Federal Reserve Board in Washington, DCSo what is the Federal Reserve Board going to do with interest rates over the coming months?
The housing industrial complex wants them to immediately pause with their rate increases. Its not going to happen. There will be at least one more interest rate hike at the Federal Reserve Board before it pauses. Good luck to Ben Bernanke. You have inherited a very tough job from Mr. Greenspan.
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Funny world we live in. AG blows the bubbles and BB gets gum on his face. Interest rates must go higher in order to protect the greater fool from his own folly. Affordable housing for everyone by the end of the decade. Good things come to those who wait.
ReplyDelete50 basis point hike along with announcement that they are taking a pause. That is the closest thing to a win-win situation for the markets
ReplyDeleteAs a bubble believer, I seriously doubt that the Fed is going to raise interest rates high and fast enough to burst the bubble.
ReplyDeleteThe Fed has unparalleled respect right now. (They don't deserve it after what Greenspan did, but they do have it). If Bernanke crushed the housing bubble (and the economy with it), there would be a lot of popular discontent. The respect for the Fed would go out the window.
A similar thing happened back in 1999/2000 with Greenspan and the stock market bubble. A lot of bubble believers thought that Greenspan would burst the bubble with raising rates. He did raise rates a little, but never enough to burst the bubble. Bernanke will do the same.
I am not saying the bubble won't burst- it will. But it won't be because of Bernanke.
A Redskins fan
A quarter point, a note about its caution on inflation but that it's positive in outlook, and a breather until late fall.
ReplyDeleteThat's the memo I got from the housing industrial complex.
Ben is going to 6.
ReplyDeleteNo Doubt,
This comment has been removed by a blog administrator.
ReplyDeleteAn increase in rates may cool some real estate markets, but it will hardly make a dent in the District's. The District's increase in values is backed by real fundamental changes that are evident to anyone who has lived in this area over a period of time. Unlike places like Bethesda or Alexandria, the District is a very different place now than it was as recently as 5 years ago ... It is a drastically different place than it was 15 years ago. The real estate there has gone up in value like real estate everywhere, but not nearly enough to reflect it's real value and where it is headed. All one needs do is look at places like Manhattan to see how undervalued the District still is. If the raising of interest rates ends up causing mortgage rates to increase (which has not always been the case lately), it's a bad thing for us here in that even more people will be prevented from becoming homeowners in the District. I'm not sure why anyone would cheer this happening. Low interest rates were the one thing giving people a chance to own their own place here. On a positive note, I read yesterday where Delegate Norton has managed to secure renewal of the federal first time home buyer's tax credit through something like 2011 ... and that it is going up to $10,000. That should help some of those individuals being hurt by the interest rate increase.
ReplyDeleteLance, How many investment properties do you need to unload? What percentage of your income derives from RE transactions?
ReplyDeleteOnce again, Lance, look at (and study) the fundamentals. Renting housing today is 50% cheaper than owning it in DC. The cost of owning has outpaced the rise in wages 3 to 1. Inventory has skyrocketed in the DC area the past year. Sales are down YOY.
ReplyDeleteBack up your claims with numbers, otherwise the "fundamental" changes you speak of are emtpy speculation.
For example, here is some data backing up the claim that inventory has skyrocketed in the DC area (study the YOY inventory statistics):
ReplyDeletehttp://www.virginiamls.com/charts/index.htm
Now, please cite us similar data and analysis showing a fundamental change in the DC area housing market. Also, some data please on why the Dc area housing market is different from other markets with high historical housing demand - e.g., LA, San Diego, NYC, Chicago, Miami.
Again, facts, data - please. This is not a faith-based discussion.
lance,
ReplyDeleteyou seem to be in the 'soft landing' camp at least for DC? Is this correct?
I'm trying to understand how tiny starter houses in Beltsville went from selling at $160K in 2002 to selling at $400K+ in 2005.
ReplyDeleteI don't think everyone wants to live in Beltsville. The schools are marginal, the neighborhoods are 2nd rate. The arguments that are put forth Lance do not explain such rampant and wild price growth on such marginal properties. There are many similar marginal properties in DC proper and NOVA that have followed the same pattern.
