Wednesday, June 20, 2007

Back to 2004 Or 2003 Inflation Adjusted Prices on Condos

In many parts of the Washington, DC metro area, inflation adjusted prices for condos have rolled back to 2004 or 2003. Take this example:




The condo located at 8201 Grubb Road Silver Spring, MD #G-102 is for sale at 259K. It is located near downtown Silver Spring, MD. Its MLS # MC6447225. Using the BLS Inflation Calculator, that 259K for sale price would be 235K in 2004 dollars (inflation adjusted dollar). However, the very same condo unit sold for 245K on 05/26/2004. Thus, its 2007 real dollar price is less then its 2004 price. That is, adjusted for inflation (by the CPI), the condo unit is selling for less today then what is sold for in the middle of 2004.

This condo unit, Courtesy of Northern Virginia Housing Bubble Fallout

9490 VIRGINIA CENTER BLVD #127 VIENNA, VA 22181

List Price: $275,000 Listing Date: 04/29/07

Prior Sale: $308,900 10/21/2004

Prices are rolling back on condos in the Washington, DC area. The real dollar price gains of 2005 have disappeared. In most areas in the Washington, DC metro area, inflation adjusted condo prices are back to 2004 or late 2003.

65 comments:

  1. Can I say it before Lance does?

    "Oh, that's Silver Spring and Virginia. That's not going to happen to my property!"

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  2. Of course, as people have explained to you many many times, it's disingenuous to use an inflation factor to analyze a market you claim is deflating. But that never stopped you before.

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  3. Keep not buying! It is working!

    Blood in the streets!

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  4. unique,

    Who said, almost two years ago, to walk away from condo deposits? You can go back and check. Who also said that condo's would get hit the hardest?

    Hardly news, unless something almost 2 yrs old is news.

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  5. "it's disingenuous to use an inflation factor to analyze a market you claim is deflating."

    No it's not. Falling _real prices_ are a sign of a deflating market. Nominal prices don't matter. Real prices do.

    ReplyDelete
  6. Great post, David.

    If you had put your money into a CD, and earned around the rate of inflation over the last few years, you would now be able to buy this condo for less in real terms.

    ReplyDelete
  7. Nothing to see here folks, move along:

    -Rate Rise Pushes Housing, Economy to `Blood Bath' (Update2)

    By Kathleen M. Howley
    June 20 (Bloomberg) -

    - The worst is yet to come for the U.S. housing market.
    The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

    ``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. ``We're talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.''

    Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.-

    http://www.bloomberg.com/apps/
    news?pid=20601087&sid=akV2sasSGUY8&refer=home

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  8. "Nominal prices don't matter. Real prices do."

    Real prices matter when making the purchase, because it determines how much house you are getting for your money.

    After you have made your purchase, nominal prices matter more if you used financial leverage (i.e. got a mortgage). If you put 5% down, it magnifies your nominal capital appreciation by 20 (because 100% / 5% = 20). So if you put 5% down and your real estate appreciates by 10% nominally, then your ROI is +200%. Of course, financial leverage works in the opposite direction as well. If you put 5% down and nominal depreciation is 10%, then your ROI is -200%.

    This simple analysis ignores the fact that you may be feeding the alligator the entire time.

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  9. "``It's a blood bath,'' said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds."

    I guess we better just add this guy to the list people "lance" knows more than... lol.

    Remember everyone, there is no bubbles, bubbles can only happen in the stock market. (according to lance)

    In fact, right now is no doubt a great time to buy.

    It is just too bad VA_investor ran away when she did. It has become far to easy to dribble lance around the field. VA_Investor at least had some idea what she was talking about, even if she was completely wrong about the bubble.

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  10. "So if you put 5% down and your real estate appreciates by 10% nominally, then your ROI is +200%."

    What if the value of the dollar falls 20%? Then what is the ROI?

    You are confused about the meaning of real and nominal.

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  11. James said:
    "After you have made your purchase, nominal prices matter more if you used financial leverage (i.e. got a mortgage). If you put 5% down, it magnifies your nominal capital appreciation by 20 (because 100% / 5% = 20). So if you put 5% down and your real estate appreciates by 10% nominally, then your ROI is +200%. Of course, financial leverage works in the opposite direction as well. If you put 5% down and nominal depreciation is 10%, then your ROI is -200%."

    James, did you read where I told another reader that BHs are either unable financially or emotionally (or both) to buy a home to live in? I think you fall into the "emotionally" unable "camp". You're over analyzing. Buy a home because it's a good thing to do. Buy it because it'll change your life from a "camper" to a "real citizen". And stop worrying ... over the longrun (which is what a home purchase needs to be), you will come out far ahead financially than if you'd never bought ... Both because of house appreciation and because of the ways in which your life will have moved forward which it can't while you are stilted living the life of a camper/college student. I.e., let yourself grow up and quit trying to justify your unfounded fears.

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  12. "No it's not. Falling _real prices_ are a sign of a deflating market. Nominal prices don't matter. Real prices do. "

    Right, they don't matter unless you care about how much of the commodity you're getting for your dollar. If, as David insists, the market is falling, you can't double count by adding an inflationary factor.

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  13. "Buy a home because it's a good thing to do. Buy it because it'll change your life from a "camper" to a "real citizen". "

    Most importantly, buy right now before prices drop anymore!!!!

