Matthew Yglesias is staying out of the D.C. housing market. After an abortive bid on one house, so am I. The market seems absolutely insane. Every economic analysis I’ve read (edit: not sponsored by the housing industry) suggests that housing prices in Northeastern markets are out of whack by every historical measure (compared to apartment rents, compared to housing rents, compared to incomes, you name it), and a brief venture into the market bears that out.
A ten minute walk from the Crystal City metro, folks are paying $400,000 for a 1,000 square foot house (usually built around 1940). I used to live in the Crystal Square apartments, right on top of the Crystal City metro, no walking outdoors in bad weather required. The building has a gym, pool, food court just below, underground parking, etc., and you can also get 1,000 square feet of living space starting at $1,230 a month. I’ve done the math, and if you are planning to stay put for five years or so, it’s a lot cheaper, even with ownership tax breaks, to live in Crystal Square, unless you are expecting housing prices to continue a sharp rise. A market in which people are expecting continued sharp rises in housing prices is a good market to stay out of.
One thing I hear from many people is that “prices can’t go down.” Maybe they will stabilize, but they can’t go down. Why not? Prices in Arlington, Virginia, have more or less doubled in five years. If prices were to go down by, say, 20% over the next two years, that would still amount to a none-too-shabby 60% price increase over seven years. A 10% decrease in prices would leave an 80% seven year increase in prices. And it’s not like prices didn’t fall in the DC area in late ’80s, the last time housing prices were equally out of whack with standard valuation measures (it’s hard to believe in today’s market, but the house I bought in Annandale when I moved to D.C. in 1995 had been sitting on the market for a year!). The “prices can’t go down” mantra sounds very much like the “NASDAQ can’t go down” mantra of the late ’90s, and listening to people at cocktail parties discussing their successful amateur ventures into real estate (“bought that townhouse in Silver Spring; figure I’ll rent it out to some students for two years, then flip it for a bigger property in White Flint”) sounds very much like listening to people discussing their stock trades circa Fall 1999, though there are obviously fewer people involved.
It’s possible I’ll still decide to buy something. Interest rates seems as low as they are likely to be in the foreseeable future, my lease expires in July and my landlords may be returning from their State Department gig abroad, and it took me months to find a suitable rental last time, and at least with a house you know you get to move on your schedule. But if I do so, I’ll be expecting it to be a financial mistake.
UPDATE: Read this excellent survey on surging housing prices from last May’s Economist.
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