The fundamentals don't support those prices. Properties like that will take huge 50%+ cuts in the next few years. They will drag down valuations for the desirable properties. That is for SFRs. The condo overbuilding will have a similar effect. RE prices have risen not because of fundamentals, but from speculation and appraisal fraud. They will turnaround and drop just as fast as they went up.
I'll try to throw out one concrete example to support what Lance is talking about. My mom bought a 3bd townhome in Kingstowne, Alexandria in 2000 for 205K. Comparable places have sold recently for very high 400's. In contrast, some friends bought a 3bd row house in the "near northeast" area of Capitol Hill, DC, in 2001 for 385K (which they then renovated). Comparable places have been selling for north of 600K. While my mom's neighborhood has changed (in-fill housing developments, more retail, new movie theater, etc) it is still fundamentally the same neighborhood she moved into six years ago. Near northeast, however, is radically different. When my friends moved in, the house on one side was vacant and was frequently inhabited by the homeless. The house on the other side was inhabited but essentially falling down around the occupants. Crime in that area was high. H street was just a blighted strip with little entertainment or retail. On and on. I won't recite the whole story, but anyone familiar with that area will agree that it has changed significantly. The two houses that I mentioned previously were both purchased and renovated; just as many other houses throughout that neighborhood have been. Crime is down. H street is rapidly improving. Etc. Basically, I won't argue that real estate prices have, to a greater or lesser extent, out-striped the fundamentals. However, I think it is fair to say that the increase in market value of my friends' house has a larger "value" component than the increase in market value in my mom's townhome (sorry mom). Put another way, when a neighborhood goes from being "bad" to "good", we would reasonably expect for the market value of the homes there to increase. Thus, to the extent there is a bubble, homes in areas where the fundamentals have improved would be less susceptible to price declines than those is areas where the fundamentals have not changed. There are neighborhoods all over DC where this kind of change has been taking place (Columbia Heights, Pleasant Hill, Petworth, U street, 14th St., "outer" Cap Hill, etc). So on the whole, I think Lance is making a reasonable point when he says that DC is not as likely to see large price declines, even if the "bubble" pops.
ReplyDelete"In contrast, some friends bought a 3bd row house in the "near northeast" area of Capitol Hill, DC, in 2001 for 385K (which they then renovated)"
ReplyDeleteYikes. They overpaid!
Michael, DCBubble listed some stats on his site a couple weeks ago showing that in the District rowhouse prices had risen something like 20+%. I bought my rowhouse a little over a year ago and in the time several properties have sold in the same "square" and they've sold for between 22% and 45% more than I paid for mine. Looking at what rowhouses in Dupont in general have been going for, this isn't isolated to my block. I can only speak for what I am seeing the in District, but I really don't think house prices here will decline in the least. Condos probably will go down a bit considering all the new ones currently being built, but even that longterm will do alright. The fundamentals are that there is a lot more money coming into DC (and the DC area) due in part to the tremendous growth of the IT industry here partly owing to 9/11. I work in IT and I'm in a position to know salaries being paid and I am constantly amazed at how much they have gone up over the last few years. Kids just out of college are making what it took me 15 years or more to get too. And for the better paid positions, we can't find enough people to fill the work that is out there. The building of Government IT infrastructure is helping DC grow in the 21st century the same way NYC's position at the mouth of the Hudson helped it grow. Also, having started so far behind the surrounding cities and counties in "real value", I can't help but think that much of the District's increase in values has to be attributable to "fundamental" ... i.e., these renovated rowhouses are the same delapidated rowhouses we had here 10 years ago and these now desirable neighborhoods like Dupont are the same "to be avoided" neighborhoods like we had before. Just my take on the situation ... If I were looking to buy a condo, yes I'd wait till the winter ... but not if I were looking to buy a house. But, even in waiting for the condo to drop, I really wouldn't expect it to go anywhere near the 50% "discount" that I've been hearing some folks say. That is not reasonable. 20% might happen, but I wouldn't hold out for anything more than that 'cause the minute they start dropping in value you're going to have everyone whose been waiting on the sidelines rushing to beat everone else out for "the sale" ... Especially since there are so many folks making those higher salaries out there who can and will pay the higher prices.
