Bacon's Rebellion

Fasten Your Seatbelts, Ladies and Gentlemen, It’s Going to Be a Bumpy Landing

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by

James A. Bacon
in

This comes from the Washington Post: The housing inventory on the market in the Washington metropolitan area has risen to about 35,300 homes, up from an average of about 23,000 in the past three years. The average number of days that a house spends on the market also is edging up. Sayeth the Post:

Wes Foster, chairman of Long & Foster Real Estate Inc. … 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.

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  1. Anonymous Avatar
    Anonymous

    “Buy now… or you will be priced out of the market…. FOREVER!”

    So say RE Agents, builders and turn over hungry buyers who are trying to stay a step ahead of the market and continue to make profits. A correction in the market is perfectly normal, although its entirely possible that because loan rates have been kept artifically low, that a huge correction could be in order.

  2. Paul Avatar
    Paul

    I thought we were just hearing how there was a housing shortage in Northern Virginia and a job surplus…which one is it? I’m not being smart, I just honestly want to know!

  3. Ray Hyde Avatar
    Ray Hyde

    A housing shortage does not preclude prices retreating from artificially high levels caused by speculation or bad lending practices. A housing shortage does preclude prices coming down to “affordable” levels.

    The housing shortage in NOVA is real.

  4. TheModerate Avatar
    TheModerate

    No big surprise here.

    People are finally fed-up with the ridiculous price of housing in the DC area. Thus, they are not buying.

    The supply is there, the only shortage is one related to affordability. Look at the numbers – the available inventory is 35,000+ – not 3,500.

    The market is running out of qualified buyers and a correction is occurring in the form of price reductions.

    Ahhh – free market capitalism

  5. Not Guy Incognito Avatar
    Not Guy Incognito

    Small corrections are very healthy for the market, but there’s too much growth to see a complete crash. Demand will still be there.

    But, there will be a major problem for sellers in about five years, because of the popularity of interest-only loans. Then they’ll find out that building equity is a lot better than having a slightly smaller payment.

  6. COD Avatar
    COD

    How much equity do you really get via your payments in 5 years on a traditional mortgage? I think it’s around a couple of thousand bucks on a $300K home.

    That should probably be townhome in NOVA 🙂

    The last 3 houss on the market in my neighborhood sold in about a week each, and I don’t live anywhere trendy.

  7. Not Guy Incognito Avatar
    Not Guy Incognito

    Chris, try $23,000 on a $300k loan.

    Anyway, my point was most people who do intrest only are gambling that their income is going to go up, not counting on car, medical, family or legal problems.

    They do work for some folks, but there’s a lot of people who are going to get hosed by them down the road.

  8. Ray Hyde Avatar
    Ray Hyde

    Assuming you have some equity to roll over from your previous home a $300 k loan might buy a decent place. First time buyers and those that can marginally afford a home are hurt most by rising prices. For them the potential gains are sufficient reason to take risks that some of us would avoid.

    Today’s WaPo carried an article noting tha PG county reversed its earlier rules restricting development. EMR is correct in saying that developers sell their homes for what the market will bear, but flat wrong in his assertion that land prices do not affect home prices or affordability. That doesn’t make developers any different from anyone else who sells a home.

    He does not explain how that situation would beany different if builders provided homes in functional areas: they would still charge what the market will bear.

    He is correct in saying that providing affordable homes through the trickle down market is not working very well, but that merely indicates that construction is not keeping up with demand: therefore, there is no trickle down available.

    Under such conditions, the PG restrictions were insane, and the state had sense enough to step in and tell the counties they can’t use their own failure to provide services as an excuse to prevent building.

  9. Jim Bacon Avatar
    Jim Bacon

    Ray, you said, “EMR is correct in saying that developers sell their homes for what the market will bear, but flat wrong in his assertion that land prices do not affect home prices or affordability.”

    I’m afraid that you are flat wrong in the way you represent Ed’s thinking. He can speak for himself, of course. But I’ve been editing his columns for several years now, and I can say confidently that he has never said that “land prices do not affect home prices or affordability.” I can’t begin to think how you divine that sentiment from his writing.

    You ask the question, how would things be any different if developers built homes in functional locations? Here’s what would happen: The extraordinary premium people pay to live in functional locations would diminish. Yes, there is overall scarcity of housing in the Washington New Urban Region, which contributes to rising house prices overall. But the scarcity is greatest in functional locations, generally closer to the urban core. Therefore, prices are rising fastest in those locations.

    Why aren’t more houses being built in functional locations? The reasons are complex. One, state and federal policies subsidize and incentive sprawl. Two, NIMBYs and local government policy restrict housing development, particularly in the most desirable inner-core jurisdictions. We don’t advocate forcing people to living in locations they don’t want to. We’re just saying, create a level playing field. Make people pay the costs associated with providing transportation amenities and government services to particular locations.

