These graphs show nominal prices per square foot:
I predict that a decade from now, DC and Arlington nominal home prices will be roughly the same as today, perhaps with slight declines. Real prices, however, will have declined significantly.
I'm no Nostradamus, so my prediction could easily be wrong, but my prediction is based on two key factors. First, DC and Arlington home prices are still substantially overpriced compared to their historic norms (relative to rents, incomes, inflation, etc.). Second, the usual tendency during a housing slowdown is for nominal home prices to stagnate, rather than to fall. This housing downturn has certainly been unusual, but inside the beltway home prices have been following the usual pattern since the peak.
I also predict that a decade from now Bubble Meter won't be around to be held accountable for faulty predictions. :-)
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On the one hand, the DC area does have a pretty stable employer, which means that unemployment driven defaults are never going to get as bad as in some other metropolitain areas. And thus far, the worst declines have been in the bottom of the market, and thus affect the median less than might otherwise be the case. And OA/teaser rate/neg-am suicide loans were never as popular here as in CA.
ReplyDeleteBut it isn't that clear to me that the decline in the middle and upper ends of the market aren't deferred rather than prevented. Even though the underwriting wasn't that bad, they certainly DID appreciate greatly during the bubble. IMHO much depends on whether people who CAN swing their mortgage payments will continue to do so in the face of price declines. There's ALOT of shadow inventory out there at the upper end, and people are feeding the alligator because of the percepation that a return of the appreciation fairy is just around the corner. I just don't think that current prices are stable, because they're STILL based upon hopes/prospects/wishes of future appreciation. -Jim A.
How do you foresee any increase in DC Metro area residents over the effecting home prices? I sense a lot of young people (like myself) moving to and staying longer in DC due to a better job market, increased focus on government jobs, a new found "sexiness" of sorts... This is the only reason I could see some justification for a slight premium to historic norms. That being said, I think the effect would be subtle, but I'd really like to know what your take would be.
ReplyDeleteJames, if your predictions were wrong all the time you could be a TV pundit or chief economist the NAR. Try to be less realistic and just predict a nice recover in prices.
ReplyDeleteDoes anyone have the income growth stats for Arlington & Alexandria?
ReplyDeleteI know that over the last decade incomes in Arl & Alex have gone up at twice the rate they have in Ffx, Lou & PWC, but I was curious if anyone had the actual numbers?
Remember when the prevailing sentiment on this blog was that DC and Arlington would see 40% declines on a NOMINAl basis????
ReplyDeleteBWAHAHAHAHAHAHAHAHAHAHAHAHA!!!!!!!!
If you bought in Arlington (or DC area) in 1989 and sold in 2000 you would have about broken even. So you could say it will be like the '90s again. However, it feels different. Back then there was no concept of a bidding war. Things moved slower and people were used to that, sellers would throw in nice incentives to get things moving. Now you still have bidding wars and flippers are everywhere and are far more aggressive due to the low interest rates. I don't think the obsession with real estate is over and with the government willing to do anything to keep prices increasing I think the madness will continue.
ReplyDeleteWhat goes up must come down.
ReplyDelete"On the one hand, the DC area does have a pretty stable employer"
ReplyDeleteYeah thats a BRAND NEW THING!!!! Never before has the DC area had such a stable employer as they have today!
10 years of stagnating prices isn't a good thing. buyers will look at
ReplyDeleterent/buy calculations brutally
and the desire to buy may die down
Pat, are you commenting on Steve M's point of 10 years of stagnating prices from 1989 to 2000?
ReplyDeleteThat was followed by a buying frenzy that lasted for years.
"That was followed by a buying frenzy that lasted for years."
ReplyDeleteAnyone paying attention knows that the buying frenzy was fueled by reckless lending practices. Did you notice that banks are tending to either die or need massive infusions of bailout money? Why? Because of a bacteria in the water? Or lax mortgage lending practices that will not return for a generation?
"nonpartisan said...
ReplyDeleteWhat goes up must come down."
Yes yes yes - very insightful analysis from someone who ignores fundamentals.
As the other anon noted, incomes in the close in areas are going up at roughly twice the rate they are in the rest of the DC area. What does that tell you about where they will bottom out?
"pat said...
ReplyDelete10 years of stagnating prices isn't a good thing. buyers will look at
rent/buy calculations brutally
and the desire to buy may die down"
Really? Interesting in that the bubbleheads always say "a house is something to live in, not an investment". Yet, when presented with the prospect of stagnation, they get hipocritical and insist on appreciation before they buy...
Anonymous said...
ReplyDeleteInteresting in that the bubbleheads always say "a house is something to live in, not an investment".
Actually, Lance was the one who said that. He was no bubblehead.
Anonymous said...
ReplyDeleteYet, when presented with the prospect of stagnation, they get hipocritical and insist on appreciation before they buy...
Looking at Pat's original post, he said nothing about wanting appreciation before he buys. The only person who mentioned appreciation was Anon 8:59, but he was talking about housingheads wanting appreciation. Bubbleheads want depreciation.
"Bubbleheads want depreciation."
ReplyDeleteBut only til they buy. Then they dont want to just live there. They want the appreciation machine to fire back up again...
my point is that lon furation stagnation may lead to some real decays in the housing stock.
ReplyDeleteIf prices sit sideways for a decade,
people will sit there in a cold stew
waiting for appreciation to get them out. As opposed to moving on with their lives they will sit on a condo
paying way too much money, not investing, not moving up.
For people stuck in a house, how do they get divorced?