ReplyDeletePrices will decline across the board. Some may decline far more than others, but in bubble cities they all must come down. It is the economics, not the location that will determine the market. Of course, if Bernanke loosens credit again, the dollar will be worth much less and inflation will reappear at a greater rate than now. With Japan tightening, it would make our bonds less attractive. Fixed rates would go sky high and the housing market would tank anyway. IMO there is no way out of this bubble.
ReplyDeleteSome areas of California have tons of amenities. They also have seen drops of 50% in the past and will see the same kind of drop again. DC isn't immune, no matter how many investment properties you bought in the last couple years.
ReplyDeleteAlso, salaries can fall even faster than they go up. If the government has less tax revenue coming in and can't borrow to fund projects, salaries can come down more than you want to know. It doesn't make people happy, but it's happened in a lot of industries.
Salary examples please? Housing price examples please? 50%? In what century????
ReplyDeleteIn the DC area you only have to go back to 2003 prices to get a 40% to 50% drop. Is going back to 2003 prices so hard to imagine? DC just lost a chunk of DHS money. Agencies will be relocating because of new setback rules. It is quite possible that the job growth in DC will be stagnant or lukewarm. Don't forget about the 50,000 new condos coming online for DC. I think you have to be extremely optimistic to believe housing will continue appreciate above a few % at best. Real declines are just as likely to happen.
ReplyDeletemost people will be shocked, but the Fed will do 50 basis points at the next meeting.
ReplyDeletetwo members of the board have explicitly said they don't care about people losing much of the unrealized appreciation in their homes if thats the cost of keeping inflation in check.
I think the size of the increase is less important than the tone set by the fed. Clearly many of the fed members are rattling their swords at inflation, and this has spooked the stock market. Margin requirements are going up and people are liquidating riskier assets. If you truly believe that they will drop a 50bp next meeting, it may be wise to have some short positions. The most probable senario is 25bp and continued hawkish language on inflation.
ReplyDeleteLance - "The fundamentals are that there is a lot more money coming into DC (and the DC area) due in part to the tremendous growth of the IT industry here partly owing to 9/11. I work in IT and I'm in a position to know salaries being paid and I am constantly amazed at how much they have gone up over the last few years."
ReplyDeleteAny numbers to back up this claim? Agains, facts, data.
I will be shocked if Bernanke raises 50 basis points-- and if he does, I think he will say "no more raises for a while" and mean it.
ReplyDeleteAlso, Greenspan and the Fed hardly ruined the stock market in 2000. When you have a bunch of joke companies not making any money and with market capitalizations of billions of dollars, that is not a good situation anyway. Greenspan then spent 2001-2003 or so lowering rates dramatically, keeping the stock market from collapsing as far as it should have and also igniting the housing bubble.
Bernanke is no Paul Volcker. He will not raise rates to the 15-20% that Volcker did. He won't even get to 10 unless there is a real economic emergency, and it is too late anyway.
A Redskins fan
Ha ha. Lance bought in 2005.
ReplyDeleteSweetie,
ReplyDeleteThe "Board" is a group of people. The building here is not a group of people.
Lewis Black on HBO from the Warner Theater in Washington, DC:
ReplyDelete"I grew up here. (applause). Actually, I grew up in Silver Spring, Maryland. But I never say that because saying 'I grew up in Silver Spring Maryland' just makes me sound like a pansey."
Michael: Any numbers to back up this claim? Agains, facts, data."
ReplyDeleteI found this on line after about 3 minutes of googling. I'm sure there is more out there if you want to find it.
http://www.ncpc.gov/planning_init/comp/FedProcurementSum.pdf
Michael, Here's another good report.
ReplyDeletehttp://www.cra-gmu.org/forecastreports/ProcurementReport.pdf
Michael,
ReplyDeleteInteresting ancilliary article re: the growth of lobbying in Washington driven by the large increase in government spending lately. (Note that the last two reports I posted wouldn't show the full extent of the spending due to the Iraq War ... the vast bulk of which is spent in the Washington region by the Dept of Defense as explained in the second of the two reports I posted.)
http://www.washingtonpost.com/wp-dyn/content/article/2005/06/21/AR2005062101632.html
"Dept of Defense as explained in the second of the two reports I posted."