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  14. We have classic mortgage broker/real estate agent/appraiser fraud going on as I write this in Rockville, MD. There is a unit (townhouse) located in 20852 on Tildenwood Drive. Listed price and sale price are very close at 600k. This community of townhomes has 2 that sold in the last 6-7 months (the only sales in this community in that time frame). They sold in the mid 400's. Almost 150k difference, the soon to be FB probaly doesn't realize those other sales happened and an Appraiser will not use those comps in the report as it will not substantiate the sales price. The Appraiser will go out of that neighborhood and use superior comps to try and support value. I wish I knew who to report this info too to stop this madness.

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  15. Traditionally interest is made up of two components, a return for the capital borrowed and the anticipated inflation. 12% interest is not big deal if wages and inflation are at 8%. Borrowing $100K and selling for $116 two years later really won't get you anywhere (it's break even). The same thing applies to arguments in this thread for ROI on 5% down.

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  16. Lance said...
    “You're over analyzing”

    $50K here $100K there, pretty soon you’re talking about real money.

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  17. "What if the value of the dollar falls 20%? Then what is the ROI?"

    Falls compared to what? The Euro? The Yen? Constant dollars?

    For simplicity, ROI is usually measured in nominal dollars. You seem to have missed the point that financial leverage magnifies percentage gains and losses.

    "You are confused about the meaning of real and nominal."

    No I am not. I understand economics quite well. Real dollars are inflation-adjusted; nominal dollars are not.

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  18. "If, as David insists, the market is falling, you can't double count by adding an inflationary factor."

    It's not double counting. The only thing that matters is the price in "real" dollars. For instance, if you bought a house in 1965 for $30K, and then sold it for $85K in 2001, then you have lost real value even though the nominal price went up. The original $30k house, when sold for 2001 dollars, should have been worth ~$168K if it kept up with inflation.

    Due to the way money can work, it is both possible to loose real money on an asset that goes up in nominal value as well as make real money on an asset that goes down in nominal value. That's the magic of money - it's only worth what other people think its worth.

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  19. lance said...
    "Buy it because it'll change your life from a 'camper' to a 'real citizen'."

    There's nothing about renting that makes someone less of a "real citizen" or more of a "camper". Your argument is fallacious.

    "over the longrun (which is what a home purchase needs to be), you will come out far ahead financially than if you'd never bought"

    On average, people own their homes for 7 years. It is highly unlikely that that prices will be higher 7 years from now than they are today. Not only is renting cheaper now—which means renters keep more of their own money—but stocks are better positioned to provide significant financial gains going forward.

    "... Both because of house appreciation and because of the ways in which your life will have moved forward which it can't while you are stilted living the life of a camper/college student."

    As usual you are mixing misinformation with fallacious reasoning.

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  20. Anonymous said...
    "Traditionally interest is made up of two components, a return for the capital borrowed and the anticipated inflation. 12% interest is not big deal if wages and inflation are at 8%. Borrowing $100K and selling for $116 two years later really won't get you anywhere (it's break even). The same thing applies to arguments in this thread for ROI on 5% down."

    Actually according to finance theory the two components of interest are the risk-free rate of return and the risk premium. But we're talking about two different ways to slice the same pie.

    Your reasoning regarding ROI is flawed because you're ignoring a very important component of owning a home: owner-equivalent rent. When you buy your own home, you are essentially renting to yourself. This allows you to avoid paying rent to someone else. How leverage magnifies returns can be better explained if you imagine renting to someone else.

    Higher nominal interest rates tend to push down the price of real estate. This in turn pushes up your yield (cap rate). Ideally when buying investment real estate, you try to get it so the incoming rent will pay for your mortgage and other expenses. In actuality, you probably have negative cash flow in the early years (feeding the alligator) and positive cash flow in later years as your mortgage payments stay flat but rents go up.

    In addition to incoming rent, which hopefully covers most of the cost of the mortgage, you will make money from the rise in the value of the property. If you put 5% down and inflation pushes up the price at a rate of 8% per year as you used in your example, then your equity will increase at a rate of (100%/5%) x 8%.

    As I said before, financial leverage magnifies your gains as well as your losses. If nominal housing prices fall over the next few years, people with large mortgages will see their home equity plunge quickly.

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  21. "As usual you are mixing misinformation with fallacious reasoning. "

    and bourbon too probably...

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  22. anonymous (the one who wants to factor in inflation) - you're not making an argument, you're just reasserting your position. I repeat -- if you insist the housing market is deflating, you can't double count the loss by adding an inflationary factor. When you buy your next house, it's not inflated, it's *deflated*. It's disingenuous to rigidly apply the rate of inflation applicable to the greater economy -- particularly when things like rent are close to hyperinflationary and affect the overall number.

    Yes, if you sell a house because you want to rent, you're going to get hit hard. If you sell a house to buy another house, inflation doesn't affect you.

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  23. Anon 5:24
    Inflation doesn't care why you are selling. The posters above, and the original post are correct that real prices are the important factor. If an asset is overvalued, the two ways that it can return to "true value" are through a nominal price decline, or through nominal appreciation of less than the rate of inflation. In the end, it is always a buy vs. rent decision (even if you would never consider renting for non-monetary reasons). At some future point, is net worth greater by owning the home than it would have been by renting the same home. For most in this area who purchased over the last several years the answer is "no".

