Northern Virginia Bubble Update:

This impressive graph (click for larger, much more readable version) of housing inventory growth in Northern Virginia is courtesy of the Bubblemeter blog. Let's see, a huge increase in supply; declining demand as short term interest rates get higher (reducing the ability of buyers to qualify under low short-term "teaser" rates) and speculators flee. I think elementary economics tells us what's going to happen next.

UPDATE: I'm not sure how they compile the data, but this site shows that inventory for sale in Northern Virginia has increased around 400% since last March 1. For example, 159 homes in Arlington and 800 homes in Fairfax for sale on March 1, 2005. On February 24, 2006, 673 homes for sale in Arlington, and 4,378 in Fairfax. MORE: But that's nothing compared to Phoenix, where inventory has risen approximately 700% in a year.

I think elementary economics tells us what's going to happen next.

Yup. Calls for a government program to 'save' the housing industry.
2.25.2006 10:24am
Jim Wilson:
Aren't you the same Volokh conspirator who was looking for a house in this area a year or two ago? Did you buy? Or is this the reason you've continued your interest?
2.25.2006 10:43am
Hans Bader (mail):
Evidence of a regional bubble.

And yet, the Arlington County, Virginia tax assessor has increased the assessed value of my home by over 25 percent in just the last year, even as houses sit on the market longer and longer.

Somehow, I doubt my assessment will be reduced so rapidly when the real estate market collapses.

Northern Virginia governments are gorging themselves on all the additional revenue they're receiving from inflated assessments, but rest assured that they won't go on a diet when property values collapse.
2.25.2006 11:00am
Robert Cote (mail) (www):
Excuse me but why even try to apply elementary economics to the emotional, manipulated and highly illiquid housing market? Elementary economics won't tell us what will happen next, we've never been here before. If basic economics were at work then prices would have responded to 100%, 200% and 300% increases in inventory. This is irrational expectations and the response will therefore be likewise irrational.
2.25.2006 11:27am
NVAR doesn't believe in elementary economics.

Look at pages 7 and 8. They predict:

1. Inventory will rise
2. Interest rates will rise.
3. Homes will take longer to sell.


4. Prices will rise 7-12%.
2.25.2006 11:32am
DavidBernstein (mail):
R. Cote: There has already been some response. Prices seem to be down 5-10% since August. But the first stage of the end of a housing boom is always denial, as sellers think they're entitled to get at least as much, if not more, than their neighbor got a few month ago. But eventually, some people need to sell, and cut prices to do so. Right now, the hope is that Spring will bring back the buyers, and prices will go back up. I predict that Spring will bring a further huge burst of inventory.
2.25.2006 11:35am
DavidBernstein (mail):
Enoch, thanks for the link. One very interesting point: Stephen Fuller of GMU is frequently quoted in the Washington Post as believing that prices will go up forever. I don't think they've ever mentioned that he works as a consultant to the realtors' association!
2.25.2006 11:38am
DavidBernstein (mail):
P.S., that doesn't mean that Fuller is necessarily wrong or even biased, but given that the media is very cautious now about who and how they quote people regarding stocks when they may have a related financial interest, shouldn't they do the same with regarding to housing, and reveal when a quoted source works for a realtors' association?
2.25.2006 11:55am
A. Zarkov (mail):
What are rents doing in the Northern Virginia area? My lease will expire in about 2 months, and the owner of the house I'm renting wants an increase. If rents are increasing overall, then that could signal rising demand. But I'll bet that rents are falling as the speculators try to rent their real estate investments. No doubt my landlord thinks, I'll pay more to avoid the inconvenience of moving. But he's wrong; I am going to move out of his house, and out of the area as well.
2.25.2006 12:06pm
SB (www):
A. Zarkov: My personal experience from renting an apartment for the past two years and now renting a single family home (both in Fairfax County) is that rent has been almost stagnant the past two years in the area. YMMV, however.
2.25.2006 12:17pm
NovaReader (mail):
On behalf of all the the VC's Northern Virginia readers who own houses and can't sell right now for personal reasons, I just want to thank David for making sure this legal blog also includes predictions of our future financial ruin. Thanks! It's great to get those two together.
2.25.2006 12:22pm
DavidBernstein (mail):
Nova, if you bought before 2005, you'll be alright. If you hold for another 10 years, you'll probably be alright even if you bought at the very peak. And if you're ever planning to "move up," you'd rather prices go down than go up.
2.25.2006 12:24pm
Zarkov, my perception is that there isn't a lot of daylight right now between rents and mortgages in NoVA. Maybe there is for condos vs comparable apartments, but where I live you can't rent a SFH or a garage townhouse for under $2000/mo.

