D.C. Real Estate Market Update:

The Washington Times says that July was the toughest month to sell a home in D.C. since 1997.

It's very hard to get a handle on what's going on, because statistical comparisons often involve comparing apples and oranges. For example, I've noticed that much nicer properties seem to be on the market now than last time I was seriously following things, in the Winter of 2005. Then, not only did prices seem outrageous, but the vast majority of homes for sale were dreck, as if everyone with a crappy house was taking advantage of the bull market in housing to sell, and anyone with a nice house was waiting to sell. (I also suspect that sellers' agents "fed" many of the nicer houses to their buyer clients before the properties formally went on the market, the better to get a double commission.)

But I can provide one piece of apples to apples evidence. In February '05, my wife and I looked at townhouses in a development in Alexandria called "Quaker Hill." It's not walking distance to the metro, but it is well inside the Beltway, and is across the street from large, beautiful single family houses. At the time, the asking price for standard three and four bedroom townhouses there ranged in price from $520K to $580K (for a model about 15% larger than most). Also at the time, houses were routinely selling in one weekend for more than asking (we bid instead that weekend on a wonderful house in Falls Church, offering 50K over asking, and didn't even come close). Checking the real estate sales from last Fall on the Alexandria website, these same homes were selling from the high $500s and up. Prices started to gradually decline, but in the mid-Spring sellers could still get in the low mid-500s for the regular-sized homes.

By July, the sweet spot seemed to be around $530k. One seller, MLS AX5588111, dropped his price on July 15 from an initial $594K to $529K, with a new listing text that started "$529,000! $529,000!." The house was off the market within a day or two, assumedly sold.

But suddenly, since then, sellers can't get even $529K. One seemingly desirable unit, an end unit with a garage (MLS AX6098109), "recently updated", has been reduced to from an initial $549K (and later $529K) to $515K with $5K closing cost help, effectively $510K. Almost a week later, it still hasn't sold. Two other houses in the development are selling for $525K, and one for $529K.

In short, at least in this one large townhouse development in Alexandria, prices are now lower than they were in February 2005. (But don't feel too bad for the sellers, most of whom originally bought these houses in the early 90s for a bit over 200K). Mortgage payments, however, would be higher than they were in 2/05 because of higher interest rates.

I make no claims that this reflects anything beyond the prices in this one particular development, and, even if it did, it's worth keeping mind that in a down market condos and townhouses tend to decline more, and more rapidly, than single-family homes. Also, while some of the bubble markets (especially No. Va., Boston, South Florida, Phoenix, and Las Vegas) seem to be rapidly contracting, prices are still rising in other parts of the country. But I think it's interesting anecdotal data nevertheless, and is consistent with the Times' claim that the market has slowed down considerably of late.

Joel B. (mail):
I think that is a fair assessment of the way things stand as of now, especially so for townhomes. One of my good friends was selling a townhouse in about February of this year, and initially went with a seemed a normal price at the time, it took a little while to sell (they needed to sell as they had already bought their new place), so they took a risk a dropped the price quite substantially (given the environment), they managed to sell it, their neighbors put virtually the same condo on the market and didn't initially drop the price, and now the condo's price that's still on the market (the neighbor) is lower then what they sold for.

I think things will stabilize, as many non-home owners I know are still genuinely interested in purchasing and desiring to buy, what's happened is buyers sense a change in the market and are taking a wait and see attitude. If, if sellers who don't need to sell let their listings expire then, things will probably even out reasonably, if however a lot of inventory remains and more people "need" to sale, prices could probably drop another 10-15%.
8.18.2006 2:36pm
dejapooh (mail):
I think your Observations are correct. I am in Los Angeles and have been looking at Investment Property (under 5 unit apt). Compaired to last year at this time, there are more properties available, and the prices are about the same (within 5% of their all time high). However, because of the increase in Interest rates the properties available are less profitable then they were a year ago. You also have to take into account the fact that Los Angeles is a Rent Control market, which distorts the rental market, and the resale market.

