Thursday, June 01, 2006

Hurricane Season is Here

Unfortunately, the 2006 Atlantic Hurricane Season has officially begun. The pain and suffering that hurricanes cause is tragic. I hope that this hurricane season will be very mild.

Skyrocketing, Hurricane insurance premiums are already financially squeezing many homeowners in the hurricane zone.

The skyrocketing rates and the hassle of dealing with the effects of living in a hurricane zone are putting a damper on housing prices. As we move towards the heart of hurricane season prices in hurricanes zones are especially vulnerable to price declines.

How many flippers and specuvestors will be buying in the sunshine state (FL) during the coming months given the following:
  • Rents don't come anywhere near to covering carrying costs
  • Housing prices are declining
  • Inventory is exploding
  • Hurricanes are brewing
We know that that 'investors' were a very high proportion of the housing market last year especially in Florida. As investors become net sellers of housing units the inventory will continue to explode [especially for condos].

In bubblicious Florida, and in other bubble markets located in hurricane prone zones, the 2006 hurricane season, is very likely to further housing price declines that are already a reality.

83 comments:

  1. With a minor in Geography, and taking courses in climatology, I feel I have a bit more knowledge then the average person in climatic events. Much debate on warmer air surface temps and ocean temps being warmer contributing to hurricane power - one thing is certain, spring begins earlier here in New England, autumns linger on, and winters are milder. We have 10 more days frost free compared to 1975 in central Connecticut. The American Robin-our state bird migrated south in the past-now many stick around the whole year. Monk Parakeets- a tropical bird, brought to our shoreline ports via ships, have adapted to climatic condtions along the shoreline.

    Lilacs flower on average 6 days earlier then in 1975, coastline erosion on state beaches is increasing. Incidences of Lyme disease is increasing and spreading. At Hartford there is an average of 20 90 degree days per summer-last year we had 40. The average year round temperature has increased 3 degrees at the Univeristy of Connecticut at storrs since 1900.

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  2. I assume you meant to write "selling" in the second to last paragraph?

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  3. As a native Floridian, I don't put housing in hurricane zones and Florida housing in general in the same boat. The whole state is not a hurricane zone. Just some areas along the coast.

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  4. all of florida is at risk for significant damage from Hurricane. The state is not very wide.

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  5. I second Mari. Unfortunately, the really overpriced junk tends to be along the seacoast--you did want that beautiful view, right?

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  6. mari
    "The whole state is not a hurricane zone. Just some areas along the coast. "

    Didn't the 2004 huricane season soak most of the Florida penisula?

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  7. Actually, if you follow housing-building related stocks, they expect to earn very substantial revenues from the Gulf Coast area, mainly related to rebuilding from Hurricanes Katrina and Rita.

    If, as David seems to be implying, the "effects of living in a hurricane zone are putting a damper on housing prices", then I would have expected builders and building suppliers to be cutting back on their exposure in that area. But instead, the opposite has been occurring.

    And, as has been posted above, lumping all of Florida as being "bubblicious" is just plain wrong. While there are definitely parts of Florida that have seen skyrocketing valuations in the past few years, many other parts have seen normal appreciations.

    Saying that an entire state is "bubblicious" may go along with a general premise that there is a housing price bubble everywhere, but simply saying it doesn't make it so.

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  8. Yeah, yeah, you talk tough now, FRITZ. But your gonna be crying like a baby when you get thrown out of your house and I swoop in and buy it for $50,000. Hey, I'll be laughing at you the whole time. You just wait.

    Average Bubble Booster

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  9. "The skyrocketing rates and the hassle of dealing with the effects of living in a hurricane zone are putting a damper on housing prices. As we move towards the heart of hurricane season prices in hurricanes zones are especially vulnerable to price declines."

    I presume this is your opinion, since its unsupported, and contradicted by what I've read in a number of articles (in WSJ? Forbes?) explaining that hurricanes have not decreased property prices on Fla. coast, probably because of state mandated insurance coverage, FEMA bailouts, and demand for ocean property. This is why people rebuild time after time in hurricane zones.

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  10. oh, noooo. Retail sales were strong in May....ooohh nooooooo, the economy looks steady....OOOHHHH NOOOO!

    ------

    CHICAGO (MarketWatch) -- Consumers defied expectations and rushed to shopping centers and malls in May to keep the shopping spree that began in April going.

    With nearly half of the nation's largest retailers reporting to Thomson First Call early Thursday, a clear majority were turning in sales results that were ahead -- some by large margins -- of Wall Street's expectations.

    Pockets of strength were strongest in teen wear and some specialty retailers. But even a handful of department-store retailers, the perennial poor performers, caught investors off guard.