    As for Lance. You did better when you tried to make a case that house prices would continue to appreciate, citing demographic trends etc.. As data accumulates that this is unlikely in the near term, you seem to have switched to some sore of moralistic argument. This, I take offense at. It is fine for your opinion to differ about the direction of a particular asset class. Every transaction on Wall Street involves a difference of opinion about the prospects for a given asset. Discussing those opinions is what makes (or made) this blog interesting. But to move from a financial argument to a moral one, that somehow buying a house makes one a "real citizen" is beyond the pale. First, I would refer you to the US constitution which no longer limits the full rights of citizens to land-owning, white, males. Secondly, I will point out that in my own case, and many others that I know, the reason that I have rented over the last several years is that, in the course of service in the US military, I move every 2-3 years. This has not allowed a time horizon long enough to consider purchase. And now, somehow in spite of that service, you have decided that I am not a "real citizen". You sanctimonious little shit. Before lecturing others on the morality of home ownership, perhaps you should realize there are many people out there who have lots of different circumstances. The marketplace has created different housing solutions for each of them. This discussion should be limited to the financial prospects associated with each of them rather than trying to ascibe virtue to some housing choices.

    An interested observer.

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  24. Anon 8:01,

    You sign yourself "An interested observer", however you are not.

    Since circumstances keep you from buying a home, you are a disinterested observer (i.e, you have no interest in whether it is best to buy a home now or wait for a bubble burst to that causes prices to decrease substantially. Unlike the bubbleheads, under no circumstance would you be in a position to buy a home.)

    The focus of this blog has all along been "should one buy now or wait for prices to plummet." Pure and simple. And in that vein, one has to consider the ramifications of putting one's life on hold while one waits for a bubble to burst. Especially since there isn't a bubble out there to burst.

    As for my saying that prices will continue to increase, I have always said LONGTERM. AND as you have stated is the case for you, one should never be buying a home for short term --- both due to financial reasons (transactions costs) and other reasons such as tying yourself down when you need to be free to move around.

    It is sounding that you, like the bubbleheads, have started to confuse "buying a home" with "making an investment".

    Sorry, but I stand by my argument that those who ARE in a position to buy (i.e., settled in one place and ready and able to become longterm members of their community) are just putting off making the commitment necessary to "invest" themselves in their communities ... and I don't mean make an investment in real estate.

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  25. This looks pretty overpriced:

    http://washingtondc.craigslist.org/nva/rfs/356123064.html

    A 1 bedroom unit was sold in the same building on 5.15.07 for $284,000. County assessment on it for 2007 was $275,100. Sale price on 6.22.2000 was $86,580.

    I used to rent in this neighborhood and regret not buying back in 2000. Will these condos ever become affordable again?

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  26. anonymous, thanks for once again reasserting your position without any reasoning. i think you added a slogan this time. very impressive.

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  27. "But to move from a financial argument to a moral one, that somehow buying a house makes one a "real citizen" is beyond the pale."

    Don't take it personally, everyone here knows lance is full of it.

    When he first started posting on this blog he tried to argue that the market in DC wasn't experiencing a bubble and attributed the unprecidented rise in prices(abscent any meaningful wage growth) to a wide range of things such as his vaguely defined "new paradigm" theory and a host of other variations on the "it's different here" mantra.

    Once it became clear that the market was entering a correction he changed his story and began saying that this was simply a "normal" RE cycle and that prices would flatten slightly but then resume their upward climb.

    As prices began to experience nominal declines he changed his story again to how HIS neighborhood was still racing up and made up fairy tales about attending open houses for "average rowhouses" that had gone from $1million to $2million over the prior 12 months.

    Now that even his own neighborhood is showing significant price drops with no end in sight he is resorting to various emotion based arguments that amount to little more than him claiming to be a "better" person by virtue of his immense debt.

    I am guessing he will convienently disappear from this blog sometime in the next three months, or perhaps morph into a true troll and refuse to carry on any meaningful discourse whatsoever. (He has done a little of both so far.) It is obvious he has no interest in an honest discussion of the market anymore.

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  28. Wow, in honor of lance's unusually arrogant post I am going to take us all on a little "tour de lance."

    Lets dial the archives to... June 2006.

    "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." Lance June 11 2006

    "There are many factors out there causing an increase in prices in the District of Columbia. yes, yes, yes ... ONE of these factors has been the "bidding up" of prices by the flippers ... but that is only one of the factors AND they have been out of the market now for the last year ... so, I wouldn't expect any further drops here due to the "bubble" they caused ... that bubble has already burst." Lance June 16 2006

    "Yes I do have a 30 yr fixed, however it is interest only for the first 10 years ... then goes p&i for the next 20 years. I know "interest only" has gotten a lot of bad press lately, but I still think it was a very good fit for my needs. In a 10 year period, it's not unreasonable to believe that natural rent increases from both units will allow me to cover the higher mortgage payments starting in year 11. (And this isn't even counting expected pay increases along the way such as the one I recently got when I changed jobs.) While I plan to stay in the house a long long time, I also know that statistically, people move on average every 7 years in the U.S. So, despite my current best intentions, chances are good that I won't even still be in the house when I reach year 11 of the mortgage." Lance June 17 2006

    "The soft landing we are experiencing is exactly what every educated person out there expected." Lance June 20 2006

    "the District and close-in areas are slowly but surely switching converting to "high class" neighborhoods where only those with the means can live. What you were calling "the paradigm shift" for DC. " Lance June 22 2006 (somehow confusing an IT tech with massive debt for "high class")

    "Homes available at prices such as these are a relative bargain now compared to what they will cost when the District fills up sometime in the next decade and no new homes can be built. Then, prices will really sky-rocket to match those charged in places like Manhattan." Lance June 23 2006

    "This is not good news for people who hope to someday buy. It's low interest rates that allowed so many people to become homeowners during the last 5 years or so. A class of perpetual renters will have been created where its members can never work their way out of their condition." Lance June 23 2006 (sorry everyone, I just HAD to finish this out with a "priced out forever" prediction... nothing else would be appropriate)

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  29. "You sanctimonious little shit."

