiful house in a very exclusive neighborhood that was paid off twenty years ago. My situation is similar, albeit not so dramatic. Our incomes don't tell you very much at all about what kind of house we can afford, and there are far more of us out there (especially in this area) than you think.
I won't go back through those arguments in detail, but, as someone who has lived in these neighborhoods for the past 20 years, the bottom line is that the demographics have changed dramatically. When I first moved to Arlington around 1990, most of my neighbors were older "empty nesters" of relatively modest means living in unrenovated houses. Some have moved on and sold out to younger, wealthier people, and some still live there. For the ones that are still live there, their incomes are low, but their houses are paid off. It doesn't matter that they couldn't afford to buy today.
Madison, I understand this point, have thought plenty about it long before I've ever known it to be a contentious issue on this site, and I have modeled this probably five times over the past several years to determine how the per-household income can remain rise rapidly while income remains stagnant. Without a significant alteration of the lending industry, interest rates, or government subsidies, I cannot find any reason for a deviation like this to occur.
The theory that it's a demographic shift with incomes (essentially) being artificially low would at the LEAST need a historical comparison to a comparable market as proof that it can happen.
I've modeled this and I've found it to be practically impossible given the demographic data available. The age distribution shifts in Arlington are pretty consistent with the distribution across the United States.
Yes, I have as well considered how an increase in investment or inheritence wealth could impact these ratios. Again, there isn't any corroborating evidence to support such a theory. Down payment percentage across the country plunged while RE prices skyrocketed over the past decade. To accept on blind faith or based on one's own anecdotal evidence that this is what's driven up the home prices without corresponding income increases is pretty naive, in my view.
Again, all of these arguments are fun, but they're absent of any meaningful comparison. They require one to believe that
a) there was an unusual demographic shift in Arlington inconsistent with the rest of the country, which there isn't.
b) that buyers are coming to the table with five times the down payment that they used to, which there's no evidence to support. c) this has been repeated throughout time in different cities with similar
d) that rental prices don't react to the change in demand for the area, which absent such things as rent controls being suddenly enforced, simply does not happen, and
e) that for this to happen in perfect tandem with the housing bubble is merely a coincidence
While I appreciate your opinion, I think you and some others want to believe that this can happen absent all empirical, statistical, and economic evidence to the contrary. I don't make any economic or market valuations based on faith. The numbers speak for themselves.
Kevin,
I didn't say that income wasn't relevant, I was just saying that it is much too blunt of an instrument to give you the whole picture. I realize you have great faith in numbers, and models of larger markets are interesting and instructive, but don't tell you much at all about how individual real estate markets behave. Houses are not widgets, and, while the substitution effect applies, the number of variables that go into it make it virtually impossible to capture on a spreadsheet. Not to mention the emotional aspect of a home purchase, which in the case of a "non-investor" (someone who is just buying a house to live in) is huge. As I noted, larger trends influence the general direction of any real estate market, but it is also clear from the last five years that the markets do not move in lock step.
In my experience, real estate markets can vary almost block by block, and this effect has only been exacerbated after the crash. In one area I've been watching, houses on one street sell within days, while houses in the same neighborhood, just blocks away, sit for months, if not years, because they are in a less desirable location (closer to a busy street, less desirable lot, etc). I agree that you cannot assume that any house in a good neighborhood will always appreciate in value. This was the big mistake many made during the bubble, when people were buying almost indiscriminately. I've seen many examples of people who bought a flawed house for "full price" in a good neighborhood in 2005, and who've taken a bath, while someone has made a profit on a "perfect" house only a few blocks away.
But my point is that you don't have sufficiently granular detail to be able to model these types of effects. You say "down payment percentage across the country plunged..." We obviously aren't talking about across the country, or even across the Greater Washington Metropolitan area. Further, the fact that the overall demographics in Arlington haven't changed "that much" is immaterial. It only has to change around the edges, with the new purchasers. As I noted, there are plenty of longer-term residents who paid $50,000 (or less) for their homes thirty years ago. Their income is in those numbers, too. Further, Arlington is not a closed market. If an area suddenly becomes desirable (short commute, good schools, etc), it attracts people from all over the area (and, in fact, the country). Modeling who already lives there is meaningless. How do you model the incomes of every lawyer/lobbyist couple who live in Capitol Hill who just had a baby who suddenly NEED to live in Arlington (or face $30,000 per year in private school costs, need for more space, etc)? Again, the average income of the residents of Capitol Hill isn't very helpful as a measure.
Loose lending standards during the bubble clearly allowed people to buy more house than they cold afford in all areas. However, even the fallout of that period has had little effect in Arlington. If we experience massive layoffs and unemployment in this area, will prices go down in Arlington? Sure. But even then, I will bet that prices will go down in Arlington less than they will in other areas in the region. Isn't Arlington still a better bet? Today, banks are not lending people more money than they can afford to pay back. Whether you agree with it or not, the market is what people are willing to pay, and they is a steady supply of people who are willing to pay a lot for certain neighborhoods.