    J.C. Penney Co. (JCP, Trade) delivered same-stores sales, the industry benchmark that measures receipts rung up at stores open longer than a year, that were 11.1% higher than last year's. That blew past the 2% forecast reached by analysts reporting to Thomson First Call.

    Penney said sales were strong across all merchandise categories countrywide, and raised its second-quarter earnings outlook by 2 cents a share to 62 cents a share. At Thomson First Call, analysts were looking for earnings of 61 cents a share.

    Nordstorm Inc.(JWN, Trade) also surprised with same-stores sales that climbed 7.8%, ahead of the 4.2% rise projected.

    Wal-Mart Stores Inc.(WMT, Trade) was the first to sound the horn on the toll higher prices at the pump could be taking on consumers.

    Over the weekend, the largest retailer in the world said that its U.S. sales were getting squeezed by consumers waiting on twice-monthly paychecks before they shop.

    That's called a "paycheck cycle" and Wal-Mart blamed surging costs of gasoline and utilities for a "more pronounced" rotation last month.

    On Thursday, CFO Tom Schoewe said in a press release that June sales were likely to come in higher by 1% to 3% -- considered a relatively weak showing.

    Rival Target Corp. (TGT, Trade) beat expectations with same-store sales that were 5.7% higher vs. a 4.8% estimate at Thomson First Call.

    Teen retailers that began to trickle in late Wednesday were strongest at stores that resonated best with the fickle fashion tastes of their target customers.

    Good early response to the summer lines and the "ongoing strength of the American Eagle (AEOS, Trade) brand" boosted same-store at American Eagle Outfitters by 11%. That outpaced the 9.3% expectations at Thomson First Call. Total sales surged 19% to $168.8 million, prompting the retailer to reiterated second-quarter profit target of 39 cents a share to 41 cents a share.

    Aeropostale (ARO, Trade), the mall-based casual-wear retailer, said comparable-store sales slipped 1.1% last month on top of last year's 4.9% decline. At Thomson First Call, analysts were looking for an average gain of 0.3%. Total sales jumped 17.9% to $73.9 million

    Hot Topic (HOTT, Trade), the teen-wear retailer whose apparel and accessories design are inspired by musicians and the songs they play, continues to struggle. The City of Industry, Calif.-based retailer said it sales tumbled 6% in May. That's deeper than the minus-5.1% expected at Thomson First Call.

    Action sports-wear and accessories were hot at Zumiez (ZUMZ, Trade), whose sales skated 18.2% higher on a comparable-store basis. That was well above the 6.8% increase Wall Street was looking for and it gave analyst Jennifer Black another opportunity to tout the retailer.

    "Zumiez is a destination in itself," she said. "The stores are constantly infused with fresh product and the retailer is on top of offering its customers the hottest trends and fashions.

    Due to the nature of Zumiez business -- catering to teens and a distinct niche -- we believe the retailer is less susceptible to being negatively impacting by escalating fuel costs and is not as dependent on overall mall traffic trends as some if the other specialty retailers," she added.

    Men's Wearhouse (MW, Trade) proved that men really are out there shopping. The apparel retailer turned in a 5% increase in same-store sales, soundly thrashing the 2.7% gain expected at Thomson First Call.

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  11. We have much bigger problems in this country than global warming that will guarantee disaster:

    Social Security Reform, and mmigration Reform to name a couple. These are real problems that will create measurable issues.

    Global warming is a small issue compared to these. Why would anyone root for a hurricane to destroy an area of the country? This site is turning from a housing bubble site to a general doom and gloom site.

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  12. "Whoever said they were going to "swoop in" and buy Fritz' house for 50K is dreaming."

    It was a satirical comment aimed at bubbleheads, I'm sure.

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  13. Contented RenterJune 01, 2006 11:01 AM

    Homeowners are "across the board" better off financially than renters, even after removing home equity for the equation.

    Savings, retirement funds, education levels, earnings, etc. are all higher. Check the census bureau stats. Is this an anomoly?


    But not necessarily because they are homeowners. That is the thing about correlations - you need to determine which variable is which. Is it that owning a home makes people better off, or is that those who are better off can more easily purchase a home?

    Everyone knows the conventional wisdom that it is "always" better to own than rent. And then there are the stereotypes that the poor rent while the wealthy own, etc. All of this played its part in the psychological aspects of the bubble.

    In recent years, however, the facts are that for many, the financially sophisticated decision was to rent cheap and invest the savings. Since it went against conventional wisdom, this decision was/is derided by many. Those who are currently renting because of what they perceive in the housing market are not anti-homeowner. We plan to be homeowners some day. But only when it makes sense once again.

