Monday, July 25, 2005

WashingtonPost: DC RE Market Cools

The Washington metro area housing market has seen rapid price appreciation of about 90% (OFHEO study) over the past 5 years. However, there has been strong fundamentals driving the market such as strong population growth, and strong job growth (lots of high paying jobs).

The market in the Washington, DC area is starting to stagnate. A reasonable argument can be made that DC prices may stagnate but it is not a bubble market because of the solid fundamentals. Here are some quotes from the Washington Post article:

Home sales tend to slow in the summer, but the number of houses for sale in the Washington area has climbed by 50 percent in recent months. The available inventory has risen to about 35,300 homes, up from an average of about 23,000 in
the past three years, according to Metropolitan Regional Information Systems Inc., which runs the local multiple-listing service.

Local real estate brokers say they are seeing signs of a change."The market has slowed for sure, especially at the high end," said Wes Foster, chairman of Long & Foster Real Estate Inc.

Foster 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.

Towards the end of the article:

In Falls Church, Josefina Villegas, 71, thought her house would sell in just a few days when she put it on the market in late June and that she would soon be winging her way, carefree, to visit her grandchildren in Florida.

Houses in her woodsy neighborhood had been selling in the $900,000s, so she priced hers at $925,000 and waited for the bids to come in. She waited some more -- no bids. She dropped the price to $899,00. Three weeks later, still no bids.

I think houses are going slower now," she said, as she worried about getting the lawn mowed once again to keep up its pristine market-ready appearance. "Send
me somebody to buy."

Deborah Davenport, 50, listed her single-family house in Fairfax County last week at $569,000. Her husband, an echocardiographer who does heart ultrasounds, was offered his "dream job" with pediatric cardiologists in Tucson. In the past week, her home has been visited by just one set of prospective purchasers.

We haven't gotten any nibbles, unlike a month ago, when people put their houses on the market, and poof, they'd be gone," she said. "I figured it had to slow, it had to stabilize; but I hope it hasn't completely stalled -- for our sake."

The Washington, DC market is stagnating. If the Washington, DC housing market which has strong fundamentals is stagnating, then certainly there will be stagnation in bubble markets which do not have strong fundamentals. Look for stagnation in bubble cities such as Miami, Orlando, Los Angelos, Merced, Bakersfield and Reno. The price stagnation in these bubble cities will be followed by price declines.


  1. I truly believe that things have hit a wall- the market in many areas of the country began a shift in late June. If this was the peak, then the fall has begun. What casued this psychological shift is unknown at this time. Only time will tell, but from evidence I am seeing from New England-where I am, to the DC area to California it seems that there is increasing inventory, and some price reduction. Time again will tell.

  2. I have read a number of articles that speak of isolated bubble situations. You mentioned Miami, Orlando, Los Angelos, Merced, Bakersfield and Reno as bubble cities. Can one assume that if the real estate market begins to soften in one of these areas it will soften in all of them? How connected is the bubble?

  3. The market has quickly come to a halt in central Connecticut-in the last week, more inventory, some price reductions. Could be slipping in the Boston/Washingtom corridor. I have no idea what things are doing in Greater NY- however from conditions locally, they do closely echo what I read in the Washington Post today 7/25

  4. I would be cautious before proclaiming this to be the "end of the bubble", as it were. Short-term weakness and long-term falls are very difficult to tell apart, as anyone who's seen the 1997-2000 stock market index on a year-price graph can tell you...

    Three or four months of actual price stagnation (ie, 0% or slightly negative), or maybe two months of verifiable losses in average home price, would probably be a more useful indicator of loss of investor confidence. Growing at normal rates is not a bubble burst by any means...

    Again, the issue is not whether prices have grown too high - the issue is how the market will sort them out. A long term revaluation could lead to stagnated values until inflation has done the job.


  5. DMZ,

    "Short-term weakness and long-term falls are very difficult to tell apart, as anyone who's seen the 1997-2000 stock market index on a year-price graph can tell you..."

    I agree with you there. :-)

    "A long term revaluation could lead to stagnated values until inflation has done the job."

    This could happen under normal circumstances. However, in a speculative episode a low inflation rate will not sort it out. There will be price declines in the bubble markets.

  6. I'm also in central CT, and I've noticed a few things this past month
    - many more houses for sale while driving around, just today I saw 3 side by side
    - real estate booklets advertising price reductions... haven't seen that in years
    but basically I just have a gut feeling that this will all end really badly for many unfortunate people.

  7. Considering how many homes have changed hands in the last few years at prices well above what they will command for many. many years into the future once the decline begins, and thinking about the strain this is going to put on the people who will be unable either to sell or refinance them (as their value will be well below the outstanding mortgage balance), I fell very badly for the people who are going to be stuck with those homes.

    Most of those people will not be speculators. Many unfortunate people, viewing the relentless rise of prices, were convinced that not buying would have doomed them to being forever locked out of home ownership. Ironically, trying to convince someone in that position that prices will fall has been generally futile. In much of the country, there have been no price declines for decades, and even where there have, they lasted only a few years, and prices have now shot up far above the prior peaks, so only those who sold in the brief downturn lost money.