Ryan Avent on the housing bubble collapse:
it’s an exurb thing. There aren’t really any metropolitan areas in the country that have been immune to these housing problems (although the Pacific Northwest and Charlotte have come close), but within just about every city, the problems are focused on the outer edges. This isn’t surprising. Families forced to the outer edges of cities are the most financially marginal, and they’re also those whose budgets are most affected by rising energy costs
In DC proper, there's an interesting effect: prices are collapsing, but a lot of buyers don't seem to realize it. Craigslist and the Washington Post have a lot of ads with prices several hundred thousand dollars above the market value of what they're selling--$800K for a two bedroom new construction townhouse condo in Columbia Heights, for example, when a whole rowhouse in Logan Circle is now listed for a little over a million. Some of these ads are from obviously addled private owners, but others are from delusional developers, whom one would think ought to know better. Their ads are sandwiched between ones selling clearly better properties for less money; who answers them? The funniest, of course, are the ones that attempt to make up for their too-high prices by simply asserting that the property is worth much more than the list price. Because it's well known that sellers frequently charge tens of thousands less than they could.
copyediting dept: "but a lot of buyers..." should read sellers, no?
When we bought our house in the Boston suburbs about 3 months ago, about 75% of the houses were priced to the market of 6 months or more ago. And, at least at that time, our real estate agent was telling us there was no point even looking at those houses, because the sellers wouldn't be interested in a 'market value' offer.
So while it seemed at first that there was this huge inventory, it really wasn't that big at all. We ended up looking at only about 6 reasonably priced houses, out of an initial pool of about 50.
I just checked, and 4 of the 5 other 'market-priced' houses we looked at seem to be off the market. Unsurprisingly, most of the others are still there.
So here is the economists' mysterious price stickiness. Some of it seems to be driven by old fashioned denial.
RA says that's "it's an exurb thing," and then you provide examples from DC proper. That suggests that maybe it isn't an exurb thing. The folks at thehousingbubbleblog.com say (quite plausibly), that the crash will start with the exurbs and marginal areas, but will move in, wave by wave, to prime locations. Also, the condo craze ($400K for a one bedroom in Alexandria near King St.) affected many actually urban locations. Thanks perhaps to the revitalization of NYC and TV shows like Sex in the City, the relative cheapness of condo construction, and the perceived suitability of a condo as a low-maintenance long-distance investment, developers simultaneously started a million projects in downtown areas. (There's a whole blog called condohype.wordpress.com that exists to mock Vancouver area condos.)
That's funny, I always thought that the exurbs tended to be the truly affluent-- think Greenwich instead of Yonkers. You know better than I do, of course... that's just what I had assumed.
"In DC proper, ... prices are collapsing"
Collapsing? Do you have a citation to support that proposition?
I think a lot of the price stickiness is simply the fact that the owners will take a loss if they sell at the current market price. We've been intermittently in the market (not feeling compelled to rush out and buy something, obviously), and we've seen several houses where they were priced too high, and when you looked at the details, they had bought the house only two or three years earlier, and might not be able to afford to sell them at current prices. I expect there's also some denial there.
In the DC area, it seems like a lot of the price of houses in the exurbs was based on projected future prices. Also, a lot of exurbs-dwellers have made a tradeoff between a yard or decent schools and a horrible commute. Gas moving up to $3/gallon, with no relief in sight, makes that tradeoff look very different.
"That's funny, I always thought that the exurbs tended to be the truly affluent"
That hasn't been true for years. Nowadays the exurbs are where middle class people buy houses, because houses in the suburbs are too expensive. The tradeoff is the commute. Well, that and the intangible that your typical exurb makes your typical suburb looking charming, with a deep sense of place and history, by comparison.
In the Dublin (Ireland) area, there are a lot of fake ads (for rental and sale properties) inserted by real estate agents that cite inflated prices in order to keep the average housing prices up.
When you call to inquire about the property, the agents always say "oh, we just sold that, so sorry".
Do US agents do the same I wonder?