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  14. va_investor
    "Homeowners are "across the board" better off financially than renters, even after removing home equity for the equation."

    Homeowners are not financially better off the renters because they own homes. They own homes because they are financially better off.

    "Savings, retirement funds, education levels, earnings, etc. are all higher. Check the census bureau stats. Is this an anomoly?"

    When was the census done.......2000
    When did the bubble occur....2004/5

    Let's wait for the 2010 census and see education levels, savings and retiremnt funds between owners and renters. My guess is there will be less of a descrepency in 2010 than in 2000. I would agree that the 2010 census will show that homeowners will still have higher income levels than renters...DUH!

    "If David's hoped for doom scenario plays out,the only thing he'll be swooping in on is the food stamp line. "

    I don't see anywhere in this blogsite where David is hoping for doom, infact I see several times that he states he wishes doom does not occur but it looks like it could happen. Let's hope for less people in the food stamp line, impeach Bush.

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  15. "Savings, retirement funds, education levels, earnings, etc. are all higher. Check the census bureau stats. Is this an anomoly?"

    Thank you, Contented Renter, for straightening out the cause/effect relationship.

    What has got lost in the recent mania is the simple truth that a) housing is an EXPENSE, not an "investment," and b) purchasing a house is advantageous in that it allows one to "buy" his future housing EXPENSE with today's dollars. Homeownership can thus contribute to long-term financial security and stability.

    That said, anyone who has purchased a "home," for extra-ordinary annual income multiples, with an adjustable rate mortgage, in the past few years in a "bubble" market, may find himself in trouble quite soon.

    I hate to see the discussion twisted from "housing bubble" to "homeownership in general." It's like saying "stocks are a good investment." What stock, in what company, at what price? Those are the questions you gotta ask and houses are no different.

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  16. I believe that LONG TERM it matters not when buy. As long as you can afford the payment today, that cost will diminish as the years go by and your salary increases. you are correct that the advantage (one of them) is fixing your housing costs at today's dollar.

    Another is the ultimate goal of having your house PAID FOR by retirement. If you sit on the sidelines long enough, this will be impossible.

    Rates are good. I care more about my monthly outlay than trying to time market cycles. Long term, entry cost is irrelevant because the house is paid for.

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  17. Entry cost is not irrelevant if it so high that near to medium term it can not be carried with available income. Entry cost is not irrelevant if it can not be carried near to medium term through the use of conventional, fixed-rate financing.

    Mortgage payments tied to a floating interest rate will follow inflation. Interest rates can not fall below zero and have been at forty year lows. Betting that they will stay at current levels, or go even lower, will undermine a homeowner's "purchase of future housing expense with today's dollars" should rates, and mortgage payments, rise over time. And it is "betting," and betting with one's home to boot.

    Can you truly "afford" a house at today's prices? Fine, go ahead. Most, by any conventional measure, can not.

    The "panic buying" described in DC-area news accounts in late 2004-early 2005 was textbook behaviour that always marks the end. Always. It is downhill from here, partner.

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  18. va_investor
    "Another is the ultimate goal of having your house PAID FOR by retirement. If you sit on the sidelines long enough, this will be impossible."

    That would be nice. If I knew that my job was going to make homeownership worthwhile, I would consider a good investment for retirement. If I bought a house, 2 years later I lose the job and have to relocate to Raleigh NC if I want to continue being gainfully employed....I'm toast! I wish I could buy a house but there is this risk. My housing plans for retirement has to be invest in securites, live in a apartment as long as I'm in the DC area, when I retire or burn out, relocate to North Carolina and buy an affordable home there. If you have a better suggestion I would be interested.

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  19. I said "if you can afford it". Of course, I meant with 30yr fixed financing. That is why I referred to today's rates.

    I remember a time when anything below 12% was considered an excellent rate. The problem is that many of you don't - but maybe you will.

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  20. Contented Renter

    "In recent years, however, the facts are that for many, the financially sophisticated decision was to rent cheap and invest the savings."

    Your response belies your claim that your decision to rent is financially sophisticated. I say, it shows a lack of sophistication. I presume that your reference to buying when it makes "financial sense" means that you'll buy when buying expenses equal renting expenses. This strategy is flawed, not sophisticated. To begin, the present value cost of buying is almost always (if not always) more expensive than the present value cost of renting in established, desireable neighborhoods. Thus, waiting and hoping to buy until buying is not more expensive than renting is futile, it just doesn’t happen, and you’ll be renting as long as you employ this strategy. Sophisticated people know this. Sophisticated people also know that buying with conventional financing locks in the costs of buying, that renting costs will increase, and that eventually rising renting costs will exceed fixed buying costs. Your so-called sophisticated decision appears based only upon present values of renting and buying expenses, and fails to account for likely changes in future values of renting and buying expenses. To illustrate this, people who bought condos in NW DC in 2001 paid what was then historically high prices (remember, many DC property prices doubled from 1998-2001), and these buyers’ buying expenses exceeded renting expenses for comparable properties in 2001. Now, however, rents have risen, but the mortgage payments have not. Now, only 5 years later, the present buying expenses are less than renting expenses. I know people who did not buy in 2000, 2001, 2002, 2003, 2004, 2005, and 2006 because they were “sophisitacted” and figured that renting was less expensive in present values. In 1998 I decided not to buy a 2 bd 2 ba NW DC condo for 80k because renting was cheaper at the time. In hindsight it’s clear that these decisions were not well reasoned.