    Ouch. Love it. That's one of the greatest smackdowns I've ever read in comments to a blog (I actually had to stop and re-read the whole lead-up to get the full effect.)

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  30. Dropping by for the first time. Interesting site but I must say, this guy named Lance should really pull his head out of the sand... "There's no bubble to burst". What planet is this guy living on? Almost everyone I know that has been involved in any real estate transactions in the last six months has abruptly woken up to a financial loss or not nearly the gain they thought they had. And the losses keep getting bigger and the gains, well those seem to be just about gone. Anyway, it is quite funny. Kind of sad, the fierce denial and all but still quite amusing. Why would someone say something like "there is no bubble" in the face of an overwhelming flow of hard data that screams precisily the opposite? I guess some people do that. I don't know why.

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  31. "You sanctimonious little shit."

    Lance isn't little.

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  32. Lance's remarks to:

    An interested observer

    June 22, 2007 8:01 AM

    Has shown the ugly side of Lance (as if the side we have to deal with isn't ugly enough.)

    Lance's attitude towards "An Interested Observer" ignores his current and future position in life.

    Lance’s remark
    “Since circumstances keep you from buying a home, you are a disinterested observer (i.e, you have no interest in whether it is best to buy a home now or wait for a bubble burst to that causes prices to decrease substantially”

    ignores the possibility of "An Interested Observer” buying a house in the near future if "An Interested Observer" should one day leave the military for a civilian career, get promoted or reassigned to a permanent base, or whatever reason.

    Furthermore, by being in the military, by making the voluntary choice to serve the nation, war on or not, the choice made by "An Interested Observer" makes him the true definition of a "true Citizen" and leaves Lance in the unenviable position of being the true "camper".

    Couldn’t even temper your arrogant attitude towards someone who serves his country and chooses (for now) not to buy, could you Lance? Still under the impression that if you are not a home owner you are only a second class citizen, Lance?

    Get back under your bridge Lance, I hear the three Billy Goats Gruff trying to cross it.

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  33. James, I will bet you $10,000 that this is not true: "It is highly unlikely that that prices will be higher 7 years from now than they are today." Where in the history of local real estate have you ever seen a decline over 8 years? You do realize that the population is only going to continue to explode as more and more pressure is put for smart-growth.

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  34. Of course, as people have explained to you many many times, it's disingenuous to use an inflation factor to analyze a market you claim is deflating. But that never stopped you before.

    I didn't understand this. Can you please "re-explain" what "people" have already explained before?

    As I understand, Housing Prices are coming down, i.e. deflating. What does that have to do with the US dollar? What I can purchase with a dollar is measured by CPI, not by how much of a house I can purchase. A house/rent/potatoes are ONE FACTOR. You cannot claim that just because one factor is coming down, the US dollar is deflating.

    Please explain your thought process again.

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  35. I just find these comments amazing. The BHs are putting their heads in the sand ... refusing to admit that some 3 years on, they are still waiting for that precipitous price drop ... with their lives still on hold in the meantime. The rest of us have moved on.

    David, help your followers. Bluntly inform your followers that prices still haven't dropped preciptously as you predicted and that they won't. You've gone on with your life .. you need to free your sheepish followers to do the same. It's the right thing to do.

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  36. Let's say I got into said condo on an interest-only loan, paid 1400 a month net of taxes (basically the same as renting a comparable place in this area and remember credit was dirt cheap at the time). Assuming the unit sells at 259K it still looks like a tidy profit after the realtwhore fees. Why would I care what the CPI is doing ? It's not like I plunked down the cash to start with.

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  37. 'Buy it because it'll change your life from a "camper" to a "real citizen".'

    Wow. I own a house and even I was offended by that comment. Probably because I rented for 9 years before I moved to DC, looked around for a year, and decided to buy a place in Maryland instead.

    When I rented, I never thought of myself as a "camper". And when I bought a place, I certainly didn't think I had finally become a "real citizen".

    Lance, even though people smack you around, much of it appears to be almost self-inflicted. Like the comment where you were oblivious to people getting qualified for mortgages based on the initial teaser rate, rather than the reset rate. And even after being told the truth, you don't seem to be able to digest the impact of this effect upon the real estate market as a whole.

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  38. "you're not making an argument, you're just reasserting your position. I repeat -- if you insist the housing market is deflating, you can't double count the loss by adding an inflationary factor."

    I have provided plenty of arguments. You just don't understand them. Several other posters have. Unfortunately for you, you just don't get some fundamental concepts about the value of money.

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  39. "I have provided plenty of arguments. You just don't understand them. Several other posters have. Unfortunately for you, you just don't get some fundamental concepts about the value of money. "

    Says the guy who lives in a rental home in Silver Spring, Maryland. LOL.