ReplyDeleteDo you mean to tell us that the United States Government employs people in this area? I thought it was just all made-for-TV fluff that I view from my old CRT TV in the living room of my dreary mid-rise rental apartment. So you're saying those people are REAL?!
What next, are you going to reveal the hidden fact that the US Government is the largest single employer in the entire world?! Woooaaah.... that's heavy. Well, we just need to look at the history of pets.com to know the long term outlook for the city of Washington DC.
"The United States Government is the largest employer in the world - with over 150 different federal departments and agencies that collectively hire millions of people each year to provide the services and products necessary to serve the needs of the American public. In this area of the ICC you'll find the following information designed to help you land a job with Uncle Sam"
ReplyDeleteSooo, are you saying that a lot of this is actually based in Washington DC?! I thought that place was where the Wizards play basketball? (I watch the Wizards on my old CRT TV in my rented living room.)
Oh, by the way, I tell all the girls at work that I live in DC, but I actually live in Upper Marlboro MD. Hey, same difference.
luv2rent, this is obviously all way over your head ... TO make it all more simple for you, the point being made is the large INCREASE in federal dollars being spent in this area via federal contractors NOT that there are federal dollars being spent here. Trust me, WE ALL already knew that.
ReplyDeleteooohh, so you mean the large government contractor I work for, the one with over $2Billion in annual revenue, isn't hiring people? See, I thought that all those people who work for that large contractor and couldn't hire people fast enough for high paying long term jobs was all just a bad hallucination. So I guess you're saying that all those well paid people who support the government, in addition to the government workers themselves, need to live someplace? See, I think they don't. I think they just show up for work every morning and then never go home at night. Or if they do, then they go back to a dreary mid-rise rental unit in Upper Marlboro, like me.
ReplyDeleteand my parting thought for the evening before I take the short walk over the beige carpeting in the hallway to my rented bedroom from my kitchen table in my rented kitchen (where my Dell Celeron is located... 5 more payments then it is all mine!) is this, Mr. Lance.
ReplyDeleteAll we need to do is look at the history of pets.com to know the economic future of Washington DC.
Put that in your pipe and smoke it, MISTER.
Mose, You did a good job explaining what I was trying to get across about the fundamental values of many District homes increasing via renovations and neighborhood improvements. Thanks! And the other half of the story is the increased wealth of this area due to a ballooning federal presence here (and the dollars that flow from it into the local economy). That part is not restricted to just the District but encompasses the entire metro area and is not something that is going to change. Actually something funny just struck me while I was writing the last sentence. In their postings, the bubbleheads are insistent that it is the renters that dictate the level of rents and that "the landlord can set it as high as they want, but the renters will decided what they can and will pay ... driving the actual rents paid." YET, when it comes to the real estate market, they make the exact opposite assertion. They in effect say that today's "bubble" prices have been unilaterally determined by the nebulous "housing industrial complex" ... and don't recognize the fact that just like in the rental market, people won't pay more to buy a house then they can. And lots of people HAVE been paying these prices ... Why the difference in perspectives when it comes to buying vs. renting? Why aren't the people holding the money still "in charge" when it comes to buying?
ReplyDeleteWow, watching all of Bryce's personalities (and screennames) debate one another is like watching an MC Escher painting come to life.
ReplyDeleteJerkstore
That's fine to say that Silver Spring is for pansies if you grew up in SE. If you are living in NW or Capitol Hill, though, you are a pansy par exellence.
ReplyDeletePersonally, I grew up in God's country, PRINCE GEORGE'S COUNTY, baby, where I never learned to say things like "par excellence."
A Redskins fan
"That's fine to say that Silver Spring is for pansies if you grew up in SE. If you are living in NW or Capitol Hill, though, you are a pansy par exellence.
ReplyDeletePersonally, I grew up in God's country, PRINCE GEORGE'S COUNTY, baby, where I never learned to say things like "par excellence."
A Redskins fan"
See you on the corner of 1st St NW and O St. NW sometime soon? Nice, pansey-like environment there in NW. A tough guy from PG county wouldn't feel at all uncomfortable walking there from the convention center..... No, not gonna happen? Why? 'cause you'd be too damned uncomfortable (aka 'scared') right there in cushy NW washington. Woman.