    I expect property prices to decrease another 10-15% in DC. But nobody knows for sure, and waiting to buy in anticipation of price decreases is just as risky as flippers buying now in anticipation of rapid price appreciation. If you plan to buy for long term it doesn’t really matter much if the near term prices go up or down 10-15% anyway, so this is not a great reason for waiting to buy.

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  21. wvu 84,

    What if you get hit by a truck tommorrow? Life holds no guarantees. Fear= paralysis.

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  22. Savings, retirement funds, education levels, earnings, etc. are all higher. Check the census bureau stats. Is this an anomoly?"

    Does the study count home equity as part of the net worth?

    I just sold my house, and there is no way that I would buy right now. I think most would agree that prices will remain flat AT BEST for the next several years, and I'll bet you can negotiate 10-20% off of asking price of a house that you actually want between now and then.

    With climbing inventories, I can't imagine that someone selling a 400k house wouldn't jump on a 40k off bid. People are scared right now and they don't want to pass on a low ball only to get a lower ball in several months. I would recommend that if you want a 30% price drop, then you go find a motivated seller and take the bulls by the horn and get your 30% off.

    There are many things that I could go out and overpay for right now, such as luxury car, watch, boat, but I choose not to and that is the same reason that I rent - it is a GREAT DEAL! I have seen 10-15% drops in DC so far, and when they get to 25-30% drops from their highs, then I will get my other 10% to make 40%. It is already starting to happen.

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  23. "I have seen 10-15% dropes in DC so far"

    I'm sorry, but a statement like that can't go by without some sort of verification or attribution.

    Are these 10-15% drops in prices? Or in the difference between a listing price and the final sales price? Are these drops citywide? Or is it based on personal observation of some listings?

    You need to be much more specific when tossing around numbers.

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  24. "I don't see anywhere in this blogsite where David is hoping for doom, infact I see several times that he states he wishes doom does not occur but it looks like it could happen."

    Its true David has stated that he doesn't really want doom to occur, but this isn't believable. Clearly David is hoping for a bubble to burst. He'd like to see massive property value depreciation. If this were to happen, it is undeniable that there would be human suffering as an unavoidable consequence.

    David hoping for RE bubble to burst, and then saying he really doesn't want human suffering is like me saying, yes, I pointed my gun at you and pulled the trigger, but I really didn't want the bullet to harm you. These are causes and effects, directly linked, and inseparable.

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  25. http://washingtondc.craigslist.org/rfs/

    Use keyword "reduced" and draw your own conclusions. (nearly 300 postings under that keyword today.

    Also check out this guy in Seattle that I found from another site: you should make him an offer, Fritz

    http://seattle.craigslist.org/rfs/166619649.html

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  26. maybe the hurricanes will come and reduce the supply of condos in FL and then prices will go up.....

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  27. va_investor
    "What if you get hit by a truck tommorrow? Life holds no guarantees. Fear= paralysis."

    I think you are out of touch with average income people.

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  28. Meant 300 listed or relisted today, and 200 reduced overall.

    You get the idea. If you don't think you can negotiate a deal, then I will help you and you can give me 50% of what I save you off of the asking price.

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  29. "they own homes because they are financially better off"

    That is it! Smart, well-educated people throw money down the toilet on houses because they can afford to.

    Makes sense to me.

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  30. wvu_84, you said "relocate to North Carolina and buy an affordable home there."

    It sounds like you are assuming that NC is a static place; that nothing will change there between now and the time you're ready to move there.

    How many baby-boomers will be retiring in the next five years and moving to NC for the climate and the relatively less-expensive propreties? Is it possible that the assumptions you are making will no longer be relevant at some point in time?

    And what if you move there, buy a home, and NC is clobbered repeatedly by hurricanes?

    At some point, we all just need to accept that life is inherently risky, and we are all going to suffer the ultimate consequence of being alive. (that consequence is: Death. Or do financially sophisticated people know how to cheat death at today's interest rates?)