  10. Ray Hyde Avatar
    Ray Hyde

    How much of metro do you suppose would have gotten built if it was paid for solely by the locations it serves?

  11. Jim Bacon Avatar
    Jim Bacon

    Ray, You need to rephrase the question. How much of the metro area would have gotten built if people paid the location-variable costs of where they lived?

    My answer: Most of it, but it would look a lot different. Our metro areas would be more compact, denser in places, and have less “swiss cheese” development. But people would still have freedom to live on their 10-acre farmettes if they wanted. They’d just have to pay more for the transportation amenities and urban services. Some would gladly pay that price. Others would not.

  12. Paul Avatar
    Paul

    Jim –

    Don’t they already pay more in gas/car maintenance costs, as well as time costs?

    And that doesn’t seem to effect their behavior. So the solution is to tax them more?

  13. Ray Hyde Avatar
    Ray Hyde

    My point is that it remains to be seen whether they would pay more for services or not. A truly comprehensive set of studies for Albemarle Place, Vienna Metro, and Tysons, both before and after construction might provide an opportunity for clarity.

    If rural or suburban dwellers were not, in addition to paying their own locational costs, subsidising truly urban services as well; and if those who used those truly urban services had to pay for them, the price difference might be a lot smaller than you purport. In point of fact, higher urban costs are what drive many to more rural areas. The idea that suburban costs are artificially lower is not proven.

    Access to “cheap land” is not a solution. In 40 years of working to create Balanced Communities in seven states and hundreds of communities, we have never seen a case where making more land available for development has increased the supply of “affordable housing” much less affordable and accessible housing. The market does not work that way.

    As for EMR,

    “Access to “cheap land” is not a solution. In 40 years of working to create Balanced Communities in seven states and hundreds of communities, we have never seen a case where making more land available for development has increased the supply of “affordable housing” much less affordable and accessible housing.” and “It is also important to note that in the current market, there is no direct connection between the cost of building a housing unit (including the cost of land) and the selling price.”

    He might have a point if you include the caveat “and accessible” but otherwise, those statements are in direct contradiction of published studies which conclude that land is a primary driver in home costs. Since availability of land is restricted by government policy in both the inner and outer areas, there is no real way to determine what the real market forces are.

    Now, EMR makes a point in saying no one wants a cheaper house near their own. Suppose we had a new kind of zoning area which is not R-1, r-5, commercial or what have you. What if you set aside a free trade zone for people who want to build yurts, solar homes, live in motor homes, park their semi out front or what have you?

    We could call it West Virginia.

  14. E M Risse Avatar
    E M Risse

    Back to the original post:

    One who follows listings in the Warrenton-Fauquier market with an eagle eye and who has extensive hands on real estate experience tells me the number of listings of houses in key zip codes have skyrocketed in the past two weeks. The prices listed indicate speculators bailing out.

    Recall, however, it will take more than stagnation in the market to solve the Shelter Crisis.

    Those who wonder where to build affordable and accessible housing (it has to be both to solve the Shelter Crisis) check out the numbers in “Cohousing and Dooryard Density” and in “Antidotes” under the heading “Understanding the Big Picture.” (Try not to confuse dwellings per acre with people per acre. The later is the metric of the 10X Rule.)

    EMR

  15. Anonymous Avatar
    Anonymous

    What is a key zip code?

  16. E M Risse Avatar
    E M Risse

    We use the term “key zip codes” to indicate zip codes that have a large enough volume of sales month after month to make useful comparisons. In this case the zip codes covering the urban enclaves in Warrenton-Fauquier. While our source uses zip codes to sort data, they also note the location within large zip codes to understand trends at the cluster, neighborhood and village scale.

    EMR

  17. Ray Hyde Avatar
    Ray Hyde

    My Fauquier conversations lead me to believe there is a high level of disgust at the proliferation of housing in Warrenton-The-Next-Gainesville. Maybe those speculators are homeowners taking advantage of their sudden equity gains and great loan rates to buy a place in the country.

    Since homes turn over on an average of seven years, it would seem that month over month comparisons are not very useful for planning and analysis purposes, but very useful for those speculators trying to make a fast buck.

  18. Ray Hyde Avatar
    Ray Hyde

    Jim, I don’t buy your argument that government restricts housing development, particularly in the most desirable inner-core jurisdictions. I suspect there are plenty of people living on ten or twenty acres that would have been happier on two acres, and plenty of sellers who would rather have sold two acres than ten. I do farmette services for a lot of them who want to outsource the labor involved. It is the outer jurisdictions that are most vehement about curtailing development. Take a ride from Springfield metro to Crystal city and you will see miles of densely developed town houses. How could that be if the inner juridictions were discouraging such growth?

