Matthew Yglesias has just rented a posh new DC pad and offers some anecdotal ruminations on the purported housing bust leavened with a pinch of cunning logic.
This was the third time I’d looked for a new place in Washington, DC and there was something . . . different about House Hunt 2006. An extremely large proportion of the properties for rent that I looked at turned out to have been properties that, until recently, had been for sale. The owner didn’t like the offers he or she was getting, and so it was now up for rent.
From this and his training at Harvard in economics, he deduces that the forces of supply and demand will prevent a radical drop in housing prices since houses are, after all, a useful, tangible asset unlike, say, Enron stock. I think he’s basically right and have been making similar arguments since the press began banging the “housing bubble” drum a couple years ago.
Since the plural of “anecdote” is “data,” let me add my own. This past week, my wife and I both sold and purchased a home in DC’s suburbs (both within two miles of the Mount Vernon estate and on land once part of said estate). Our current house sold for about 87% of what it likely would have sold for one year ago–but 140% of what my wife paid for it a little over three years ago. Conversely, our new house sold for 79% of what it would likely have garnered a year ago, but 238% more than the owners paid ten years ago.
In our case, while we wanted to move to a newer home with a more open design, we were staying in the local area and were under no great pressure to sell. We priced the home on the higher end of what comparable houses in the area are selling for but low enough that we had a reasonable chance of selling before school started. Conversely, the sellers of the home we purchased had initially overpriced it because the comps were based on last year’s market and it stayed on the market for three months before they dropped the price. Because they needed the proceeds of the sale to finance a new home in Florida and were still netting a hefty windfall compared to their equity, they were eager to sell.
Based on my anecdotal sense, plus having followed the market very closely the last four years or so (I have now sold and purchased a total of four homes in the area since 2003) I concur with Matt that the market is softer than it once was but hardly plummeting. And the softness is most pronounced in the far suburbs. Houses in DC, McLean, Bethesda, and other places that are Metro accessible have dropped very little, indeed.
Matt closes his post wondering how widespread adjustable rate mortgages (ARMs) are. Anecdotally at least, they’re incredibly popular. Given how high housing prices are in the major urban centers, most of us have little choice. My wife and I have used ARMs for all of the last several loans we’ve taken out individually or together. (Although, with the exception of a small second trust on my Ashburn townhouse, not the type Matt refers to where the rates change constantly.) In most cases, a 5- or 7-year ARM is the best option. The monthly payment is far lower than on a conventional fixed rate loan and most people will sell their home and move well before the rates become variable or they’re forced to refinance.
I would note, too, that most of the bursting of the so-called “bubble” has been a self-fulfilling prophecy. The geniuses at the Fed decided, with no evidence whatsoever, that it was dangerous to have people borrowing too much money on non-traditional mortgage loans and have been steadily ratcheting up interest rates for two years. The result has been to force housing prices down a bit–people care about the monthly payment, not the loan amount–and to punish people with infinitely variable loans.
Update (Steve Verdon): For more on the housing down turn there is James Hamilton’s post over at Econbrowser. Here are some relevant ‘graphs,
Even so, Dave Altig at Macroblog , , another source that’s always worth reading, thinks the gloom and doom has been overdone. Dave notes that even with a drop back to 2003 levels, home sales per person are still at historically high levels, a point also noted by Bizzyblog and some Econbrowser readers. I must say that I don’t take much comfort in that. The bigger the preceding surge in construction, the bigger the overhang that might now have to be worked off. I certainly don’t see much in the historical record to suggest that the more dramatic the prior boom, the more modest was the subsequent bust. Just the opposite– 1929 (the year the Great Depression began) started out as a tremendous boom, as did 1973, which preceded the biggest U.S. recession since World War II.
Dave offers some other observations that give me more comfort. First, he notes correctly that none of us are really certain what’s in store, given the great challenges in making these forecasts. Surely the responsible statement to be making in the current situation is that there is a significant downside risk, which may or may not materialize. Second, Dave along with the always-excellent Tim Duy notes the potential of other sectors such as nonresidential investment to pick up some of the slack from a weak housing market. Third, Dave observes, as did I, that things so far are no worse than in 1994. If we do see a replay of that “soft landing” that successfully controls inflation, then, as Dave noted last January, Bernanke could come out looking quite the hero.
Hence, Kevin Drum’s pessimism may be misplaced.