    So, mitigate your risks, but live your life too.

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  31. tulip maniac
    "I just sold my house, and there is no way that I would buy right now. "

    Glad to hear some that makes sense. I sold a house in 2003 and invested the profits in mutual funds. I rent and invest into a 401K (I probably wouldn't be able to do this if I bought another house). Even though the stock markets are going through turbulent, in the long run I should be better off because my assest are more diversified.

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  32. d in dc - I take issue with your statement that initial carrying costs are "almost always" higher - in "desirable neighborhoods," whatever that means.

    In fact, in a normal and balanced real estate market, the cost of renting vs. buying is more or less equal. The exception is in very affluent neighborhoods, where buying is more expensive under nearly all market conditions. "Very affluent" neighborhoods apply to very few of us.

    I am a proud, contented renter in a recognized ghetto neighborhood in DC and can tell you that in my neighborhood, the cost of buying, on a monthly basis, is at least double the cost of renting. That is insane.

    I will also offer that the last primary residence I owned was in a very "desirable" NW DC neighborhood. It was purchased in 1997, with a 15 year, fixed-rate mortgage and a three percent down payment. The monthly cost to own was roughly 15% below rental costs, without tax considerations. And the prevailing rate of interst was nearly 3 points higher than available today.

    So, you may preach as you wish, but my personal experience demonstrates, to me, that the patient will be rewarded. Unless, of course, it is indeed "diffent this time."

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  33. Anon 9:32
    Should I buy a home in DC now or invested in securities and buy a home in North Carolina when I retire? My logic dictates I should go with the North Carolina option.

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  34. So the entire basis for the claim that DC prices have already dropped 10-15% is based totally on Craigslist ads that have the word "reduced" in them?

    Color me unimpressed with such stunning research capabilities.

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  35. "I am a proud, contented renter in a recognized ghetto neighborhood"

    In what direction is the neighborhood headed? In five years, will things be better or worse in terms of dining, shopping, and entertainment options that you can walk to?

    Do you have an english basement?

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  36. I have lived in nva. for 25yrs and, absent a brief window in the late 90's, ownership has always cost significantly more than renting.

    I can't comment on ghetto's because I have no data.

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  37. Anon 9:37
    "And what if you move there, buy a home, and NC is clobbered repeatedly by hurricanes?"

    I'm not too worried about Asheville, NC being hit with too many hurricanes.

    "It sounds like you are assuming that NC is a static place; that nothing will change there between now and the time you're ready to move there."

    Asheville, Hickory, Statesville and Hendersonville NC is probably going to be alot more static than DC metro area.

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  38. wvu_84, "My logic dictates I should go with the North Carolina option."

    It sounds like you know what is best for you. Everyone has self-doubts, but don't let yours overwhelm you. Keep socking away the dough, be content with renting, and try to enjoy life! I have to admit that reading the blog is not conducive to the goal of "enjoying life".... :-)

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  39. "
    Can you truly "afford" a house at today's prices? Fine, go ahead. Most, by any conventional measure, can not."

    Sorry, but this is just not true. Too bad you can't live in the fanciest neighborhoods and the wealthiest, clostest-in towns, but saying that average people can't afford a house is ridiculous.

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  40. More of a combination of Craigslist, Ziprealty (search fairfax county and sort by listing date and read), and my personal experience with realtors, houses I have sold and neighbors of these houses that I have seen sit before being reduced. Also have compared sales price with settlement price. (tax records. I get flyers in the mail showing listing amounts and sale amounts.

    Inventories that have tripled and quadrupled in Arlington, and Fairfax proper since this time last year when they used to stay extremely low for years. (public information). I have made good money in this field and watch it like a hawk. Enough about me, what are you seeing in the DC area? Prices still increasing?

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  41. "I am a proud, contented renter in a recognized ghetto neighborhood in DC and can tell you that in my neighborhood, the cost of buying, on a monthly basis, is at least double the cost of renting. That is insane.
    "

    Sounds like you make some really solid financial decisions there. Can I be like you?

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  42. Anon 9:53
    "Sorry, but this is just not true. Too bad you can't live in the fanciest neighborhoods and the wealthiest, clostest-in towns, but saying that average people can't afford a house is ridiculous."

    I bet you are a realtor.

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  43. "Tulip Bulb Maniac said...
    More of a combination of Craigslist, Ziprealty (search fairfax county and sort by listing date and read), and my personal experience with realtors, houses I have sold and neighbors of these houses that I have seen sit before being reduced. Also have compared sales price with settlement price. (tax records. I get flyers in the mail showing listing amounts and sale amounts.
    "

    This is really stupid. You should not post anymore.