"See you on the corner of 1st St NW and O St. NW sometime soon? Nice, pansey-like environment there in NW."
ReplyDeleteLOL. You picked a location one block from NE. So you think my description is wrong because of the parts of NW that are one block from other sectors?
A Redskins fan
http://www.ncpc.gov/planning_init/comp/FedProcurementSum.pdf
ReplyDeleteThis reports says nothing about housing or RE. The U.S. job market was strong in the late 90s and the stock market crashed - b/c there was a speculative bubble on Wall Street. Just as now there's a speculative bubble in the housing market - and the job market is good throughout the U.S.
Show us some analysis and data that proves that a strong job market in DC has led to higher-priced housing market - and not the growth of speculative investment or exotic loans leading to it.
No one here doubts that the job market has been strong in the U.S. the past few years or that increased govt spending has found its way into DC. This blog is about a speculative bubble in the RE market. Neither report linked to above addresses those facts. So, please - don't waste our time.
"You picked a location one block from NE. So you think my description is wrong because of the parts of NW that are one block from other sectors? "
ReplyDeleteStick to the portion west of Rock Creek Park on those occasions when you head into town to feel socially sophisticated.
Michael, You are trying to compare what happened with the stock market with what you think can happen with the real estate market. Your correlation is flawed. The problem lies in your basic misunderstanding of how LIMITED land (the underlying "asset" in a real estate transactions) differs from "shares of a business enterprise" where the underlying asset is nothing more than the "current value of all expected future returns ... i.e. dividends ... from that stock. In more simpler language, there is absolutely NO correlation between what can happend to a share of a business (with its limitless "return" possibilities) and land which is by definition limited. The investors realized that the claims being touted by all these dot.coms they'd invested in wasn't going to materialize -- and the real value of the expected flow of returns from their investments became known, the price of the shares fell. Granted, real rstate prices, like shares CAN indeed include an expected return flow just like stock, because as you have correctly said, there are investors and flippers out there. HOWEVER, there is also a real underlying asset value out there (the land ... and the building) that is not very substantial in the value of shares. THAT is the element I am referring to when I say that increased wealth (via government spending) in this area can lead to an increase in that element's value. The land within a reasonable commute distance is limited ... and the more money that is out there (and more people), the more the value of this underlying asset gets "bid up" ... It is how land gets allocated. Why do you think small apartments in NYC go for far more than large houses in Kansas ... The rising prices are the "allocation" method that a capitalist system uses in deciding who will get what when there is only a limited supply of it available. Put another way, if you are finding it hard to find a house you can afford, it is because someone else has more money at his disposal and can outbid each and every time. And THAT is why the increase wages and dollars being pumped into the federal sector "contractor" companies is very directly responsible for rising real estate "values" in this area. And note that "value" IS indeed in the eye of the beholder AND more importantly, the "Ability to pay" of the beholder. I can understand the bubbleheads' desire to "wait it out" ... but the reports I posted show clearly what makes the "bubble" in this metro area so different from the "bubbles" in other metro areas. Personally, as I said previously, if I were in the market for a condo I would wait several months because condos are less restricted by the "limited" land issue I discussed earlier (i.e., you can to a certain extent "build into the sky" thereby "creating" more land)and there are a lot of condos now in construction, but as far as houses go, I wouldn't wait. And longterm, with height restrictions in the District and elsewhere, even the "sky land" ends up being limited.
ReplyDeleteLance,
ReplyDelete"...there is absolutely NO correlation between what can happend to a share of a business (with its limitless "return" possibilities) and land which is by definition limited..."
One word: Speculation. That's what we're discussing on this blog when we talk of a real estate bubble.
Land is not limited in this country. By no means. Buildings can be torn down. Laws can be adjusted to accomodate higher buildings. Metro lines can be extended. Cities such as LA and NYC make DC seem a village.
Meanwhile, in a country in which land is severely limited, Japan, they are still suffering the nasty effects from a real estate crash in the late 1980s. Why? Again, speculation.