Last year I was interested in a building that was perfect, except that the $780,000 property was earning $2400 a month in rent. The market rent in the area was closer to $8000-$9000, but because all of the leasees were long term renters, there was no way to buy the property and come close to covering your expenses.
8.18.2006 2:36pm
dejapooh (mail):
My expectation is that as interest rates raise to combat inflation, we will enter a recession. With people losing their jobs and having an increased monthly payment due to variable rate mortgages, you will see a large increase in the number of homes on the market. Many of them will be institutional, and thus be available for under market (for a quick move). Over the next 3 to 5 years, maybe a 20% to 30% correction is possible. Much depends on how bad the recession is and how high interest rates go.
8.18.2006 2:40pm
I check these links regularly for anecdotal news about the RE market across the country. A common thread seems to be an increasing inventory of properties for sale especially in condos and townhomes and people who have little equity in their home who are (in some cases, frantically) trying to sell before they lose equity.
8.18.2006 3:06pm
markm (mail):
"Mortgage payments, however, would be higher than they were in 2/05 because of higher interest rates." In other words, the cost to the buyers is still going up - but the split between the bank and the seller has changed in favor of the banks.
8.18.2006 3:37pm
The Ghost of Xmas Past (mail):
Here is a nice artilce today in the Baltimore Sun:

To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, quietly has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company's popular "PayOption" adjustable-rate mortgages.

The letters explain that "this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly."

A model letter provided to me by Countrywide includes this hypothetical example of what could be ahead for a California homeowner currently making only minimum payments monthly on a $402,000 loan.

The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.

If the loan reset at today's rates, the letter explains, the full payment required would be $2,887.50 - more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper, making the potential payment crunch much worse.


This is going to end very badly, for a very large number of people.
8.18.2006 3:39pm
Kevin L. Connors (mail) (www):
Resale prices here in the OC are still on an upward trend, although the pace has slowed. The median single-family home is now north of $.7m.
8.18.2006 3:52pm
JeremyB (mail):
If you want a better idea of what's going on in the market, find a university real estate department in the area that does a paired sales analysis (same home sold multiple times in the recent past) or a multiple regression analysis. MRA is usually more robust, because it can extrapolate from all sales and find significant variables that contribute to sales price.

Wichita State University's RE department publishes their results at least annually, and I'm sure there's something similar in your neck of the woods.
8.18.2006 4:06pm
Harry Eagar (mail):
Hmmm. My friend the pawnbroker says he can anticipate real estate downturns earlier than anybody else because he starts getting Rolexes from agents and lawyers. That started happening early this year.

However, this is an isolated, atypical real estate market.
8.18.2006 4:29pm
Perseus (mail):
Sacramento (-1.3%, -5.0%) and San Diego (-1.0%, -1.8%) have experienced two consecutive months of YoY median price declines along with huge declines in sales volume (classic signs of a bubble deflating). Price increases in SoCal and San Francisco have slowed to a crawl and sales volume has likewise declined dramatically. It's only a matter of time before the rest of California gets hit hard despite all the happy talk from real estate agents.

E.g., from Bubblemeter:

For metropolitan Sacramento, CA, the NAR anti bubble report (fall 2005) stated:

The local housing market will experience a price decline of 5% only under extreme unlikely scenarios. For example, mortgage rates rising to 7.8% in combination with 25,000 job losses could lead to a price decline.

However, according to data from DataQuick:

The new survey shows that median sales prices for new and resale homes and condominiums in Sacramento County fell 5 percent below July 2005 levels.

According to Freddie Mac interest rates on 30yr fixed averaged 6.52%. Jobs are still plentiful in Sacramento as it "showed strong growth in online want ads." [] The 'extremely unlikely scenario' where mortgage rates hit 7.8% in conjunction with 25,000 job losses in Sacramento area has not yet happened. Yet, median prices have already declined 5% (YoY) in Sacramento county.
8.18.2006 5:13pm
pp (mail):
Sacramento and San Diego are declining because new housing starts aren't slowing, especially in the suburbs where one tract house is really a perfect substitute for another. Real estate in CA is continuing to tick up, albeit slower in the areas where new housing starts is not a significant portion of the market.
8.18.2006 7:12pm
Tom Bri (mail):
The 'double commissions' you mentioned are illegal almost everywhere in the US. I work in Illinois, where they are still legal, at least for now.
8.18.2006 10:44pm
ajf (mail) (www):
david -- this seems to be the case in at least one other townhome development. check out the recent sale prices in this development -- all the units are essentially the same, the only real difference: when they were sold.
8.18.2006 10:54pm
I purchased a detached single-family house in 1990 in the Alexandria area of Fairfax County, Virginia (just outside the beltway). There was zero appreciation in value during the Clinton boom years. For most of the decade, the house's value was 5 to 10% below its purchase price.

Toward the end of 1999, when the economy was preparing to go into recession, values in the area began to appreciate. I sold the house in May of 2000 for six percent above the original purchase price.