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  40. Lance said...
    “I just find these comments amazing. The BHs are putting their heads in the sand ... The rest of us have moved on.”

    Please “Lance”, help us see the light. Post any data that supports your position. (And it sounds like you haven’t moved on)

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  41. Lance said...
    “I just find these comments amazing. The BHs are putting their heads in the sand ... refusing to admit that some 3 years on, they are still waiting for that precipitous price drop…”

    Out of touch with realty reality
    Thursday June 21, 2:31 pm ET

    By Les Christie, CNNMoney.com staff writer

    Despite turmoil in the housing markets that includes record foreclosure numbers, mortgage rate increases and home price depreciation, homeowners don't believe there's a real estate slump, according to a new poll.

    Most - 55 percent - are confident that their homes continued to increase in value compared with a year ago, according to a nationwide telephone survey conducted this month by The Boston Consulting Group (BCG), a business and management strategy firm.

    The overconfidence of homeowners doesn't jibe with the findings of most home-price indices, which point to lower median single-family house prices of about 2 percent nationwide.

    http://biz.yahoo.com/cnnm/070621/062107_housing_
    perception_gap.html?.v=1&.pf=real-estate

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  42. Lance, California real estate prices soared way beyond what the average person could afford. Today prices all falling fast, with hugh discounts. Why would I want to buy now when the prices are declining monthly?

    Is the DC area different money wise? Many in CA make more money than in other states, just as DC. Prices will be dropping in your area soon, just like CA,FL and the other bubble states like yours. It's always been a rule of thumb that everything seems to follow Kali.

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  43. Anon 8:23 said:
    "I have provided plenty of arguments. You just don't understand them. Several other posters have. Unfortunately for you, you just don't get some fundamental concepts about the value of money."

    What you're not getting is that the other poster is saying that if you are buying a home to live in, the fact it goes up or down a few or even many percentage points in value isn't important since when you go to move to a different house in the same area its price will have moved accordingly those same percentage points up or down.

    This is in line with the reason why smart people bought when the need arose to buy a home and didn't sit around waiting for some yet-to-happen crash in prices to "profit" from what isn't really an investment in the first place. As long as they knew the could handle the payments that would come their way, they knew they'd be in a home of their choice and not have to be at the mercy of fluctuating mortgage interest rates and/or prices ... not have to risk later not being able to afford what they knew they could afford today.

    The other anon knows to look at his/her home as a home and not a way to speculate. But you don't get it nor will most of the BHs posting on here. They can't differentiate between buying a home and making an investment. They think they are one and the same. They can't understand that a home is an expense which needs to be minimized AND made predictable. Of course, perhaps it's because unlike those of us that did buy, they can't today afford what they want to buy ... and they are not willing to compromise on what they want. As such, they have to wait for prices to crash since the alternative --- i.e., living in a place they deem below their standards --- isn't acceptable to them. The biggest problem with their view of course is that they don't understand the concept of "baby steps" ... i.e., that you have to start small and by starting small you will someday acheive your dreams. And that by not starting at all .. i.e., wanting "all or nothing", you usually end up with precisely that ... Nothing ...

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  44. Anonymous said...
    "James, I will bet you $10,000 that this is not true: 'It is highly unlikely that that prices will be higher 7 years from now than they are today.'"

    First, I don't make $10,000 bets because there is very little chance that the other party will actually pay up. Second, I don't make any bets with people known as "anonymous" because they have absolutely no intention of ever paying up.

    "Where in the history of local real estate have you ever seen a decline over 8 years?"

    We are in the largest national real estate bubble in U.S. history, so history is a poor guide. The RE price declines are likely to be greater and last longer than what we've experienced in other recent housing booms. However, if you want local examples, I'll give you local examples from a much smaller housing boom:

    San Diego, CA, July 1990 - July 1998
    Boston, MA, July 1988 - July 1996
    New York, NY, Sept 1988 - Sept 1996

    I'm using Standard & Poor's as a data source. In fact, the S&P 10-city composite was down 10/89-10/97. And, no, they don't adjust their indexes for inflation. I've provided examples of 8-year price declines after a much smaller boom than the one we're currently in. If you really are willing to pay up and are not hiding behind your anonymity, you can go ahead and pay me the $10,000 now.

    Oh, by the way, I forgot a city: Washington, DC, April 1990 - April 1998.

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  45. Lance said

    "refusing to admit that some 3 years on, they are still waiting for that precipitous price drop"

    We'll this is different than the call to action based on the need for prospective buyers to be good citizens (altho you later pull out the "it's the right thing to do" b.s.), but if you check the markets, the stock market has gone up 20+% over the last 3 years while international stocks (perhaps a brewing bubble of their own) have gone up nearly 50%. So it's not as if those who have sat on the sidelines have had their money sitting doing nothing in a money market account. In fact, most people who have invested in assets other than real estate have done better than those holding houses. My life may "be on hold" according to your logic, but my international stocks have made a helluva lot of money. Cheers regarding your attempt to shame me into buying a house, but I'm completely comfortable, in fact pretty darn happy, with the performance of my "alternative" assets over the last few years.

    ReplyDelete
  46. Lance's quote:

    ...refusing to admit that some 3 years on, they are still waiting for that precipitous price drop ... with their lives still on hold in the meantime.

    It has been said that the housing bubble isn't so much bursting in that it is losing air-
    FAST!
    We are in the top of the second inning of the world series of housing prices declining. We are not even anywhere near the 7th inning stretch.

