Housing Bubble in D.C. Area Bursting?
While still torrid by national standards, the housing market in the D.C. area has cooled off compared to recent years.
D.C. Area Housing Market Cools Off (WaPo, A01) YahooNews
Washington area temperatures may be sizzling, but the once-torrid real estate market seems to be cooling off as houses stay on the market longer and the number of homes for sale rises. Home sales tend to slow in the summer, but the number of houses for sale in the Washington area has climbed by 50 percent in recent months. The available inventory has risen to about 35,300 homes, up from an average of about 23,000 in the past three years, according to Metropolitan Regional Information Systems Inc., which runs the local multiple-listing service.
The average number of days a house stays on the market has crept up by two days in Fairfax County, to 16 days in June from 14 days a year earlier. In Montgomery County it has risen to 20 days from 18 days, according to MRIS. Those are, however, still short turnaround times by historic standards. Meanwhile, the number of houses sold in Northern Virginia’s inner suburbs fell by 9.6 percent in June, compared with a year earlier. In the District, the number of houses sold dropped by 8 percent, while in Montgomery County they dropped about 1.6 percent.
Local real estate brokers say they are seeing signs of a change. “The market has slowed for sure, especially at the high end,” said Wes Foster, chairman of Long & Foster Real Estate Inc. Foster said the market is returning to “normalcy” after a frenzied era of multiple contracts, bidding wars and desperate buyers waiving their right to property inspections or appraisals. “It’s very healthy,” he said. “It worried the pure hell out of me the numbers we were seeing. I remember Boston in 1982 to 1989, when [prices] went up 25 percent a year for six years, and then in one year [they] fell 87 percent. The ride up for everybody selling was wonderful but the ride down was awful. . . . It was very painful and I don’t want to see that here.”
Foster said the recent manic market has been fueled by what he called “crazy fools running around buying houses as investments,” with “bad loans, interest-free loans.” “They’ll get hurt, and I think they should,” as prices inevitably correct themselves, he said. A slowdown is needed because so many average people have been priced out of homes or compelled to pay high prices, he said.
One quarter isn’t a trend, but I’m certainly hearing a lot of rumblings in this direction. How much of this is the natural fact of markets being cyclical and how much of this is a result of the idiotic moves of Alan Greenspan and company to ward off non-existent inflation by raising interest rates is unclear.
I have recently moved to DC from Chicago. I could have bought a place here but instead I chose to rent for the following three reasons;
1 For a comparable property in DC, NoVA and Montgomery county (basically area you can commute from) the fully loaded monthly cost of rental is half that of ownership (including tax benefits). This observation is based on about a dozen pairs of very comparable properties either being sold or rented. As a result it is clearly cheaper for me to rent rather than buy.
2 Given the above observation only reason anyone would buy would be if they believed that property market would continue to go up by some constant number to justify the higher monthly carry cost. For me that number is 7%. I don’t believe the market will continue to go up by that number because; a) we are already way above any affordability threshold, most people in who live here can’t afford the median priced home, b) base closing impact on NoVA and DC, c) rising mortgage rates, d) constant media reports on ridiculous property prices in our area.
3 More than half of the properties I looked to purchase were being sold by people who had never lived in them. These people were asking me to let them earn over 500% return on their equity (typically less than 5% of purchase price) over a period of less than a year. I had a physiologically negative reaction to this level of greed. I believe this is immoral and against Christ. I realize this is my belief but I have to live by it in my life decisions.
“Home sales tend to slow in the summer, . . .”
Is that a regional tendency? Around here (Kansas) home sales tend to be more vigorous in the summer months.
Summer is usually the peak real estate sale periodin DC due to military PCS cycles and government moves during the summer when school is out. I’ve seen houses stay on the market much longer than just a month ago, but not any decrease in the selling prices. I think people are just biding their time waiting for the bubble to burst.
As for second guessing Greenspan, I think there are plenty of armchair fed members here who wouldn’t hesitate to lambast him if we indeed have runaway inflation if he didn’t take steps to tighten credit before it gets out hand. This is the primary lesson from the ’70s. Remember the WIN buttons?