Lance, I really have no idea what you're talking about in your posting above. (Nice try with the long paragraphs, though.) But I'd rather hear from the home builders and Wall Street set right now on the issue of today's housing market and its future. They're usually pretty good with numbers and at watching out for their interests - and they're bearish all around on the housing market for the next few years.
Again, please address the issue of speculation in this most recent housing market, and then back up your claims with some data. It would be easier then to see you as someone with a serious argument, rather than someone who is regurgitating something read from a realtor's website or a dinner conversation with recent home buyers hopeful that the market doesn't drop on them.
As a suggestion - since you are fond of freely offering others suggestions on this blog - you should refrain from posting the same, tired arguments on this blog. Hit the books and study (here's one for you I found information: http://www.amazon.com/gp/product/0452281806/sr=8-1/qid=1150164319/ref=sr_1_1/002-9028572-5833617?%5Fencoding=UTF8). Then come back - in your case, you may need a good year to study capitalist market fundamentals - and post more insightful and educated comments. You would do us all a great service.
Enjoy your time off.
Michael:
ReplyDelete"Land is not limited in this country."
If you can't understand how wrong this unequivocal statement is, then you can't understand how real estate works. I'm starting to realize how Darwin's theories might apply to separating renters from buyers.
Way to latch on to one sentence, man. Maybe he mispoke. But then I found this doing a simple search: http://www.google.com/search?hl=en&lr=&q=world+population+could+fit+in+Texas&btnG=Search
ReplyDeleteso how is using the argument that land is limited explain housing price run-ups five times the past year in DC? did land become five times more scarce?
speculation makes sense. especially when something like 30% of condo buyers in DC area have been speculators since 2004. i wouldn't trust this re market right now.
"If you can't understand how wrong this unequivocal statement is"
ReplyDeleteMinor grammar point...but how can something be wrong if it is unequivocal?
Strange blog. Lots of bickering goin on, short of info. More info, David. Less opinion. (I dont think most readers pay attention to the comments. Too shrill. Pretty pictures though)
new guy,
ReplyDeleteA big Welcome to You!
New Guy,
ReplyDeletePerhaps a reviewing the definition of "unequivocal" will help? M-W.com's definition is below. Look at definition #2 for the answer to your question.
unequivocal
One entry found for unequivocal.
Main Entry: un·equiv·o·cal
Pronunciation: "&n-i-'kwi-v&-k&l
Function: adjective
1 : leaving no doubt : CLEAR, UNAMBIGUOUS
2 : UNQUESTIONABLE -production of unequivocal masterpieces -- Carole Cook-
Despite what Michael would like to think, the supply of land in this country (or anywhere in the world) won't magically increase at the same rate of speed required to meet the needs of rapidly increasing populations. His state is unequivocal because it is presented as "unquestionable" ... i.e. without qualifications such as "if we could find a way to change mindsets and change regulations to allow for building whole cities in our national forests, then ... etc. etc"
Hey, I developed a method to grow land in a petrie disk. At this rate, we'll have a new land mass off the coast of Southern New Jersey by 2010. Anyone want to buy stock in my company? It's called "New Land is Everywhere, Inc."
ReplyDeleteYou can fit the world's population into Texas. Not comfortably - and with a stress on resources - but all 6 billion + would fit in there.
ReplyDeleteLand is "limited," of course. But not in a real estate sense and not anytime in our lifetimes, b/c there's just so much space to build on this country. Plus, there are skyscrapers/high risers in which people can live. (and if the laws restrict them, you rewrite the laws, like in NYC, to meet demand.)
"Limited land supply" is a tired myth that I'm tired of hearing from RE people to justify these prices nowadays! I think it's used by real estate cheerleaders to justify speculative, high prices. No one in RE talks about speculators.
Like michael pointed out, how does limited land explain Japan's RE slump the past 15 years? everybody knows that country is high in population and short on people. So why aren't prices sky high there now?
And how does that explain DC city's RE price rise the past 5-6 years when the city actually lost population?
Speculation, speculation, speculation. Needs to be corrected. Prices will come down. Unfortunately, people will get hurt. But markets correct themselves and collapse under their own unsustainable weight.
i meant Japan is high in population and short on land. no slur meant against short japanese folks.
ReplyDelete