If I owned a rental house right now, I sure wouldn't raise the rent if I had good tenants.
2.25.2006 1:40pm
AppSocRes (mail):
I lived in Alexandria VA about three years ago, while working as a consultant to the federal government. I kept my Boston area apt because I've lived here a very long time, the landlord likes me, I and my rent is about 1/2-2/3 the market rate. My Alexandria rent was less than my Boston rent -- which as I've mentioned was way below market in Boston. In Alexandria I was getting much more for my money: an incredibly large, well-maintained, and marvelously located one-bedroom apartment in a high-rise. Bottom-line: Rents in Alexandria were way less than half the market rate in the Boston Area. Meanwhile, the housing prices I saw in Alexandria were way over comparable prices in the Boston market.

Something is horribly out of whack with real estate prices in Northern VA when the sale/rental ratio is more than twice as large in Alexandria as it is in Boston -- a city where the same ratio predicted a bubble that has already begun bursting. Right now in Boston times on the market are way up and closings and asking prices are falling steadily.

I sure wouldn't buy a house right now in the DC Metro area.
2.25.2006 2:11pm
Ted Frank (www):
Local inventory was actually higher on November 1, and dropped for three months before rising back to the December 1 level. While the data is not inconsistent with a bubble-bursting hypothesis, it's hardly sufficient to prove it -- it's equally consistent with a bubble-deflating hypothesis where 20% annual increases are replaced with 5% annual increases in price. I think it's within the range of possibility that supply expanded and interest rates rose just in time before the market got taken over by true bubble-inducing speculators.

Prices aren't down 5-10% in my Arlington condo building; a 2BR sold for 11% higher than an identical model did ten months earlier. I don't know where David B. is getting his price figures. Of course, I have a prime location right above a Metro station.
2.25.2006 4:35pm
DavidBernstein (mail):
Ted, prices year over year are still up 10% from 1/05 to 1/06, but they have fallen since August. Even if the unit you are referring to sold yesterday, you are still talking about the prior unit selling in April, when prices were still rising. Go to, and plug in Arlington 1 or 2 bedroom condos. There are literally hundreds for sale, whereas last year at this time people were literally lining up to buy anything. The mantra "we are just going back to a normal appreciation of 5-10% a year" was EXACTLY what I heard in the Spring of 2000 regarding tech stocks. I (mostly) listened to the conventional wisdom then, much to my dismay. Check out TOLL stock, down something like 40% since August, because of its heavy exposure to No. Va. And there is another builder, smaller, can't remember the name that is down more like 70%, that only builds in No. Va. and North Carolina.

BTW, my brother and sister in law pay $1,150 a month to live in a small 2 br apartment very near the Clarendon metro that would easily cost $350K if sold. What sense does that make? And it's not like they are grandfathered in, they started renting last year.
2.25.2006 4:44pm
Daniel G:
One thing to keep in mind - inventory may not be the best way to look at things. There was historically a really constrained NoVa housing market. The inventory was simply non-existent in many areas with very fast job growth. Recently, a large number of condo complexes have been completed. Inventory is now approaching a _reasonable_ level for the first time in maybe 7 years. One bedroom condos in Reston still cost 270k. The era of selling your place in 4 days at a 20% premium over the previous quarter are over.