    The arguement "I don't see no prices deflating in DC" ignores the fact that in some areas there are pockets of resistance, but eventually all resistance is broken by an overwhelming force, in this case, falling housing prices.

    As for the arguement, How can we have inflation and deflation in prices at the same time?
    It all depends on what item or items you are looking at.

    Houses go down in price, food & energy go up in price, is it inflation or recession?

    Some houses manage to go up in price in pockets of resistance areas but housing in hard hit areas (AZ, FL) is it housing inflation or deflation?

    Million dollar homes in the nation hold their value or increase a little, most non mansion housing going down in price due to flippers getting out of the market, foreclosures, sub-prime mess, etc, housling inflating or deflating?

    Are houses selling for more than they were previously? The short answer is yesbut, as in-

    yes-but Will they sell for more in the future?

    If next year the average housing price declines compared to this year, can it still be argued that houses are in a deflationary mode when the cost of living is going up?

    Again, economic arguements best left for the economists to fight it out over.

    Accept or reject my conclusion as you wish, makes no difference to me, I just thought I would give you my idea on the subject.

    As for me, I will sit back and let the bloodbath go on and watch the show from a safe distance.

    No I don't got popcorn, doesn't agree with me, I'll enjoy Raisinettes though.
    (Where are the Goobers? Well, they were the ones who bought in 2005-2006)

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  47. "Let's say I got into said condo on an interest-only loan, paid 1400 a month net of taxes (basically the same as renting a comparable place in this area and remember credit was dirt cheap at the time). Assuming the unit sells at 259K it still looks like a tidy profit after the realtwhore fees. Why would I care what the CPI is doing ? It's not like I plunked down the cash to start with."

    You would still have to pay back the mortgage. And currently, owning a home generally costs about 1½ to 2 times the cost of renting that home. If that condo mortgage were for, say, $235k, and it sold for $259k 5 years later, you would get less than 2%/year -- before fees. That means that you would have more money even by really renting that place, and putting the money saved each month into a bank.



    I have provided plenty of arguments. You just don't understand them. Several other posters have. Unfortunately for you, you just don't get some fundamental concepts about the value of money.

    Well, I don't know what you're talking about, either. How is "adding an inflationary factor" (a requirement for comparing a dollar amount of one year to a dollar amount of another year) a "double count" of loss?

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  48. "They can't understand that a home is an expense which needs to be minimized AND made predictable."

    LOL...

    and how does that support your argument that it is always a good time to buy?

    Housing prices are falling and will continue to do so for the foreseeable future. THAT is predictable...

    ...waiting until things stabilize is minimizing an expense.

    You used to try to use scare tactics to get people to buy by telling them that they risked being "priced out forever" or forced to join a "class of perpetual renters." Now that prices are falling... you are forced to resort to sad emotional arguments about being a "true citizen."

    News flash... May's median sale price in almost all of Northern VA is already below May 2005's median... and prices continue to drop.

    What is the rush? My investments are doing well and I will buy when I decide the market has stabilized.

    Your emotion based approach to major purchases is a mark of immaturity.

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  49. Lance said...
    “What you're not getting is that the other poster is saying that if you are buying a home to live in, the fact it goes up or down a few or even many percentage points in value isn't important…”

    So “Lance”, those folks with ARMs getting reset to a much higher rate have no worries if the value of their home drops “many percentage points”?

    Lance said...
    “They can't understand that a home is an expense which needs to be minimized AND made predictable.”

    Why the increase in ARMs in the last few years? Is an ARM predictable as a 30 year fixed?

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  50. Just out of curiosity. I’ve been on the side lines now for two years and now I’m finalizing a purchase here in Woodbridge. Woodbridge got hit pretty good and still is. The house I’m buying was originally for sale for $620,000 and I got it for $440,000 plus $16,000 in cash back for closing (Buy down rate). Two other houses sold in the same neighborhood just now for over $500,000. Mine does need a little work but nothing home depot cant handle. As of now I think I got a good deal but realistically how much can prices come down. There is a acceptance level where buyers will jump back in and job growth is good. Prince William has a bad rap but they are fixing it. (High end stores are coming, Wegmans, Harris Teeter, ect...) I just can’t foresee prices falling an additional $100,000 to the low threes when people paid so much. I think some people will walk and pay the bank 20 or 30k but pay the bank an additional 100k after the sale. I think this is what they mean when prices get sticky. All you anti Lance guys, how much do you see prices going down? Please be realistic. I do support renting, but I just want a house. So Im not buying as an investment but I dont want to overpay.

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  51. Responding to _K's comment:

    "owning a home generally costs about 1½ to 2 times the cost of renting that home.."

    Really? How is that possible? Are all the landlords willing to sit-back and lose money? I doubt it. Renters usually pay the mortgage and then some for the landlords. Otherwise, it is just not worthwhile. Maybe if the mortgage is pretty low (old), but then the property condition will most likely be less than stellar.

    If you have any evidence, I'd be more than happy to give it a look. I just don't see how it is possible.

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  52. Virginia and Maryland are not DC.

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  53. Anonymous said...
    “Really? How is that possible? Are all the landlords willing to sit-back and lose money? I doubt it. Renters usually pay the mortgage and then some for the landlords.”

    The landlord can ask what he wants for rent, but if it’s not priced competitively he will sit back and lose more money.