They will fall. The average wage isn’t high enough to support the home prices, so they will fall.
And average times on the market that low aren’t just LOW, they are silly low.
When they creep up to three figures averages, then they need to start to worry.
And, I’d love to have been a real estate agent the last few years in DC or CA
With the heavy presence of federal employees and those beltway bandits that work for them here, average wages will only keep rising. The median family income in Fairfax County is close to $100,000. With federal spending, especially for military, intelligence, and homeland security ever increasing, I can’t see a downslide in real estate values anytime soon. A cooling off in the unrealistic expectations, yes. But not a downward movement in price. Within the close in suburbs, there simply isn’t enough room to build new houses and the demand far outstrip supply.
Then how to explain this article in the New York Times today?
Housing Market Revs Up Again, Setting Record in June
The military PCS cycle is usually in EARLY summer (late May/early June)… It being late July, I am not a bit surprised things are slowing down.
Anyone in the military who owns a home knows you don’t put it on the market in mid-late summer. You’ve got to get it on the market late April/early May, or you miss out.
Not a burst, but a slow leak.
Prices are on the high-side, with more investors than residents due to a lot of factors, including Europeans with a Euro working in their favor.
I live in SW Florida, in a county where house prices went up 39% last year. Nearly all of it was investment by non-residents. One new development opened and had 1,200 homes sold out within two weeks of the announcement, long before any ground was broken. Those places–the investors hope–can be flipped once or twice before anyone actually moves in. If that happens, the investors win, big time. If not, then prices will start downward again.
I’m betting on the latter, and living in a rental until then.
One quick reaction to Victor’s comments about base closings. From the articles I have read, the DC area isn’t losing military (and related) jobs as shifting them to other parts of DC. Fort Belvior is supposed to be a big winner while Arlington is the big loser. That should create some interesting housing markets with southern Fairfax County getting additional lift.
DC Loser stated that Fairfax County median family income will only keep rising, pushing houses prices ever higher.
However, Fairfax County website on Economic and Demographic Information is pretty clear that the Median Family Income has fallen in the 2 previous years in which information is available, namely 2003. Falling from a high of 99,100 to 94,000. Quite a drop considering housing prices rising at such a brisk pace.
Note that these 2 years with a drop in income (graph only goes back to 1979).
Interesting to see if the downward slope is an anomaly or a trend.
Herd mentality is causing the seasonality
When a shopper sees that other shoppers are backing away from submitting bids, they will be hesitant to make a bid also. Herd mentality is causing the seasonal slow down now. This mentality will not cause the bubble to bust. This mentality will only cause the tide to ebb for a period of time. If the fundamental of local economy doesn’t present major sea change, by Spring next year, another herd movement will cause another rising tide to buy and push up housing price, although smaller percentage rise should be expected. The tide ebbing period of 2005 will serve to preserve energy to be released next Spring.
However, there are only 2 factors in my mind that can cause a major sea change in the market, and cause a significant period of stagnation or correction: That is either
1) significant rise of interest rate, something beyond 8%, anything below 8% is not enough. Or
2) significant loss of local employment.
Until either of these 2 can happen, market direction is hard to change. Despite the higher home price, people do have money to buy. Why are these 2 factors important? because they are the most fundamental measures of source of money. There are hundreds and thousands of web articles predicting the market to crash, but I am only interested in those that discuss the above 2 fundamental factors. So far, there are no tangible evidences and not any reasonable reasonings presented by these so called “expert” economists to suggest they would happen. I just wonder how could the bubble be pricked without either of these sources of money being taken away? Most probably, we would have to wait for some kind of significant job loss in the DC region to take away people’s source of money. Could that be a long wait if not forever?
Despite higher interest rate as a risk factor, historically speaking, higher interest rate alone seemed never had directly caused housing price deflation. I proposed this observation in late 03, and nobody seemed to be able to provide a single evidence to suggest otherwise. California in the 90s, and DC area in the 80s all experienced similar boom cycle under an unfriendly interest rate environment. Major deflation seemed all coincide with job loss in every case. Unless this try-and-true unofficial pattern will change in the future, most probably, history will be the best guide.