We will see a bit of a price correction, but folks need to remember that the economy (and hence demand amongst residential buyers) is still very strong. The speculators will get smacked here as prices flatten out. However, as prices dip a bit, the real residential buyers will come back into a market they have been priced out of by speculating idiots. One reason that inventory is a bit high right now is that folks are still trying to sell for a premium over last year! (Real) Buyers know this and are waiting for bargains. They'll start getting them in a couple months. Then we'll start to see a return to equilibrium.
2.25.2006 5:27pm
my brother and sister in law pay $1,150 a month to live in a small 2 br apartment very near the Clarendon metro that would easily cost $350K if sold. What sense does that make? And it's not like they are grandfathered in, they started renting last year.

That makes perfect sense. Obviously, the landlord did not buy it for $350K, he bought it for a lot less, and $1150/mo is paying off his mortgage. There is no way anybody could buy now and expect to rent the place out for anything close to covering the mortgage, of course.

The author of that study claims that northern VA will gain 250,000 jobs in the next 4 years. If true, those people will need somewhere to live...
2.25.2006 5:45pm
John Lederer (mail):
Wouldn't those statistics equally describe a mere change in the quantity of home sales?

In other words if in January 400 homes were sold, with an average wait of 14 days, and in February 600 homes were sold with an average wait of 14 days, we would not say that the housing market had cooled, but we would see a 50% rise in listings.

I don't think that is necessarily the explanation, but it is a possible explanation.
2.25.2006 6:01pm
DavidBernstein (mail):
John, home sales are down substantially. So possible, but wrong.
2.25.2006 6:45pm
I was looking at SFHs in Alexandria, today. The rental was $1900/mo. Two identical houses (love the post-war burbs) on the same block were for sale at $500K.

In general, I have been seeing an abundance of houses for rent and for sale. The houses for sale are $600K and comparable houses for rent are $2K. It does not take much sense to see where things are headed.
2.25.2006 7:42pm
Ted Frank (www):
I think Daniel G is right on point. If inventory was 1 house in January '05 and 10 houses in January '06, that would be a 900% increase, but noone would say that there's a glut of housing. The question is what the equilibrium level is where demand meets supply, and neither David nor his graph tell us that answer. There could be excess inventory now; on the other hand, inventory could finally have grown to meet the excess demand. But percentage increases tell us nothing other than the obvious fact that the market isn't as hot as it was twelve months ago.

$70k down and a $280k mortgage at 6% interest translates into almost exactly $1150/mo. in after-tax interest and Arlington property tax expense (at 30% marginal federal+Virginia tax and itemized deductions), which is the same as the $1150/mo. rent you quote. While buying thus has the opportunity cost of not being able to invest the $70k elsewhere, and requires a bit more cashflow than renting does, and there's the risk (and reward) of home appreciation and depreciation, there's no guarantee that the rent will stay at $1150 over the thirty-year life of a mortgage, either. It's not an obvious buying decision for the long-term resident, but it's not an obvious renting decision, either.

My next door neighbor bought at $567,000 in November. The fellow two floors up bought an identical 1009-sq.ft. unit (with one additional parking space and two floors higher) for $595,000 in January. Parking goes for $75/month around here, so it's hard for me to put more than a $15,000 value on the additional parking space. Give $5,000 for the higher altitude, and it still looks like prices are going up.
2.25.2006 7:52pm
DavidBernstein (mail):
Ted, you obviously have more local knowledge of your building than I do, but the broader statistical datapoints I've seen suggest a (relatively) small decline in prices since August, and an expectation among the smart money (investors in building stocks, and condo developers rapidly cancelling projects) that the decline will continue. If interest rates suddenly drop again, the party may revive. If they rise substantially, a real crash may occur. If they stay more or less where they are, there might very well be a soft landing where prices fall only a bit in nominal terms, but gradually decline substantially in real terms. My own gut is that I'd be very surprised if prices in No. Va. don't fall at least 20% in real terms from the August highs, with the outer suburbs and the condo market taking the biggest hits.
2.25.2006 9:06pm
DavidBernstein (mail):
P.S. I've never done the math myself, but property investors (as opposed to recent speculators) seem to believe that rental property is only a good investment if the price of the property is no more than 100 times the monthly rent. Some will go as high as 150, the bargain hunters demand more like 75.
2.25.2006 9:08pm
Neo (mail):
If this were near any city except DC, this would show that some major commericial segment and/or corporation(s) is is big trouble.