KatyZ
I haven't heard much about that trick here in the states. Our agents do like to "re-list" properties to hide # of days on the market and price reductions and steer you towards shady financing though. However, since real esate agents are barely a notch above used car salesmen and trial lawyers on the unethical scumbag totem pole, it wouldn't surprise me if this was going on.
Prices aren't too down in D.C., from my experience. In December, my wife and I sold our condo in Columbia Heights (and not the "nice" part of Columbia Heights either) for more than we listed it for, which, in turn, was quite a bit more than we had bought it for in March '06. It's possible we just got lucky, but I wouldn't think so as our place was not that great - trendy enough, I suppose, but in a horribly managed building, not particularly close to the Metro, and cozily nestled between two thriving drug markets. We were able to buy a house with a yard and driveway literally right across the Montgomery County line in Silver Spring that we never could have afforded when we were shopping for the condo, so D.C. is still at a substantial comparative advantage with respect to the suburbs. At least, from our experience.
The main difference was that it took us a while to sell, which was a pain. But in the end, it worked out financially.
Just not true. In the Denver exurbs you could buy a modest home or condo in the 150k-250k range (east Aurora) or a lamented "McMansion" for 600k-800k or home (west Lakewood/east Golden). No one living in those pricy homes is anything remotely describable as "financially marginal".
Noah,
I think you would be surprised how many people at all income levels are "financially marginal." If you read the human interest bits of foreclosure articles, it really does seem that there are broke people at all income levels, and some of the worst mistakes were made by people with surplus income who decided to "invest."
but I wouldn't think so as our place was not that great - trendy enough, I suppose, but in a horribly managed building, not particularly close to the Metro, and cozily nestled between two thriving drug markets.
It was probably purchased by a local drug dealer looking for a shorter commute.
Amy P wrote: Noah, I think you would be surprised how many people at all income levels are "financially marginal."
Or, to clarify, simply look at Colorado's foreclosure rate, particularly in Adams County where a lot of the newer "exurb" type developments have been occuring ($250-400k and occassionally soembody's custom-ordered $600k). Not pretty, and there are a good many newer 1- and 2-owner homes for sale, as well.
I'm in an inner DC suburb (Arlington) and prices seem to be down some (5-7%), but not as much as further out. The county knocked $100000 off the assessment for our house this year, and the neighbors I have talked to also got lowered, mostly by $50000 or $70000.
It seems that there is a real scarcity value to the houses which are close enough in for an easy commute, that would hold for the District as well. People are willing to spend some more money, and money which they are not necessarily confident they will recoup, for a nicer life. The other thing which seems to be propping us up is that people who have lived in nearby apartments, when they want to buy a house, tend to want to stay close to the neighborhood they got fond of - out in the wilds of Loudon there are not so many apartments to feed buyers to the house market.
In San Diego the list prices have dropped some, but the sell prices are dropping even more imo. People used to get full or above list offers and now that's a thing of the past. It doesn't matter all that much if they can't sell it for their mortgage because in California the bank can't go after you for the difference.
In northern Montgomery County, one big driver of falling prices is the other development that was going on, incentivized by the bubble prices. Even after housing prices started falling, the developers often were committed to putting up the whole development, and it made financial sense to keep building. About ten miles north of us, there's basically a whole made-up town being put up. The developers are still building--it's like an illustration of that basic microecon problem where the business is now too unprofitable to start, but the folks currently in it still get a better payoff producing than not producing because their marginal cost is relatively low.
The further out you go, the more land is available and the fewer restrictions in place, in general. So this kind of "inertia" of building probably hits exurbs harder than suburbs.
You can look at sales prices in Montgomery County MD, which verges from the essentially urban Bethesda/Chevy Chase to the exurban Damascus, here:
http://sdatcert3.resiusa.org/rp_rewrite/searchtype.aspx?County=01&SearchType=sales
It's a pain to try and get price trends from this, but volume is easy.
In Damascus, comparing 12/2006 to 12/2007, volume dropped by 50%. In Bethesda/Chevy Chase, it dropped by about 10%. I bet you'd see price changes that reflect this. I'd be very surprised if prices were collapsing in DC.
That's funny, I always thought that the exurbs tended to be the truly affluent-- think Greenwich instead of Yonkers. You know better than I do, of course... that's just what I had assumed.