I have a family member who is an aeronautical engineer. She can't model how bumblebees fly, but she doesn't try to deny that they, in fact, do.
One more thing -- I don't live in Arlington any more. I do spend $30,000 per year on private school. My child is very happy where she is, but if I have another child, Arlington, here we come! An additional $60,000 per year can pay for a lot of house.
Investing in real estate on the rise
http://www.washingtonpost.com/realestate/more-people-turning-nest-egg-into-a-home/2011/07/27/gIQALMTHwI_story_1.html
"This region is the only one of the nation’s 20 major metropolitan areas to consistently post price gains this year, according to the closely-watched Standard & Poor’s Case-Shiller index."
Kevin,
What data do you use?
I found the following at City-Data.com
http://www.city-data.com/city/Arlington-Virginia.html
For all of Arlington county, median household income increase ~50% from $63k in 2000 to $96k in 2009.
Median household prices increased ~140% from $233k to $559.
In looking more closely you see the following(Note-I think this chart needs a factor of 10 adjustment to match the total household numbers shown in other charts but I'm presuming both charts are consistent with each other):
~1350 households making $100k+
- $100-125 = 500
- $125-150 = 350
- $150-200 = 250
- $200+ = 250
The $400k+ housing market:
Home values: 1585.
- 400-500k = 600
- 500-750k = 625
- 750-1,000k = 260
- 1000+ = 100
It seems to me that regardless of the median income lagging the housing gains, there are more than enough incomes to afford the high end housing market. I'm not concerned that the $100k+ median household number is roughly 200 shy of the number of homes because as has been pointed out, there has to be some accounting for older families whose house is paid off even if they couldn't afford it today.
Much like CRT showed that there wasn't much pressure from an exotic mortgage standpoint, I also don't see how there is much pressure of people who can't afford their homes.
My $0.02
Madison, thanks for coming out of the lurker "closet."
In addition to the examples that you and mytwocents and others have described, here's another: there are a lot of retirees in close in neighborhoods, with paid off houses (or low mortgages), and who are drawing as little income as they need from their tax-sheltered investments. Like Madison's friend, they might appear to "make" only about $70K or $90K, but they may have made a lot more than that pre-retirement (i.e., no inheritance), and may have net worth many times current income, in addition to a house worth $800K or more.
It may be that no one has done an empirical analysis using all available data yet (or maybe they have - one would have to look in the real estate and finance academic journals for these articles, which I have not done).
But if there is no study, as long as the prices have been fairly sticky or slightly rebounding in parts of City of Alex., parts of Arl., and parts of FFX Co., i.e., for 4+ years now, one would need to explain that price stability/ rebound. And I think a lot of the anecdotes people have offered here are consistent with that.
In other words, the longer that trend continues, the harder it is to accept the hypothesis that prices will decline significantly because incomes are not consistent with house prices in the same ratio as in the past, in these areas, without a full empirical study controlling muddying factors.
In any case, we'd need the same quality of data/design to test that hypothesis, as one might want to test the hypothesis that there are factors in addition to the demographic/income shift that may support prices.
I agree that if we saw 10 more years of similar experience, we'd have better info. I also agree we just don't know what effects will be brought about by future govt. spending and economic changes.
Kev,
I don't think prices will only go up inside the beltway. I'm actually surprised my house has gone up as much as it has. And no, I don't treat my house like an ATM, besides I already have granite counter tops ;)
In other words, the longer that trend continues, the harder it is to accept the hypothesis that prices will decline significantly because incomes are not consistent with house prices in the same ratio as in the past
I'm not saying that prices will decline significantly. Yes, price-stickiness, stubborn sellers, and irrationally/emotionally/psychologically-driven buyers can perpetuate this until prices, incomes, and rents fall into line with each other.
I'm arguing against the notion that because Arlington is now "special" or just because the incomes there have gone up a bit more than other areas does not justify prices at these levels. Anonymous (and to a lesser extent you) was attempting to justify this disparity beyond the scope of the housing bubble, that this is actually happening because of a paradigm shift in demand which just so happened to occur with the bubble itself. I think most people who pay attention to these sorts of things know that this isn't a coincidence. There's no case to make that Arlington home prices would be where they are right now were the bubble never to have happened.
Jewel, I'm just playing with you. Make sure you keep that granite sealed so it doesn't stain;)
"Kevin said...
a) there was an unusual demographic shift in Arlington inconsistent with the rest of the country, which there isn't.
b) that buyers are coming to the table with five times the down payment that they used to, which there's no evidence to support. c) this has been repeated throughout time in different cities with similar
d) that rental prices don't react to the change in demand for the area, which absent such things as rent controls being suddenly enforced, simply does not happen, and
e) that for this to happen in perfect tandem with the housing bubble is merely a coincidence"
Hey CRT, didnt you and Cara find some evidence just along these lines?
Actually, I know you did -- there is no doubt about it. Still, im having trouble finding it.
Do you remember where it was, or do you still have it handy?
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