Housing Bust?

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 [1], [2], 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.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Bithead says:

    One wonders just how accurate this assesment is, given the bug’s eye view. Far be it from Yglesias to mention that that is a crime problem inside the loop, but the rest of us have been hearing reports of such things for years, now. It strikes me as reasonable that given that factor, sales in his chosen area WOULD be down, Nu?

  2. Bithead says:

    Hit ‘send’ too fast.
    I mean to say, that the points he makes seem logical. Yet, I suppose he’s missing some basics, here…

  3. Frank says:

    If you are a first time buyer, should you want to root for a ” housing bust ” ?

  4. Dave Schuler says:

    It seems to me that the DC area is a rather unrepresentative sample—there’s a certain amount of regular turnover that’s built into the system there due to changes in administration that’s not the case elsewhere (turns is one of the factors in housing price increases) and there’s also some insurance because it’s not too likely they’ll be opening up another federal government somewhere else. That was tried 150 years ago or so. How did that come out?

  5. Jane Galt says:

    The Fed is taking no official notice of the housing bubble; they’re raising rates because inflation is perking up and they were unsustainably low before, not because they want to do you out of home equity gains. 😉

    That said, while housing bubbles take much longer to pop than other kinds of asset price bubbles, and the prices don’t drop as far, a 20% decrease is far from unheard of. Also, the flip side is that recovery tends to take quite a while . . . it can take ten years or more to recoup the losses.

  6. just me says:

    I think whether there is a boom or a bust depends a lot on where you are living.

    The market here is still very high, much higher than it was when we bought 5 years ago, and it hasn’t started to drop as of yet.

    I do suspect at some point the market around here will probably go down some, I honestly don’t see the housing going up much more than it currently is for our area.

  7. Anderson says:

    Housing bubble … yawn … here I am having a slow-ass Monday, and so is OTB, it appears.

    Somebody please post about how the theory of evolution is what’s causing us to lose in Iraq, okay?

  8. donsurber says:

    One nice thing about WV, our values never went up 🙂

  9. Wm says:

    Just as another anecdote experience. Closed on my Falls Church, Fairfax house last week (took about 4.5 months to sell). 3BR 2BA starter home. Could have sold it a year ago for $560,000 – $575,000 – final sales price was $510,000. About a 9 – 11% drop. But bought it 6 years ago, and made a ~190% profit.

  10. lamonte says:

    James – before I can believe you might know something about the local housing market I have to believe that you know how to spell McLean!

  11. Jon Marcus says:

    So 10-20% annual losses are a soft landing? Wow, what kinda losses would mean the bubble had really popped?

    Sure, it’s great that you’re seeing a net profit…this year. But maybe all that means is that you got out quick enough.

  12. Joe says:

    “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.”

    Yes, in an appreciating market, most people will sell their homes before the interest rates spike up on their 5/1 or 7/1 ARMs. Unfortunately, if the market is depreciating or flat between purchase and sale, that’s probably not going to be the case–few people are going to sell their homes for a lot less than they paid for them (especially once closing costs and brokers fees are included), except as a matter of last resort.

    Quite frankly, if the reason that you opted for an ARM is that you couldn’t afford 30 year fixed payments, then that was a deeply irresponsible choice to make. Being able to earn more than the interest you’d pay on a standard mortgage? Fine. Sporadic (but lucrative) income pattern that lets you pay off big chunks a couple of times a year (but maybe not make monthly payments)? Also OK. But “the only way I can possibly afford this house is a mortgage where my payments spike up to even more unaffordable levels in 5-7 years”? Dude, you are a foreclosure just begging to happen.

  13. James Joyner says:


    In a market like DC’s, first-time purchasers simply have to jump in somewhere. Further, when I bought my townhouse, I was 95% sure that I’d move before the 5 years were up. Indeed, the only reason I stayed a full two years was that leaving earlier had significant disadvantages from a capital gains perspective.

    On our new house, the difference between an ARM and a conventional is nearly $500 a month. We could swing that if we had to but at significant cost to our lifestyle. We figured the potential risks at the end of the 5 year period were well worth the known benefits.

  14. Bithead says:

    I can’t help but wonder if there isn’t some political motivation on the part of Mr. Drum in even attempting to address this particular subject.

    Let’s see. We have midterm elections coming up. What possible motivation could Mr. Drummond have to be talking about this particular subject and expressing what Steve correctly labels as “misplaced pessimism”, do you suppose?

  15. Alan Kellogg says:

    Locally housing prices have gone down as well. In addition, population went down as well. The San Diego CA area has succeeded a little too well at pricing itself out of the reach of most people.

    We are talking about housing sales in upscale neighborhoods by and large.

  16. Joe says:

    “In a market like DC’s, first-time purchasers simply have to jump in somewhere.”

    I live in just such a market. The place to jump in–the place where *I* jumped in–is when and where you can afford what you’re buying. It’s not fun. I lived like a pauper for five years when I didn’t have to so I could afford to put 20% down and have reasonable 30 year fixed payments, and I bought a very old fixer-upper in a yet-to-be-established neighborhood–but it’s what grown ups do.

    As I said above, buying with the knowledge that you won’t be able to afford payments in five years is an incredibly foolish choice to make. Planning to sell within that time is great, but if property values are going down (and given closing costs and brokers fees, really even not going up that fast), that very well may be impossible. In any event, your last gamble worked out pretty well it seems, so maybe this one will too–and it also appears that you aren’t like a lot of people with ARMs who couldn’t afford payments under any circumstance when the teaser rates expire.