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  44. RE: This is really stupid. You should not post anymore.

    Draw your own conclusions, or just keep listening to what the realtors are telling you.

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  45. Anon 9:53 - of course the other anon is a bitter realtor.

    As for the other comments, yes, my ghetto neighborhood is moving in the "right" direction. And I do have an "english basement," but use it for storage. I live in a renovated row house. And as for the bitter realtor that wants to be like me, come take a look at what it costs to buy an apples-to-apples comparable property in my ghetto. Neighbors paid about 370 times a month of my rent last fall. Again, that is insane. They are from out of town and are rather taken aback by the winos peeing, gently, on the side of their very expensive house. Oh, well.

    As for the neighborhood improving, it went to hell in the 1960's, "improved" in the late seventies, crashed, price-wise, in the early 80's, moved back up in the late 80's then crashed again early 90's. Two steps forward, one step back, every ten years, for thirty years. That is not history I will ignore. Nor will I ignore the fact, and it is a fact, that every asset mania, through centuries of recorded history, ends with price declines that are unjustified. In other words, when this thing bottoms out, property will likely sell for less than it is "worth." By then, most of the realtors on this board will have got promoted to assistant manager at Walmart already, so don't don't hold your breath guys.

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  46. "
    Draw your own conclusions, or just keep listening to what the realtors are telling you. "

    Ok, and you keep making inane assertions based on incompetent statistical research.

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  47. "By then, most of the realtors on this board will have got promoted to assistant manager at Walmart already,"

    Will they have to live in your neighborhood then?

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  48. RE Ok, and you keep making inane assertions based on incompetent statistical research


    Tell us your assessment - I will even cut you some slack and not ask for sources. I will not cut you slack for not having a pair of onions and getting a name on the site - takes two seconds (want statistics for that too ;)

    Prices are rising (roughly how much), or prices are falling by (roughly how much?)

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  49. DC Too,

    I've lived in the hood for much of my life, but when making a signigicant investment in property, I'd never buy in the hood. Location, location, location, it's a cliche, but it cannot be underestimated in property.

    Don't pretend like you don't know what I mean when I say desirable neighborhoods. In DC I suppose these would mean the obvious, Gtown, Cap Hill, Dupont, Woodley, Adams Morgan, etc. "Gentrifying" neighborhoods (now that's a loaded term, but come on, desirable isn't) in my opinion don't make the cut.

    Now you said that "in a normal and balanced real estate market, the cost of renting vs. buying is more or less equal." I don't think this is true. It's very, very rare for these costs to be equal, because homeownership is valued at a premuim because of anticipated appreciation, and the incentive of fixing housing costs. You give an example of 1997 in DC. That my friend is not a representative example. This may have occured in DC for a brief period of time, but I doubt you can give any other examples.

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  50. Is "tulip bulb maniac" really much more of a name than "anonymous"?

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  51. Single family home prices in the Greater Washington Metropolitan area are down about 4.5% from 3Q'05 and about 2% from 2Q'05. YOY still shows 11% gain.

    Source: http://www.realtor.org/Research.nsf/Pages/MetroPrice

    The pattern indicates that a top has been hit and it is turning.

    Conventional wisdom holds that houses appreciate about 6-7%/yr on average. Studies (and I don't have them readily available) indicate that home prices climb about 1-2% faster than inflation historically.

    For the past 36 years inflation has averaged 4.73%/year so conventional wisdom is in the right ballpark. (inflation has been 2.53% for the last 10 years and 2.66% for the last 6)

    Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

    I haven't finished my assessment but I would expect home prices to revert to their historical mean.

    So, take home price history and draw a line through 36 years. You'll find that appreciation over the past 10 years has followed a steeper slope. It should come back. This will help identify a floor to the % drop. I haven't calculated this yet.

    I do think the drop will be less than what the calculations above predict for the following reason: greater lending availability. I think there is a basis for higher home prices because access to capital is easier (online banking competition/easier global competiion/liquidity etc.) however, I intend to limit this to a 20% increase in home asset prices. (something along the lines that the 20% down payment requirement goes away with greater banking competition.) I may modify this number.

    Any how, all of this is an interesting puzzle to me and I'm only playing at finding a basis for claims one way or the other.

    Finally, I don't believe "this time is different." I do believe that what goes erratically up, must come (erratically?) down.

    My $0.02

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  52. Two Cents,

    Supernova already did the math, but you can do it too. Please post the results. You might conclude that current home prices are nearly right were they are to be expected assuming appreciation at the rate of inflation plus 1-2% during the past few decades.

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  53. "Neighbors paid about 370 times a month of my rent last fall."