I have also noticed a greatly increased supply of houses on the market in my area. I live in Virginia Hills, which is about 2 mi S of the Telegraph rd beltway exit, and consists of one of the few places in No. Va with low-end houses built mostly in the 1950s. For the last several years it was rare to see a for sale sign, and when they went up a Sold sign was up by the next monday. Now a lot more for sale signs are going up, and tend to remain up for maybe a week or so. This is a far cry from 10 years ago, when I bought my house. Back then, for sale signs stayed up for months. Here is what I suspect may be happening – There are a lot of people around here who are retired or are close to retirement. When I bought 10 yrs ago a surprising number of these houses were still held by their original owners. I suspect that prices are now high enough (they more than doubled in the last 5 years) that many of the old timers are cashing out and leaving the area for cheaper pastures. Since price appreciation has stalled in the last few months, speculators are probably wise to cash out as well. But once the old timers and weak hands sell out, the previous trend could resume. Federal spending growth isn’t gonna slow down, and zoning restrictions are if anything getting worse. Several MD counties have put complete moratoriums on building recently, and this is only going to make shortages worse. I predict the trend will continue until either Federal spending stops growing, or the zoning nazis relent and permit a lot more high rise construction.
I bought a home in Mclean last year (June 2004) for 800k and the
house is 45 years old on a 1/3 acre lot in the heart of Mclean
district. The reason I chose the Mclean is because I graduated
from Mclean HS 10 years ago so I know the school system in this
area is one of the best (behind Langley) in Fairfax County.
We put down 500k for the down payment and borrowed a 300k loan.
Our combine income is 230k/year so getting a 300k loan was not
a problem for us. I believe the median income in Fairfax county,
last time I check, is 95k, I think my wife and I are doing
very well.
Having said that, I just sold that same house in Mclean
in May 2005 for 900k. I am making a 100k profit after living
in the house for less than a year. I didn’t not put a lot
of money (about $12k) into renovating the house. We were ready
to purchase a 1 mil home in Mclean; however, after carefully
analyzing the situation, I am going to “rent” instead of purchasing
a new home. I am convinced that real-estate in Northern Virginia
will drop based on the followings:
1) I don’t know about anyone else salary but both my wife and my
salary are the same today as they were five years ago. I work as
an Network/Security Engineer (government contractor) while my wife
is also a government contractor for a big local company in this area.
My salary stuck at 120k while my wife salary is also stuck at 110k.
In 2000, we bought a townhouse in the Herndon area for 190k. We sold
the townhouse in June 2004, prior to purchasing the home in Mclean,
for 440k. Salary can not keep up with real-estate price appreciation,
something has to give.
2) I am renting a very nice house in the Mclean area for $4000/month.
Had I purchased the same house, with an ARM five year mortgage, I would
have to pay about about $7000/month. You can add another $1000/month
in Property taxes. Somehow, there is a big gap between renting and
buying. Another situation, my sister rented an two bedrooms condo in
Falls Church (utility & condo fee included) for $1300/month. That same
condo goes for $350k. What this is telling me is that there are too many
people buying real-estate and renting them out, even at a loss, with
the assumption that the property value will continue to go up that it has
been for the past four years (18%/year). After two years, they can flip
it for a profit. I think I read in the Washington Post that about 30% of
homes in Northern Virginia are purchased for investment purposes.
3) I read an article in Washington Post a few weeks back that about 54%
of all new loans in 2005 are in the form of “interest-only”. This tells
me that a lot of people can not afford to buy a home with a conventional
15 years or 30 years fix interest rate or you just have a lot of
“investors” jumping into the real-estate market. The only way for them
to afford a home is with “interest-only” loans. If there is a slight downturn
in the economy, look out. I think Allan Greenpan addressed this issue and
warned the bank about creating “exotic” loans to consumer.
4) There are a lot of people in the Northern Virginia who spend more than
50% of their income for the mortgage. This is not a good sign. The
conventional wisdom is that no more than 1/3 of your income should be spent
on home mortgage.