Greenwich is more like a middle-distance suburb than an exurb thanks to reasonably fast train connections to Manhattan. It's also a sizeable labor market in its own right.
AIUI, the New York exurbs with the worst delinquency and foreclosure problems are the developments built in the Poconos over the past 10 or 15 years. Many of them were sold to financially marginal buyers, and the high cost of the brutally long commuting into the city hasn't helped.
There aren’t really any metropolitan areas in the country that have been immune to these housing problems (although the Pacific Northwest and Charlotte have come close), but within just about every city, the problems are focused on the outer edges.
Add metro Honolulu to the list of cities that seem to be weathering things. All the rest of Oahu saw price declines in 2007, but metro Honolulu had almost a 3% increase, that's added to triple digit increases over the past five years or so. We went into the condo market hoping that there would be some softening, but we ended up paying about 95% of the asking price on a small condo near Ala Moana. Other units we looked at have come down quite a bit. A couple of units we saw earlier just dropped about 15% each on the asking price. Overall, though, the inventory's just not there and prices still seem to be a little sticky.
One thing that might grease the stickiness (I'm not sure the metaphor works) is to allow taxpayers to take a loss against taxes for selling residences. It seems like the endowment effect or inability to recognize a sunk cost prevents people who ought to sell from actually selling. A big fat tax break might do the trick.
Probably more useful then a rebate, anyway.
One thing that might grease the stickiness (I'm not sure the metaphor works) is to allow taxpayers to take a loss against taxes for selling residences
Considering most people don't have to pay for a gain on the sale of their residences, that would be a little weird and asymmetrical.
A lot of these people are in the situation where they drew out the equity in their houses, trusting that prices would always go up, and they're furious that the outside world isn't cooperating at present. Because the realtors told them: "it's a great investment!" Now it's not such a great investment and if they drop any lower on the selling price they won't make any money....
Yeah, chalk it up to denial. We're going to have to wait a while for the mule to realize it actually fell off the cliff.
exurbia is never full of truly affluent
then there are exurbian states like Arizona and Nevada where people who couldn't afford California moved
Unremarked also is - in the cities and coastal areas (Florida) - that so many of the people "losing homes" are investors. It ain't like gandma and grandpa or that poor single mom are losing their houses, more like people who rolled the dice on rising house prices (or overpriced houses) and lost
It will be a mess, but these houses and the mortgages that finance them will be have to be worked through one by one, there is no magic bullet
A bankruptcy lawyer once told me half the country is bankrupt, they just don't know it yet.
Pretty true. You can make all kinds of money... but if you've got three mortgages, cars, and a bunch of credit cards maxed out you're still a candidate for bankruptcy.
Yeah -
nothing better than leverage, heh?
Face it - when the history is written on the post-1980 US economy, it will be summed up by the term leverage. Literally the entire economy has been based on borrowing to fund spending on almost all levels, with the benefits of this activity going to the top 10% of the country.
The post 1980 US economy has been stunningly strong and this despite the S&L "crisis", 2 wars and what is happening now with home price deflation and market panic.
We have had tremendous increases in wealth, employment and per capita consumption. (and we are - without a doubt - undermeasuring both savings and employment and have been since the 90s)
Not only that, but the financial system has gotten better, that's right - better - due to consolidation of banking companies, securitization and derivatives. I wouldn't ever trade it for what we had before.
As for leverage, Brad, do you realize that US corporations are sitting on a mountain of cash, with stronger balance sheets than decades ago. perhaps too much cash.
At least from my perspective, it's an exurb thing in DC. I just (in November) bought a good-sized house in Lovettsville VA - an exurb about 60 miles away - for something in the mid-300's. The original list price of the house was about $600k. It was absolutely impossible to get anything of comparable value, any closer to the city. (Trust me on that one, my sister-in-law is a real estate agent, and we would have known immediately if there were anything). DC prices might have fallen, but it doesn't matter to me if the prices were down to $400 thousand or $400 million. I can only afford a house in the mid-300s.
"I can only afford a house in the mid-300s. "
That's what you think. With a zero-down 140% mortgage with a 3.5%ARM we'll get you into that 400 million dollar house!