    Could you clarify this please? For example, if you pay $1000 per month in rent, you are saying that neighbors paid $375,000 for a rowhouse? Or if you pay $2000 per month, they paid $750,000 in total?

    What would a comparable rowhouse rent for in Georgetown? (I've been there, they look nice) What would a comparable rowhouse sell for in Georgetwon? Do you use the subway system there?

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  54. If the guy's Neighbors paid about 370 times a month of my rent last fall....

    Then they could be locked in for 30 years at historically low interest rates, locked in below what he will be paying to rent in the same neighborhood in 20 years.

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  55. I seem to recall from an article in the economist that home value to rent ratios are calculated as the home's sale value divided by 12 months rent (the yearly rental income). I forget where these numbers typically fall but the article demonstrated that these ratios are way up over the last 6 years. I'll see if I can find a link.

    My $0.02.

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  56. This would completely fail to take into acccount interest rates and carrying costs unless I am missing something.

    As a Landlord, the cost of my mortgage is very important in determining whether the numbers work.

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  57. I still can't find the economist article, which was good, but it seems that a home/annual rental PE of 9-11 was considered historical.

    I suppose that would look something like the following for a landlord.

    A 120K home.
    PE of 10.
    That would imply a monthly rent of of $1,000.

    For the landlord:

    with 20% down, and ~100K loan at 6% would be about $600 for principle.

    Plus a 10% vacancy overhead ~$60, plus 10% of income towards repairs ~$60
    plus, taxes at ~100 per month, plus the cost of lost interest on the down payment ~80/month,

    would be in the ballpark of $900 and you'd want to be cash flow positive and hopefully earning 10%.

    Starting at a much higher P/E ratio would squeeze the finances for a new landlord I suppose?

    Playing with numbers...

    My $0.02.

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  58. "A 120K home.
    PE of 10.
    That would imply a monthly rent of of $1,000."

    Are you seriously out of your mind?

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  59. No. It's an example...

    My $0.02.

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  60. d in dc said...
    Two Cents,

    Supernova already did the math, but you can do it too. Please post the results.


    Where are the results from Supernova’s math?

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  61. I remember back in the mid-eighties looking at Brick Colonials in Silver Spring. They were priced at about 100k and the negatives were about 400-600 per month. Quite hefty given the prices. Interest rates were 12-14%

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  62. "A 120K home.
    PE of 10.
    That would imply a monthly rent of of $1,000."

    Even if housing prices plummet 30% tomorrow, not much will be out there with a sales price of $120K. Yet $1,000 per month is a pretty reasonable rate to pay in rent right now, even with "overpriced" housing stock supposedly everywhere.

    Doesn't make sense. In your example, the rent on that $120K house would need to be about $100 to have any chance of reflecting the reality of the marketplace.

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  63. "I remember back in the mid-eighties looking at Brick Colonials in Silver Spring. "

    Those well-made, close-in, easy to maintain houses in established neighborhoods? In 2006, they are worth less than $100,000, especially with interest rates below 7% for people with good credit. Can't wait to snap one up on the cheap at a foreclosure sale.

    ;-)

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  64. Ill take a dozen at 100k each, preferably backing to Sligo Creek.

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  65. My example is there to illustrate how a PE of 10 on a 120K house would look from a landlords perspective. It creates a sort of "unit PE" to work with.

    Since it's fairly linear, if you had a $480K home you would multiply all of my numbers by 4.

    When you do this, it illustrates how a new landlord, with 20% down on a 480K loan would have costs on the order of $3600/month. He would have to expect earnings of $4000 per month to be cash flow positive and turning a profit.

    If rents, as you imply, really are much lower, let's say around $2000 for that property in this latest example, then you can quickly see that the higher P/E becomes more risky for the landlord.

    Please let me know if you see an error in the example's assumptions versus simply saying that homes aren't worth 120K.

    Thank you,
    My $0.02.

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  66. Everytime someone trashes a particular neighborhood, indicates that a home is of dubious contruction quality, is ugly, is far-out, whatever, they only underscore the fact that there is a housing bubble. Why else would prices on these types of places have rocketed up in the past 5 years? It adds nothing to the discussion.

    One day people won't be able to believe that a apartment-conversion condo ever went for $500K...

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  67. "Those well-made, close-in, easy to maintain houses in established neighborhoods? In 2006, they are worth less than $100,000, especially with interest rates below 7% for people with good credit. Can't wait to snap one up on the cheap at a foreclosure sale."

    I wrote this. It was intended as a compliment for those homes, and it was intended to illustrate that they have intrinsic value beyond what condos are selling for in Reston VA.

    Every time someone compares a home to a stock, I just shake my head.