But when was the last time that the federal government had a big layoff ? Never.

I'd say the real estate speculators have gone in this market. If your holding .. cover your head, as the ugliness has just begun.
2.25.2006 11:35pm
A. Zarkov (mail):
I don't see how the population can increase for 250,000 jobs in northern Virginia. The roads are already completely saturated. How are these people going to get to work? There is a guy next to me in my office who drives from Gainesville to Fairfax and it takes him1.5-2 hours (one way). The Metro into DC from Vienna/Fairfax is extremely crowded, even late at night!
2.26.2006 12:19am
NoVa Prof:
For a great rundown of market conditions in January 2006 (with a typical positive spin from the realtors, see this site.
2.26.2006 12:59am
I was looking at SFHs in Alexandria, today. The rental was $1900/mo. Two identical houses (love the post-war burbs) on the same block were for sale at $500K.

Mortgage on a $500K place with a 30 year fixed at 6% with 20% down is $2400 a month. $500/mo more to own rather than rent isn't that outrageous, I'll take that deal.

But when was the last time that the federal government had a big layoff ? Never.

Didn't they have one around 1990, as part of the post-Cold War "peace dividend"?
2.26.2006 1:23am
Neville (mail):
While I agree on the fact that we are probably at a major turning point in the real estate market, all of these 'percentage change in inventory' numbers don't in themselves necessarily mean what they appear to mean, or much at all.

The amount of inventory available has been at an extraordinarily low level for several quarters - any move back to a more normal level would more or less have to generate charts like these.

Looking at actual historical inventory numbers over time would probably generate more light and less heat. The fact that we are not seeing comparisons of that sort as frequently as charts like this suggests to me that the picture they show is not (as yet) very shocking.
2.26.2006 9:20am
DavidBernstein (mail):

Your math is incomplete. Twenty percent down is $100,000. Put that in the stock market, and expect 8% returns a year (compounded). So you start off losing 8,000 a year, which adds another $650 a month to your costs. Then add the costs of home maintenance/depreciation. It costs at least several thousand a year to maintain the roof, gutters, landscaping, windows, appliances etc. Figure conservatively another $300 a month. Then add closing costs. No big deal if you are staying 20 years, but if you are staying five years you figure $10K going in, $40K (including real estate commissions) going out. So another $800 a month for that. If the price of the house goes up substantially, of course, you come out ahead. If it stays where it is, you'd be better off renting. If it goes down, you're hosed.
2.26.2006 10:18am
Ted Frank (www):
I'm curious what model predicts 8% compounded returns in the stock market if the real estate market is collapsing between a bursting bubble and higher interest rates.

Enoch's math is also incomplete because the $2400/month includes principal payment (which is loss of cash-flow, but not loss of wealth), tax-deductible interest, and excludes tax-deductible taxes.

Is there anywhere in America where home prices are just 75-100 times the monthly rent? That's an investment a heck of a lot better than 8% compounded return, and I'll sell out my stock now to leverage into that.

NB that by that metric, home prices were overpriced here in 2001, when I faced a 200-1 or so ratio, and I would've missed out on the 400% increase in my initial equity investment because I was worried that the home was being sold for twice what had been charged for it in 1998, and was doomed to crash.

There's probably a crash due in the Bay Area, where rents have allegedly dropped 23% in the last few years. But with traffic in NoVa only getting worse, the prime locations in Arlington are going to continue to have high demand, even if people in Gaithersburg or Leesburg might end up taking a bath.
2.26.2006 11:43am
DavidBernstein (mail):
Ted, if you believe all that, you should own more than one condo! And the answer is that as of eary 2003, you could have found lots of places throughout the U.S. where housing costs 75 to 100 times rent. Now that prices have increased 30% plus nationwide while rents have been stagnant, it's pretty rare, though it's easy enough to find here in Michigan. In the 1990s, you wouldn't have had much problem finding condos in D.C. that rented for less than 100 times monthly rent--my gardener used to live in a condo in Falls Church that he sold for $55,000 in 1999. That seems absurdly cheap now; or are prices now absurdly expensive? I'd say somewhere in between.