    -Cold Sales Give Renters a Break

    Some developers who planned condos
    are switching their buildings to rentals. In the fourth quarter, developers announced they have or will switch 5,915 such units, according to Delta.
    Condos aren't the only part of the market where there are more rentals. According to Delta, the number of condos, townhouses and houses listed for rent rose 23 percent in November from a year earlier on the region's multiple listing service, commonly used for for-sale properties but also for rentals handled by real estate agents

    http://www.washingtonpost.com/wp-dyn/content/article/2007/01/04/AR2007010401794_2.html

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  54. Mike said...
    The house I’m buying was originally for sale for $620,000 and I got it for $440,000 plus $16,000 in cash back for closing (Buy down rate)…… As of now I think I got a good deal but realistically how much can prices come down)…. I just can’t foresee prices falling an additional $100,000 to the low threes when people paid so much.


    Hey Mike, six months ago, other buyers/sellers were saying: “these homes can’t possibly fall $180K”.

    Ask yourself a few simple questions:
    What conditions brought on the boom? Do we still have those conditions? Are there any more ARMs to re-set? Are rates going up? Are we seeing tighter lending standards?

    Do you think it normal for some state governments to suggest a moratorium on foreclosures? Do moratoriums indicate a healthy market?

    How does your local inventory look? Is it high compared with the last say, three years? Is it higher than last year?

    What lead you to this home? Did you not have many, many more choices today than you had two years ago? How many more choices will future buyers see after another round of ARM re-sets?

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  55. "Virginia and Maryland are not DC. "

    What do you want for that bit of insight? A little gold star?

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  56. "All you anti Lance guys, how much do you see prices going down? "

    That is the million dollar question and you won't get a consistent answer from everyone on this blog.

    On the one hand you have Lance who is on the record claiming that prices won't drop a bit in the district and that sometime in the next decade they will climb to match the prices seen in Manhattan.

    On the other hand you have a whole range of posters on this blog that expect prices to fall between 10-50% depending on exactly where and exactly what you are talking about.(condos in Manassas vs SFHs in desirable parts of DC)

    Personally I expect us to reach price declines of ~20% in nominal dollars from the peak (not necessarily YoY) in Fairfax county within the next 12 months. We are already nearly half way there...

    I expect over the next several years we will see declines reaching the 33% range in real dollars.

    The farther out you go the worse things will be. Condos will be hit the hardest with higher end detached homes holding their value the best.

    If you have found a house that suits your needs at a price you can afford, go ahead with your purchase and don't worry a moment about what the market does once you sign the papers. You have already saved tens of thousands of dollars by not buying at the peak.

    No one person's situation applies perfectly to anyone else.

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  57. Robert,

    I agree prices are coming down more, no doubt. How much is the question. Many areas around the country do not have the economics to support the prices. D.C. does pay good salaries. Even the Enlisted military guys get a hefty housing allowance here (Over $2000).
    If I had to TRY to predict the future it would be roughly an additional 10% drop in prices and 40 year loans becoming more popular. Right now lenders charge a hefty rate on 40 year loans and I think this will change. I also think it will be specific homes hit. Not necessarily how old the home is but the style and land. Very hard to find a flat yard here, split foyers will take a beating. This is the burbs, people buy here for space and yard unlike D.C. I see a lot of homes that are just garbage, these are the ones dragging the inventory. I can see it first hand, A good house and land, priced good will go under contract. A house with a horrible yard crazy layout, not upgraded, small, will sit forever regardless of price.
    All these news articles talk about 4% to 6% drops but there has been EASILY a 10% drop here, not a doubt in my mind. You ask how it dropped 180k so easy, well off ask and when you are still looking at profit its easy. But when prices drop to the point where majority of people will lose THEN you will see stickiness. Right now everyone is trying to get a last chance at a tidy profit, when they realize they cant they will end up selling a little more then what they paid. With the exception of the people who bought in 05 and 06.
    I also think America is a panic society. There is tons of able buyers but they wont because of market conditions. Once there is a glimmer of hope a good chunk will jump in Panic again thinking they will miss the bottom. Pretty much supports why you can never time the bottom.
    No doubt the fall will continue but I think we are closer then most people think to stabilization.

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  58. To Mike,

    It sounds as if you have found the house you want to spend many years of your life in, your dream home if you will, so any advice we give you to be prudent with your purchasing dollars are going to be a hard sell to you, or so it seems by your post.

    I and most of the rest of the posters are Not against buying a house, provided it can be had for the best possible price. We are for buying a house when housing hits bottom or sometime after that.

    Since it is no easier to call a bottom than it is to call the top of the market, most of us are waiting to see how much lower houses are going to get.

    For myself and possibly many posters on this blog, we are waiting another 2-3 years before considering to buy a house (and save up a good sized down payment for an even cheaper house) that is our decision.

    If you have decided to buy now, that is your decision. It seems you have made your mind up, so any advice we give you is for you to accept or reject. It is your money, it is your life.

    For those of us willing to wait it out, we do not want you to become another casulty in this housing debacle, another victim kicking himself for overpaying for a house that could be had for 50k less if you had waited. But again, it it your money, your choice.

    We merely offer our suggestions and you will accept them or reject them as you see fit.

    Whatever you decide to do, we wish you good luck and hope you can get your future house for the best possible price.