Re: Families forced to the outer edges of cities are the most financially marginal,
Huh? Unless you are talking about outright rural areas, exurbs are the domain of the upper middle class, McMansion land, the results of 50 years of ongoing "white flight" and urban decay as people with a little more money move farther and farther out in quest to escape the hoi polloi and make sure their children only associate with the right type of friends in the right schools.
Re: Nowadays the exurbs are where middle class people buy houses, because houses in the suburbs are too expensive.
Again, huh? While there's usuallly an old money enclave near to the city proper (think, Beverly Hills or Grosse Pointe) many inner ring suburbs are fairly affordable-- but they also suffer many of the ills of the city itself: high crime rates, diverse populations (meaning lots of Blacks and immigrants), deteriorating housing stock, and mediocre or even terrible schools. Occasionally one of these places will gentrify, but usally that's due to gayborhoods or other bohemian developments (in other words people who don't much care about the schools)
By the way, anyone who thinks the housing meltdown is limited to or concentrated in the suburbs is ignoring the data. Check out the stats for Cleveland or Detroit proper for God's sake! And here in S Florida the trouble is truly everywhere, not just out on the edge of civilization where the alligators bellow at night.
Maybe by re-reading the comments, we can learn something here. That is: all real estate is local. The exurbs in your area might be affluent, but in another area it might be where the "marginal" families reside.
The real clue here is the common thread amongst exurbs: lengthy commutes. It told people that this bubble was bursting when gas hit 3 bucks a gallon after Katrina and didn't retreat. Party's over. Of course the first thing a bubble does when pricked is rapidly expand, that is the death throws. Then it is quick deflation, which we witnessed the last year. It is almost over, but because of the foreclosure laws of many states, you can't see it yet. It will take years for the foreclosure mess to straighten out.
I used to live in Northern Virginia (bought a home in Fairfax County in 2001, sold in 2005 - yeah, we were very lucky on the timing), and here were my observations:
- The exurbs are/were a combination of middle class (like Bristow in western Prince William County) and upper-middle class (like Ashburn & South Riding west of Dulles Airport in Loudoun County).
- I believe the flight to Loudoun, etc. was more middle class flight (as is happening in exurbs across the nation) as opposed to 1970s-type white flight. Loudoun County is reasonably diverse ethnically, but is in the newer subdivisions they are fairly uniform by class. What that means is that you may have a white marketing consultant living next to an Asian computer programmer living next to an Arab doctor living next to an Argentinian civil engineer. There was a rapidly increasing Hispanic population, mostly service/working class, in more modest "exurban" enclaves like Manassas, Sterling, Woodbridge (again, Loudoun/Prince William Counties).
- The flip side of that is that Fairfax County, particularly in the older, inner regions near the Beltway, were becoming wildly diverse by both class AND race - so there was increasing stratification between the upper-middle class and working/service class. While there was some interesting, eclectic ethnic vibrancy with revitalized strip malls, niche businesses, etc., there was unfortunately serious quality-of-life issues in terms of traffic, gangs, and an overall New Jerseyfication of the older DC suburban belt.
- Schools in Fairfax County continue to be world-class, but for many folks, particularly young families, the question is bang-for-the-buck. Fairfax's high schools are hands-down top-notch, and a 40/50-something parent could conceivably eek it out in high-cost/high-stress Fairfax until the kids are out of HS. However, a 30-something parent who wants to move out of his/her condo or townhouse and wants good elementary schools and a larger yard is really going to look hard at Loudoun/Prince William.
- On the commute aspect - yes, there were many folks living out in the Virginia exurbs who made long, arduous commutes to Arlington, Crystal City, DC, etc. However, the corridor from Arlington out through Tysons Corner, Reston, Herndon, Sterling, and Ashburn is teeming with jobs. Many folks living out in Loudoun don't have to commute that far, and in fact, those that moved there may have even shortened their commute. AOL, Verizon (formerly MCI), numerous federal/defense contractors, and a plethora of other high-tech jobs are out there. And while a commute to Tysons isn't short, it is still relatively close compared to downtown DC.