5) I read in the Washingtonpost a few weeks ago that a female model
is giving up her modeling career and start her new gig as an real-estate
investor. This reminded me of back in 1999, at the height of the
Internet boom, that you have cab driver and housewife bought and sold
stocks over the Internet. In 2005, instead of trading stocks, people
trade houses. When this happens, it tells me that the end is almost near.
History always repeats itself.
6) I have a lot of my colleagues at work who talk about purchasing new
real-estate as an investment. Almost all of them all at least two houses.
Furthermore, a lot of the houses that they purchased required little or
no down payment and almost all of those house are financed with
“interest-only” loans. They are willing to take a lot when renting these
house with the assumption that the properties will go up in value in
the next few years. Did we not have the same problem with stocks in
term of “options”? How many of us managed to make money with our company
stock options?
7) Every time the Fed increases short-term interest rate, mortgage interest
rate does the opposite. It goes down. Should it be the other way around?
I think the real-estate market in Northern Virginia will burst in the next
24 months. It is more psychological than anything else. If enough people
convince that it will happen, investors will start unloading the properties,
it will then create a panic in the generation population of Northern
Virginia.
By the way, the couple who purchased my home, the husband drives school bus
for Fairfax county. I don’t know what his wife does but they took out a 800k
mortgage to purchase my home. They are hoping that they can turn around
and sell it in two years for 1.3 mil. This is, as Allan Greenspan puts it,
irrational exuberant
Tony
DC Loser predicts: “A cooling off in the unrealistic expectations, yes. But not a downward movement in price.” Perhaps. But it’s been estimated that in the DC area 11 percent of recent buyers are investors and 30 percent are doing interest-only loans. Buyers in these two categories are not likely to continue buying in a market that is cooling off. Investors count on very high appreciation to make a profit; they need %15 percent appreciation just to cover transaction costs. And people taking out interest-only loans also do so calculating high appreciation so they can sell at a profit if they can’t meet the higher payments down the road. It’s hard to see why either group would keep buying if it became evident that prices had cooled off. If this is the case, then a mere cooling off could cause 30 percent or more of current buyers to suddenly disappear from the market. Thus a cooling off might well be the trigger that could cause real panic and decline. Sure some sellers would just take their homes off the market when disappointed with low bids. But in the DC area lots of people have to move when they are assigned to or find jobs elsewhere. They’d have to sell. And in 2007 2/3s of interest-only and option ARMs will start requiring higher interest and principle payments. All the people with these loans who’d been banking on 15-20 percent annual appreciation of the sort we’ve seen recently could find themselves having to sell at big losses. Many will just walk away. At that point a high foreclosure rate could produce real declines. And prices are so out-of-line with incomes and rents at this point that it’s estimated at current low inflation rates it might take fifteen years to get back to the historically average price-income and price-rent ratios.
So…Bottom line question is. If you own a second home in the DC area would you hold on to it and rent, or sell it now.
I’m actually in that position, owing to pending nuptials. We’re selling the second place as soon as I’ve been in it for 2 years and no longer have to pay capital gains.
I have satisfied the capital gains exemption requirements and my second home is currently vacant. The monthly rental income is a tempting option as it is a positive cash flow. Then again if I sell it would bear a large equity gain. If the price held flat from here onward, renting might be preferable. Do you think the lower end of the price market will flatten while the high end will decline in resale value?
No special insights there, I’m afraid.
Basically, renting requires me to bet that the price will increase, or at least hold, over time. Selling allows me to get a fixed–and large–profit and reinvest it in the main house.
They keep saying it’s a sellers’ market. In actuality the buyer is always in control. As long as so many buyers are willing to be taken for fools sellers will get greedier and keep raising their prices. When enough people refuse to be taken to the cleaners and treated as idiots prices will come down. When that happens coupled with rising interest rates and crazy over building I see them drop to 1999 levels. If we experience a terrorist attack, prices could drop to even 1997 levels or lower. I believe it is already happening…..some of my neighbors can’t keep up paying $3200 a month in mortgage for a one bedroom!!