    True, those areas are not mixed use and not balanced, but even EMR admits that people want it that way, they don’t want anything different and particularly less expensive anywhere near them because it makes prices less predictable. Military people who will be in an area a short time (speculators) particularly seek out stable, homogeneous neighborhoods.

    If you don’t advocate forcing people to live where they don’t want to, then it seems to me that you cannot very well force someone to dispose of his property in a way that is not most profitable or desirable to him. The end result of that process has got to be forcing him to live where he doesn’t want to. As an example, one of the local papers described in agonizing detail the problems faced by farmers forced to liquidate.

    I support the conservation lady in Maine who, in spite of local citizen opposition, kicked the fishing camp leases, snowmobilers, and hunters off of the 20,000 acres she bought, “It’s my land, I can do what I want”, she said.

  19. Ray Hyde Avatar
    Ray Hyde

    Jim, you say that if developers built enough homes in functional locations, then the extaordiary premiums people pay to live there would diminish. Diminish, not go away. By your own argument you claim that higher prices there are representative of the value people place on those homes. I don’t deny that supply and demand would lower the prices if enough homes were made available. At the same time, developers will continue to demand the highest prices they can get, and like Harley Davidson, they are free to reduce production if they don’t see the necessary profit margin.

    There would still be a premium for living there, some would choose to pay the premium, and some would not. As Paul pointed out many people have examined the cost and time conditions and concluded that commuting is worth the cost (or was before the government knuckled under to the anti-road lobby). In Prince William County, voters have consistently voted in support of road bonds, in addition to the money they spend for state highways they don’t get.

    There is a whole industry involved in studying the land price vs commuting cost dynamics, and the general consensus seems to be that those who choose to commute are making a rational and cost effective decision-you can commute for a very long time for the difference in initial home price. EMR would argue that the sum of all those individual decisions for personal gain add up to a net loss. How can that be, particularly when you consider that citizens in a place like PW county are willing to throw still more money into the pot? Are we going to claim that they are completely stupid or accept that they are doing what they want?

    Neither is your argument that prices are increasing fastest in the inner areas correct. Loudoun and Fauquier and Prince Georges and Charles counties have had the fastest appreciation, unless I read the papers wrong. Higher gas prices might change that, and will, in my opinion. Apparently, what has happened is that people have examined the costs of paying for the “amenities” and services provided by inner locations and have determined that it is not worth the cost; consequently the greater part of growth has occurred in suburban and rural areas. Even if it is true that government is somehow subsidizing that growth (not proven), then it is probably because most people want it that way and have elected their government accordingly.

    What you propose is not a level playing field. What you propose is artificially raising the price until you get what you want – NIMBY. If you have 95% of the population living on 5% of the land, as EMR advocates, then 5% of the population will be enormously land rich on the one hand and taxed to death on the other hand. You call that a level playing field?

  20. Jim Bacon Avatar
    Jim Bacon

    Paul, Yes, some people are willing to pay the cost in commuting time/car maintenance/gasoline prices in order to afford to a less expensive house far from where their jobs are located. But that’s not to say they’re happy about it. If given the opportunity to buy a similarly priced house with a shorter commute, would they take it? No, not everyone would. But some would.

    Which gets us to Ray’s point. Yes, NIMBYs and local governments DO restrict housing develoment in inner urban cores. Sure, Arlington and Alexandria seem to be fully developed — there’s not a lot of vacant land (except in the Potomac Yard, but that’s another story) — but, in fact, they’re not. There are significant tracts that could be redeveloped at higher densities, and some people (not everyone, but some) would be willing to sacrifice the big yard for a shorter commute. But there are significant barriers to redevelopment, not the least of which is getting zoning permits and fighting off the NIMBYs.

  21. Anonymous Avatar
    Anonymous

    It’s really not gonna be that bumpy, your gonna see a quick (over 3 to 6-months) decline in the value for houses of about 8-12% as the people who are speculating and flipping houses get worried and stop speculating (buying only to sell at a higher price). Then your gonna see another 2-3% decline in the value of houses since some people will start selling because they dont want to wait around for values to go back up, while others will realize they cant afford the hughe mortages that they currently have so they’ll cash out, or be forecloused on and go back to the renting market.

    A decline of 10-11% in NVA housing prices is something that we should hope for, because it could be much worse and will be in South Florida, CA, and NYC. Anything more than a 15% decrease in housing prices will casue another decrease in housing prices as speculators that buy out housing complexs before their built will not be able to afford to hold on to their properities with higher payments and cash out, or continue to take losses.

    Essentially if your holding a equity line of credit, a house in order to sell at a higher price, a mortage you really cant afford, or have multiple properites as your main retirement investment plan your gonna be screwed.

    Anything over a nationwide drop of 10% in housing prices will be worse than hmmmmm.. the crash of the Asian tigers, or maybe more like the late 90’s collapse of the Mexican peso.

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