Now it's true, if I were such a genius I would have invested in D.C. area real estate around 2000. But I also know that in 1988, lots of people thought DC condo prices would go up forever, and in 1993, they were holding 40% losses, on average. And that market was less speculative than this one. You're right that location will help the close-in markets, but the problem is that literally thousands of condos are going up there, and supply is going to trounce demand, unless, of course, interest rates go down further.

I'll grant you the tax deduction point, but that still makes home ownership significantly more expensive than renting.

Anyway, what's missing from this whole discussion is that the No. Va. market is not unique. Think New York, Vegas, Phoenix, So. Fla., LA, San Fran (house prices going up with rents going down!), Boston, and for that matter, Sydney, London, etc. This is a liquidity drive worldwide bubble, the same as the late 1990s stock market. When that market crashed, and then 9/11 happened, central banks slashed interest rates to pump liquidity into the system, resulting in inflation, (just as in 1998 after the emerging markets crisis and Long Term Capital, causing, or at least greatly exacerbating, the stock bubble), but asset inflation rather than price inflation.

I don't think a "soft landing" will necessarily destroy stocks, but it would likely cause a recession. Most of the wealth is paper gains only, and since most owners have had their homes for years, they'll still be wealthier than when they started. But look for speculators to get creamed, and those who cashed out their equity in favoer of adjustable rate mortgages, hoping to refinance or sell in the future, to go bankrupt--even with just a soft landing.

Anyway, if there's a real crash, stocks will go down, but real estate stocks will go down a lot more. Hedge with long-term puts on builders.
2.26.2006 12:55pm
Bill Schumm (mail):
I'm not convinced that the higher inventory is indicative of a large drop in demand. The sales prices of those houses spiked high last year, in some cases as much as 25% increase in 8 months. I think that a good part of the sudden inventory rise is people getting properties onto the market to take advantage of the remarkably high prices.

Thousands of government workers retire each year and they can take this windfall and move into a palace in another part of the country. My own little townhouse has increased in value by nearly 100% in three years. (Yeah, I'm selling this year.)

By the way,, the Gummint did not have a big layoff in '90. They cut some spending and the Clinton administration whacked the daylights out of the Defense Dept., but that attrition was applied to military bases all around the world. Non-defense government jobs actually increased during that time. D.C. never stops growing.
2.26.2006 1:32pm
Ted Frank (www):
Ted, if you believe all that, you should own more than one condo!

Not so -- I have a fixed after-tax interest rate for a residence of 3.6%. I can't get that sort of interest rate on an investment condo, and there are real benefits from diversification.

I'm not sure that we're that far apart in our disagreement. I think ARMs are too risky for most home-owners, I think buying into a brand new condominium is not a good speculative investment in 2006, and if I didn't already own a home, I'd be renting; I just don't want to pay $40,000 in transaction costs to try to time the market when there's a significant chance I'll be in the same condo in ten years. I'm just not ready to cry that the sky is falling.

Ann Arbor ownership prices are $150/sq.ft., and rents are $1.1/sq.ft./mo., so the ratio there is about 135 (not sure where you're seeing 75-100). Plus there don't appear to be a lot of small condos or large apartments in Ann Arbor; it's not quite the same sort of real estate market with childless urban professionals that DC is.