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  59. "Really? How is that possible? Are all the landlords willing to sit-back and lose money? I doubt it. Renters usually pay the mortgage and then some for the landlords. Otherwise, it is just not worthwhile. Maybe if the mortgage is pretty low (old), but then the property condition will most likely be less than stellar.

    If you have any evidence, I'd be more than happy to give it a look. I just don't see how it is possible."


    Rental properties normally don't start generating profit until at the earliest several years after purchase (after the monthly mortgage cost has gone down).

    One can easily do a web search to find many examples of ridiculously high price-to-rent ratios (which still exclude ownership maintenance costs). "http://www.newworldeconomics.com/archives/2007/040907.htm" is one. (I can't embed the hyperlink because this blogger confuses itself when it decides to separate the tag onto different lines.)

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  60. mike:

    Personally, I think that I would make the purchase. But I'm someone who is waiting to buy more because I can't afford anything at all than because I want to get a better deal than the ubiquitous horrible deals available now. (Although I still wouldn't pay way over value.) Prices will continue to drop, but that one seems to be a much better value than the comparables right now. So even if that type of house later becomes more affordable than the one you plan to buy (which is likely), it probably won't happen for at least a few more years. But it's your money, so you should decide whether likely being able to get a better deal, probably at least a few years later, is worth the risk of not buying now this house.

    (BTW, you might want to check out the Zestimate.)

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  61. Mike said...
    “Robert,
    I agree prices are coming down more, no doubt. How much is the question.………”

    Yep, that’s the question. But I look at it another way. I continue to save money by renting. When it makes sense to buy, I’ll jump. If the perfict home came on the market tomorrow, I’d jump. I will not purchase a home for $XXXK when to me, it’s not worth $XXXK.

    I had planned on declining prices, I’m seeing them. I don’t have to buy at the bottom, just close enough that I can move when quite a few others can’t or, lessen the pain if/when I do decide to move. If the market meets my criteria, I could retire here, or just as easily could not. I’m not banking on a house to decide my retirement fate or a lifestyle change (job, illness, death, birth etc...). I have a few co-workers that are chained to their home. Their choices have been made for them.

    “Once there is a glimmer of hope a good chunk will jump in Panic again thinking they will miss the bottom.”

    I believe the run up was caused by cheap money, loose lending, and outright fraud. We are seeing those conditions slowly but surely dry up. The buyer pool is shrinking. The U.S. is at ~70% home ownership. That leaves ~30% to eat up the inventory, without factoring in first time homeowners/renters, the unemployed, and those at/below poverty level. Before the panic, you’ll hear water cooler conversations on how real estate is such a bad investment.

    What conditions will save the market from further decline? Salary increases? Government bailout? Lower interest rates?

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  62. "The U.S. is at ~70% home ownership."

    This to me really is the most telling number. That is likely the highest ownership rate this country has ever seen. These houses are eventually going to be filled with people, but they aren't going to do it at anything near current prices.

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  63. Robert Said

    "U.S. is at ~70% home ownership. That leaves ~30% to eat up"

    Excellent point, but this is a stat for the entire U.S.
    Michigan, Detroit, Florida, Nevada, Ohio... These places are done and dead. With the exception of Florida the rest will suffer for a long time.
    Look at CA, its getting beat up but it doesn’t matter. They always had high foreclosures and high prices but it keeps going because of location and jobs.
    Really my point is if you like or don’t mind (I did for years) renting do it because you will come out better then buying right now for sure. But if you really want to buy and you find a property that is about 10% below CURRENT market price (You can find them, foreclosures, divorces, etc...) I think you are safe as long as the economy in this area roll and jobs keep coming here.
    I know very few people even in the burbs that make less then 100k combined family income. Now as I mentioned in a post before, the older neighborhoods or less desirable neighborhoods are dead.
    I’m not anti bubble we are in a bubble, I’m just curious where the bottom might be in this area I could care less about Detroit.

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  64. Mike said...
    “Excellent point, but this is a stat for the entire U.S.
    Michigan, Detroit, Florida, Nevada, Ohio...”


    That is the caveat. I find it almost impossible to get local data on anyhing. The closest I can find for “local” stats for homeownership rates:

    http://www.census.gov/hhes/www/housing/hvs/qtr107/q107tab6.html

    (Note that DC is in the South)

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  65. We are in an unprecedented bubble but I have to weigh in on this nominal vs real debate...

    I'll give a hypothetical to show that real declines are not always a bad thing.

    Let's say you bought a condo in 1997 for $100k. Let's say in 1997 the cost to rent an equivalent property is roughly the same as your mortgage + rent - tax deduction. So, in this case your cash flow position is equal.

    Let's say the condo increases to $102k by 1998. This is a nominal increase but a real decline (assuming 3% inflation). But, guess what, you've paid out the exact same as rent but you know have $2k in equity. That's a lot better than $0k in equity. What do you care that the real price has decreased?

    When you borrow money to invest in stocks, for example, you need your price increases to not only beat inflation but also to beat the interest rate you're paying to service the debt. But it's not so simple with houses because you always have to factor in that you must pay rent. It's like someone saying that if you decide not to invest in the stock on margin, you must pay $1000 per month to not do it.....

    Now, of course, much of that hypothetical no longer applies. Rents are nowhere near mortgagespayments. Nominal prices are in fact declining.

    My point is we have to be careful about getting all hung up on small real declines. If you want to talk real declines you really have to factor in all sorts of variables including rent costs, interest rates, taxes, etc.

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