I won't be heartbroken if my current home, in Alexandria City, doesn't appreciate in the next few years. It appreciated 130% in six years, and property taxes have of course doubled. It is the local governments in Northern Virginia, grown fat from double-digit annual revenue increases, who bemoan the current stagnation in housing prices.

The Washington Post can cite this slowdown as more evidence of how Bush is ruining the economy, but they didn't cite the weak housing market of the 1990's as evidence of Clinton's economic incompetence.
8.18.2006 11:17pm
I didn't mean to imply that only the Washington Post reports on the cooling of the local real estate market - the article cited was of course from the Washington Times. My reference to the Post was my editorialing on the slant I personally perceive in the Post's reporting.
8.18.2006 11:21pm
douglas (mail):

"Sacramento and San Diego are declining because new housing starts aren't slowing, especially in the suburbs where one tract house is really a perfect substitute for another. Real estate in CA is continuing to tick up, albeit slower in the areas where new housing starts is not a significant portion of the market."

Absolutely. RE is a local market, with a more loosely connected national market. One big difference between today and the collapse in the early 90's was that the big developers flooded the market with units then. They learned from that episode, and regulate quite closely how many units are coming on-line at any given time. Sure, apparently you'll see exceptions in Sacramento or San Diego, but the really big developers are much more careful than they were in the past, and they have a huge impact on the market forces. Also, in places like L.A., there's little land available to build on in the city, unless you're a big developer, so supply is still limited (for major trends).
I think much of the market slowdown now is a correction weeding out the less careful, and less knowledgeable investors from the market. Some people who took on variables will have problems, but obviously, if they're looking at doubled payments, they'll refinance to a slightly higer rate rather than the doubled up variable, hopefully avoiding foreclosure.

Take into consideration also that building materials have gone up TREMENDOUSLY in the last year and half, or so. The costs of building new houses has gone up as a result. This will slow down new starts, and limit availability of units, controlling supply. Eventually, things will balance back out, and we'll see a more realistic upward trend emerge.

Think about it, with the increases we've seen in the last three years, is a slight downturn really a downturn, unless you're flipping...

At least, that's what I hope is happening...
8.19.2006 3:43am
Perseus (mail):
Your hope strikes me as ill-founded. The essence of a bubble (i.e. "irrational exuberance") is that prices have deviated from economic fundamentals and historical averages. For example, see here for metro L.A. (inflation-adjusted median prices are now 70% higher than the previous bubble peak in 1989). Excess building is a symptom of the bubble that will cause prices to decline even more than in those areas that have seen less building, but make no mistake, prices are likely to decline in places like SoCal too (just not as much as in San Diego and Sacramento).

Many people with ARMs (and CA has a greater share of them) will not qualify to refinance because they were counting on big price increases in their homes to provide them with the necessary equity. Those big price increases have evaporated in areas such as LA and SF, which means that they will have to come up with the higher payments as their rates adjust upward in the next couple of years. Since a significant number of them won't be able to afford it, their houses will be added to the housing inventory, which has already doubled in SoCal in the past year (sales volume is down 25%). Further downward pressure on prices will come as speculators and flippers disappear (if they haven't already) and as people begin to realize that renting makes better financial sense until prices decline substantially.
8.19.2006 8:28am
douglas (mail):

their houses will be added to the housing inventory, which has already doubled in SoCal in the past year (sales volume is down 25%).

That's the weakness of your analysis- twice nothing is still nothing. Over the last few years, supply has been near-negative given ravenous demand. Demand is still significantly higher than supply, and price fluctuations are more about financing and individual sellers circumstances than supply. Distressed sellers will inevitably start to attract opportunistic buyers who have money made over the last few years to invest. That sort of 'dip' can ony go so far, barring psychological market factors that I can't predict. No question that prices cannot continue to increase as they have, but a slowed growth curve does not a burst bubble make...
I hope.
8.22.2006 4:20am
Perseus (mail):
The current supply of houses is hardly "nothing." At the current sales rate (which has been slowing), Los Angeles county has 5.6 months of supply (and rising). If demand were significantly greater than supply, the sales volume would be the same as last year with all of this increased supply. What's happening is a classic bubble peak. And when a large chunk of those teaser rates and ARMs start adjusting upward next year, there are going to be plenty more "distressed sellers," who will erase many of the price gains that opportunistic buyers would leverage to make additional purchases.

By any number of measures, prices are several standard deviations above their historical norm. See here.
8.23.2006 4:43am