My neighborhood, home prices are $500-$600/sq.ft., and rents (plus parking) are $2.5-$2.8/sq.ft/mo., a ratio of 200-220. A high ratio, but not Bay Area high, and not really any higher than late 2001, when there was considerably more uncertainty about whether there would be a DC at all. And judging by the higher rents in Bethesda (which has comparable nightlife and restaurants, worse grocery stores, and is further away from the airport and downtown), it's at least as likely that the rents are going to go up here as the real-estate prices are going to go down.
2.26.2006 3:22pm

Your math is incomplete too. Rent will increase - and it only needs to increase 5% a year for 6 years before that $1900/mo rent exceeds the $2400/mo mortgage (which will remain constant). I rented for 8 years in grad school, and they never failed to increase my rent the maximum they could every year. Moreover, you will probably be forced to move periodically (if they sell the house out from underneath you or convert the apartment to condos, or whatever), and each move will cost $5,000-$10,000 (it was cheap to move when I had an apartment, but now that I have a house full of stuff I would not want to move every couple of years as I did then). I suspect renters move more frequently than owners.

There is also the tax advantage of owning, of course, as Ted said.

Twenty percent down is $100,000. Put that in the stock market, and expect 8% returns a year (compounded).

It goes without saying that if you compare the most advantageous stock market scenario to the least advantageous housing market scenario, gee, you shoulda rented and bought stock instead. Yet we know there have been stock busts as well as housing busts. If you put $100K in the stock market in 1999, would you be happier now than if you'd used the $100K to buy a house in northern VA? Worst case scenario with stock bust, you have a handful of paper. Worst case scenario with housing bust, I have to keep living in my house in Reston, wow, that really sucks. Good luck waiting for your "buy and hold" strategy to bring back your stock.

From 1970 to 2005, average annual real appreciation in home prices was 6.1% nationwide - and it did a lot better in certain markets. Average real individual gain in the S&P 500 index over the same period was more like 4.5%.

Then add the costs of home maintenance/depreciation. It costs at least several thousand a year to maintain the roof, gutters, landscaping, windows, appliances etc.

You can certainly mitigate that with an intelligent purchase. I bought in 1999, and all appliances and the roof were relatively new (less than 5 years old). I haven't had to replace anything yet, so my annual maintenance has been minimal.

If the price of the house goes up substantially, of course, you come out ahead. If it stays where it is, you'd be better off renting. If it goes down, you're hosed.

The same applies if you use your $100K to buy stocks now and sell them in 5 years! If they go up, great, and if they go down, you're hosed. No guarantees either way.

I don't see this crash you're predicting unless the DC metro area economy takes it in the neck for some reason, or unless there is a mass exodus from the region.
2.26.2006 4:54pm
DavidBernstein (mail):
Ted, I wouldn't move if I were you either. I might find a way to hedge, however.

Not predicting a great crash. Predicting at least a 20% decline in real prices over a medium-term horizon, which could simply mean no nominal price increases for the next several years, or, if prices decline more like five percent a year for four years, then we are talking more like a 40% decline in real (inflation-adjusted) prices. Of course, if rates rise substantially, a recession hits, there is war with Iran, regulators crack down on mortgage companies, or other such things occur, the hit could be worse than the late 80s early 90s, when a 33% nominal decline and 50% real decline was common in the Northeast, including the, DC area. Is there any reason that the market CAN'T go down at least as much as it did between 1989 and 1994?

Do you have a source for the 6.9% price increase annually? My understanding is the long-term price increase in the DC AREA is 6.9%, but that's substantially higher than most of the U.S., where the average is 2-3% over the long-term. Unless the last two years have skewed the results, which would be like looking at NASDAQ returns as of late 1999.

I'll buy a house in No. Va. in a year or so for emotional (and spousal) reasons, but I won't be thinking of it as an investment, though I will try not to lose my shirt (prices in Potomac and McLean seem to have increased by relatively small percentages, and I think those markets, with their great schools, will hold up relatively well as the market softens).
2.26.2006 7:23pm
hey (mail):
Rent/Buy is always a hard choice, especially with upper midle class ++ people who have a built in preference for owning vs. renting.