For people with ultracommutes from
manassas or beyond, when do they
ever get to stop?
the japanese have people trapped 18 years after the bubble, no wonder
they have a lost generation.
i'd much rather a real swift decline
and then a return to 2-3% appreciation, but the bottom so far down that any further foreclosures wont impact prices.
as for that decade of stagnation,
we never saw any decent investment in DC, if we had a decent bust in 91-92, and then a new rise, we might have seen DC do a lot better.
No, they don't. They just want to pay a fair price for their home, one that's in line with where prices have usually hovered (inflation-adjusted, of course) for the last 100 or so years. That ain't now. And we don't want to buy something that, by all *RATIONAL* logic, should decline another 30-40%.
ReplyDeleteI mean, really, if you were running a business and a tractor could be purchased for twice the cost-of-use as renting it, what would you do? Would you scream "the pride of tractor ownership!!!" or "why do you want to profit off the loss of others???" Sure, there's an intangible value of actual homeownership, and you have to factor that in, but you also have to be honest, dispassionate and cold about the numbers. And right now, they just still don't make sense.
Look at the graph of Immunington, it shows a fall of just over 10% from the peak in mid-2005 to the trough in early 2009.
ReplyDeleteThis resembles the 1-2 year drop of about 10% in the 1990's after the S&L crisis. Except for that initial drop, Immunington and Immundria in the 1990's were basically flat, rising from a 10% trough about 1994, drifting up gradually to 1999.
That flat decade was followed by a price increase that made up for 10 years of no appreciation. Some call this the bubble but perhaps it was just prices reverting to the mean.
If the next few years follows the same pattern as the 1990's, this is the bottom. Prices will rise 1% or 2% each year (or not, they could fall 1% or 2% a year.) for another 4 or 5 years.
At some point in the future, we'll see 10% and 20% annual increases again. That's been the pattern around here since the 1970's.
"Remember when the prevailing sentiment on this blog was that DC and Arlington would see 40% declines on a NOMINAl basis????
ReplyDeleteBWAHAHAHAHAHAHAHAHAHAHAHAHA!!!!!!!!"
LOL - yeah back in the heady days of 06/07. You couldnt be on this blog for more than 5 minutes before someone would be spouting off about the upcoming cataclysm in immunington/immundria. 40% was the bare minimum of what we would see. Calls of 50, 60, even 70% off werent unheard of.
In hindsight, how could they have been so blind? Do they live their whole lives like this...thinking for years and years that somehting big will happen when there is little to no evidence of it? If so, I really pity them. I wonder where they are today???
"I wonder where they are today???"
ReplyDeleteThey're over at NOVA Housing Bubble Fallout, still fantasizing and hallucinating that any day now, real soon now, they'll buy a perfectly maintained 4/2 colonial on a quarter acre in Immunington for $300,000, $30,000 down, because prices plunged in Manassas.
It's the Substitution Effect, or, maybe it's that condo rents have something to do with million dollar houses, or maybe it's Alt-A's in Baltimore.
Is it a mental illness or are they just trolling each other?
"At some point in the future, we'll see 10% and 20% annual increases again."
ReplyDeleteSo you are saying a home in NoVa will cost 3 or 4 BILLION dollars in the next 10-15 years?
"So you are saying a home in NoVa will cost 3 or 4 BILLION dollars in the next 10-15 years?"
ReplyDeleteNo. 4 or 5 years of flat (+/- a couple percent), followed by a few years of 10% to 20%.
A $800K place in Immunington might drift up (or down) $820K, $790k, $810K, $780K, for several years.
In a few years, when everyone is certain that prices are stable, the year over year progression suddenly will go, $890K, $1.3M, $1.7M, $2.4M.
Then the screaming will start all over, "It's a bubble!" and "I earn $140K, why can't I buy a house?"
Then it'll go flat. Prices have done that since the 1970's. Roughly on a decade to 15 year cycle.
There was a big RE price jump in the early 1970's corresponding to the post Vietnam war inflation.
Prices went flat when Volker cranked up interest rates.
There was another shocking price jump in the late 1980's.
In the early 1990's, S&L financial crisis cooled things down and prices dropped about 10% in the Immune zone. The price bottom was about 1993/4.
After the flat 1990's, prices rose for a short time to make up for the flat decade, exactly as they had in the past after every flat decade. That was 2002-2006.
We're in the middle of yet another flat period now. There's no way to predict the future but it started in 2007 and this seems to be the bottom.
Sometime in the next 3 or 4 years, the rip-roaring price increases will start again, as they always have.
Or maybe it will be different this time.
re: DC prices.
ReplyDeleteThere's a symbiotic relationship between 1) gentrification; 2) quality of DC / inner-burb schools; and 3) stagnant housing prices.
The fact that housing prices (even close-in) have stagnated will tend to make folks even less likely to move out of the city. Lot easier to make that decision when you've got $100k in equity on offer.
Add to that the improvement in DCPS and charter school options, and there's even less pressure for middle class residents to leave.
Add to that the crumbling suburban infrastructure, and completely intolerable traffic congestion, and there's leaving is even less attractive.
The expansion of the middle-class tax base, and the reduction of impoverished residents will tend to have an accumulative effect.
And, of course, the displaced have to go somewhere, so you have a recipe for a continual decline in the (inexpensive) suburbs to the benefit of the core.
In September, I'll be sending my 4 year-old to DCPS. That was *not* an option even a decade ago. Will we be forced to move to the 'burbs for middle-school? Possibly. But gentrification has made it possible for middle-class parents to stay in DC for a decade or more after having kids, rather than a year or two.
So--at least close-in--there's more to it than price/rent ratios and median income.
In the 90's when prices were flat, interest rates were falling. In this decade I'm sure that interest rates will be increasing. That will make things much different going forward - lower home prices.
ReplyDelete