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  68. "When you do this, it illustrates how a new landlord, with 20% down on a 480K loan would have costs on the order of $3600/month. He would have to expect earnings of $4000 per month to be cash flow positive and turning a profit."

    Landlords vs. Homeowners who live in their home.

    Big difference. Think about it.

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  69. Sure there are differences but I know of plenty of home owners who considered the rental value of their property before buying. The idea being if they get transferred, laid off, or move will they have to sell? Some actually wanted to eventually be able to rent their starter homes out rather than sell when they upgraded. Some just wanted to see if renting vs. owning was way out of whack.

    So I have thought about it. What's your point?

    My $0.02.

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  70. People who only post as anonymous are very tiresome. If you think you have something relevant to say, then at least distinguish yourself from other anons.

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  71. It is smart to take a look at how much a house is worth on the rental market. If the cost of renting is way off what your mortgage is costing you, you may be be better off renting. I sold and am renting. If I were to purchase the house in which I live, it would cost me an additional $7000 a month! I would not buy this house, however, because I could not afford it. A house I could buy in my neighborhood, which is significantly less desirable, would cost me an additional $1,700 a month.
    If I planned to live here forever, it could pay off long term to buy. But like most Americans, I don't plan to live in my current house forever.

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  72. Yeah, you'll keep "trading up" like most Americans. That means there will be a continuous upward trend in overall housing prices. Otherwise, you won't be able to trade up, you'll just do lateral or downward moves.

    Seymour Johnson

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  73. For us it is not an issue of trading up, rather, my husband's job is very mobile. We move every three years or so. We are also very smart with our money. I know for a fact that our financial situation is better than most of our peers. I can think of only two people who are doing better. Can you say the same, Seymour?
    BTW, thanks for not just being another anon.

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  74. $inthebank - what percent of your net worth has come from real estate? Don't answer, if you would rather not.

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  75. Somewhere around 70%. Yes, I'm one of the millions of lucky "fools." We bought carefully and put down 20%. We also sold with just as much thought. Our debt is 0 and has been that way for almost 10 years.
    We are protecting the money that we have made in real estate as we feel quite certain that a significant portion of our gains would have vanished in the next couple of years, had we kept our house.
    Sometimes real estate is a good move. Right now is not one of those times.

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  76. The problem for many here is that they NEVER owned. I truly believe that real estate is a path to true wealth. I've been in it for 25yrs and plan on at least another 20.

    btw - it is about 70% for us too.

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  77. RE can be a path to wealth, if you buy smart. Buying a house that has a good chance of depreciating a by a large chunk is not smart. It is more likely that this will happen then it is likely that housing is going to appreciate in the next couple of years.
    In many markets, the smartest thing to do with ones money is save it! Then, when prices have come closer to the mean, buy.
    Just because a number of people made the wrong move by not buying in the last handful of years, doesn't not mean that they are making the wrong move by not buying today.
    Markets change.

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  78. My point is that some will never buy due to fear. I don't need any instruction on real estate markets. People could wait for prices to drop, but what will the interest rates be? It may be a false economy even if prices drop substantially.

    We have usually kept our prior homes as rentals, thus interest rates are quite important to me.

    Several places are now free and clear. Everything will be in 7 yrs.

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  79. Oh, did I say I thought I was better than my peers? I don't recall that. I suppose I should not have said peers. Rather, I should have said friends.
    I think it a little telling that you would have to work at Starbucks in order to be surrounded by a peer group that contains only two people in better financial shape than yourself.
    Perhaps you should put in an application. I imagine that it is hard to be the poor guy at work.

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  80. VA Investor,

    Are you existing rental homes cash flow positive? I would guess so.

    If you had to buy them, or another investment home, today how easy would it be to make it cash flow positive? Would it be worth the down payment?

    My $0.02.

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  81. "I imagine that it is hard to be the poor guy at work. "

    Wow. How utterly self-indulgent, even delusional. Does getting into arguments on the Internet with strangers whom you know nothing about make you feel better about yourself? Apparently so.

    That, in itself, speaks volumes about the kind of person you are. I hope your husband's three years are up tomorrow and you move along ASAP.

    S.J.

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  82. My $.02 ,

    It would be very hard to make any sense of buying a rental at this time. I am positive on everything and have not bought since 2003.

    Even in 2003, they were not "new money" purchases. I 1031'd (traded) existing properties for new ones that were undervalued.

    I was negative in the 80's. But after taxes, it was almost break-even. Then the tax laws were changed (passive activity loss limitations).

    I am looking now at a potential rental in an outlying county where the rental demand is very strong. I still think prices will drop, but I have to weigh interest rates.

    These are tough times for me because I love to buy. I don't need any more rentals and am reluctant to tie up capital that could be used for better deals in a few years.

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