Too many people are arguing from different time horizons as to the advisability of purchasing. If you have a decent chance of selling your house in the next 5-10 years, one should definitely not be buying at the moment, especially in DC, based on a financial evaluation. If you are indifferent to financial return on your house, or have outside concerns (such as spousal/familal pressure), do what you need to do. But one should not try to argue that because a 20 year horizon makes buying a good idea, someone with a short term view should buy.
2.26.2006 10:32pm
I did find some stats on rental appreciation from the Northern VA Association of Realtors.

Arlington County
Average Monthly Rent
Detached Home (1998) $1625
Detached Home (2005) $2050
Hi Rise Apt (1998) $1191
Hi Rise Apt (2005) $1742
Townhouse (1998) $1300
Townhouse (2005) $2103

Fairfax County
Average Monthly Rent
Detached Home (1998) $1652
Detached Home (2005) $2164
Hi Rise Apt (1998) $1013
Hi Rise Apt (2005) $1600
Townhouse (1998) $1237
Townhouse (2005) $1788

So, rents are definitely not stagnating.
2.26.2006 10:52pm
Ted Frank (www):
I think David's been a bit too bearish on this, but Enoch's being too bullish.

Rents are not stagnating, but high-rise condos in Arlington have tripled in value between 1998 and 2005, vs. 50% increases in rent. On the other hand, the average apartment size is, I think, somewhat smaller. It's hard to get the apples-to-apples comparison, which is why I prefer the $/sq.ft. figure.

Average real individual gain in the S&P 500 index over the same period was more like 4.5%.

1. Does this include reinvested dividends? I doubt that it does.
2. It looks like you're measuring from a peak baseline for the S&P, which would artificially deflate the trendline. One needs to measure peak-to-peak or trough-to-trough.
3. One is typically paying 0.5 to 0.6% annually in after-tax income in property taxes to own, while there typically isn't that level of taxes on stock ownership. That's an important part of the comparison.
4. Stocks are considerably more fungible than real estate, and transactions costs are lower.
5. Moreover, if David's partially right, and home values are due for a 10-20% correction, the favorableness of the statistic for real estate completely dissipates. The comparison would look completely different in 1999, but, as you note, one was far better off buying-and-holdng real estate in 1999 than in stocks.

One factor noone is mentioning: the risk of tax reform that would destroy the mortgage deduction for blue-state-valued real estate (i.e., a cap at $100,000 of mortgage or so). In a fell swoop, I would not only no longer be able to afford my condo, but be facing a 30% overnight decline in value.

David: have any ideas how I might hedge? I'd buy reasonably-priced puts if I could, but that financial option's not out there. Yet. (I'm aware of entrepreneurial attempts to create the financial instrument.)
2.26.2006 11:38pm
Enoch's being too bullish.

To clarify, I don't expect prices to keep running up the way they have been, but I don't see any reason to fear a dramatic decline, either. I guess a 10-20% decline is not impossible... I'm no expert, and I've seen "experts" predict movement in all directions (up, down, stay flat).

Rents are not stagnating, but high-rise condos in Arlington have tripled in value between 1998 and 2005, vs. 50% increases in rent.

Though to be sure, the mortgage payments required to buy those condos have not tripled, since credit is now cheaper.

Does this include reinvested dividends?


If you don't like that figure, the SSA says "the long-term ultimate average annual real yield assumed for equities is 6.5 percent." But then you have people like Krugman predicting something like 3 percent.

Stocks are considerably more fungible than real estate, and transactions costs are lower.

Isn't that a good thing from the standpoint of home values - it makes them more "sticky"?

the risk of tax reform that would destroy the mortgage deduction for blue-state-valued real estate

If the Republicans have any brains at all, they will examine the effects of such a move on the swing states. Is that going to put Florida permanently in the Democrats camp? Arizona? Nevada?
2.27.2006 9:08am
(Jeek is Enoch... used a different computer, sorry)
2.27.2006 9:08am
Kirk from Colorado:
Interesting comment thread. I may be moving out to northern Virginia.
Is there a web site with a good searchable database of the rental market? (like provides for the sale market).
2.27.2006 8:16pm
Try this -
2.27.2006 8:31pm