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Pessimists vs. Optimists and The Weekend Poll

I haven't yet figured out what's really behind the bloggers and commenters who seem to fervently hope for an even more drastic plunge in home prices. Some, I suppose, are investors hoping to build their wee rental empires with super-cheap properties. I say knock yourself out buying foreclosures, you're doing the market a favor. But jawboning the market down doesn't seem to have much purpose, and I don't see the fun in all that cynicism.

Conversely, trying to cheerlead the market back to health doesn't work very well, either. In Saturday's Washington Post Real Estate Section, I have a story about the "Surround Sound" campaign the National Association of Realtors has pursued over the past 16 months, which tries to counter the gloomy economic news that prevailed in the press -- aka this here newspaper and its assorted electronic accoutrements.

Weekend reading: Also on Saturday, Stephanie Cavanaugh reports on things that would put my tinny old tool shed to shame: pool houses, carriage houses and other cool structures that some folks have on their property estates.

Also, today is Real Estate Live chat day! Post real estate reporter Dina ElBoghdady will join me, taking the place of Maryann Haggerty, who is happily vacationing (per last report) on the other side of the globe. We will log on a bit early to get a behind-the-scenes start on your comments and questions, so feel free to post something ahead of time. Have a great weekend.

The Weekend Poll

By Elizabeth Razzi  |  June 12, 2009; 6:00 AM ET
Categories:  Buying , Selling , The economy , The market , Weekend Poll  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Buyers and Sellers at a Standoff?
Next: The Arlington Rap and Chat Plus

Comments

A lot of us out here would just like to be able to buy a house. At a price that's not a huge premium over renting. With enough space to grow into, rather than handing over 6% transaction fees doing the housing ladder thing. And we'd like it not to eat up 50% of our take-home pay. And not involve an insane commute.
It was not that long ago that this was possible in the DC area. We long for the price-to-income ratios of 1998. And are bitter that they don't seem to be coming back.
So we wait, and we analyze, looking for signs of weakness so that we might get the home we want for a price we're willing to pay, or signs of prolonged strength that can quell our fears of losing our shirts on houses that were either cramped or terrible commutes anyway.
Where I'm looking, I don't actually mind today's prices, I'll pay them if need be, but not if I'm also going be boxing myself into a financial corner for doing so.

Posted by: kingstowne_renter | June 12, 2009 11:58 AM | Report abuse

Perhaps a lot of us are potential first-time buyers who have carefully watched the Case-Shiller index and income and rent to mortgage ratios and feel that a one-bedroom condo (coupled with outrageous condo fees) is not a starter home. We saw people in our same predicament six years ago be able to buy small brick ramblers (not fixer-uppers or foreclosures) or town homes for the same percentage of income as the condo developers are trying to foist crackerbox properties on us now. Perhaps we graduated several years ago, saved up a down payment, but can’t afford property like someone who graduated with the same degree and same job a couple of years before that. Perhaps we think it makes more sense to pay an 8% mortgage rate on a $200k house than 5% on a $500k house. Perhaps we also don’t want to reward people with our tax dollars who took out irresponsible loans, gambled, and lost. No one was forced to borrow money. Conversely, what is the harm in lower prices? It allows our children to be able to afford a reasonable first time home. To quote Patrick.net: “ . . .government leaders never talk about how lower house prices are good for pretty much everyone except bankers, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you'll save more on your next house than you'll lose in selling your current house. Every "affordability" program drives prices higher by pushing buyers deeper into debt.”

Posted by: Rockvegas | June 12, 2009 2:19 PM | Report abuse

Rockvegas, I couldnt agree more. I was in the post years ago calling about the mess and how there was no way I was buying a condo in this area at these prices and how out of whack everything was.

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/24/AR2006032400802.html

Posted by: cavatellie | June 12, 2009 11:17 PM | Report abuse

I wouldn't call it being a pessimist...I look at it as being a realist. Prices are ridiculously high in most parts of the metro DC area, especially in the mid to high price range. The housing market here is still totally out of whack with regards to incomes. Just look at the historic data and you'll be floored by the magnitude of the problem. It's heartening to read of others who are waiting this bubble out, as we are, and hoping for more reasonable prices in the future.

Posted by: wireknob | June 13, 2009 12:17 PM | Report abuse

One other thing.

We really need to stop clarifying ANYONE who doesn't think the market is priced right as a pessimist.

There were many REALISTS that saw this collapse coming because they used common sense in understanding demand, salaries, inflation, etc and how housing prices are tied directly to them. Housing increases from the 60s when my parents bought up to the boom reflected inflation and increases in their salaries also. Their salaries kept pace with the house appreciation and inflation. That did not happen here the last 8 years, especially NOVA where average salaries of the middle class actually decreased while housing prices shot up some 400% in some areas for NO LOGICAL REASON minus reckless lending to anyone that wanted a loan...which created a false demand...a facade. Anyone can create demand if you fake it.

Just because someone isn't all sunny about something, doesn't mean they are a pessimist.

A pessimist would say we're never going to get out of this, and things will get worse and worse and worse and we're forever doomed.

Most of the ones are here, like myself and rockvage are being realistic about unsustainable pricing that went out of control with no fundamental model to support those price increases and are saying that prices need to re-adjust to 2000 levels in order for the market to stabilize and for people to be able to afford living in this area without being forced to spend more then 40% of their take home income...any more and you are setting up more failures.

Please stop calling people pessimistic...it makes you sound unintelligent and uninformed.

Posted by: cavatellie | June 13, 2009 1:32 PM | Report abuse

Wireknob, most of the condo blogs talk about that data, but for some reason the post avoids it. I'd like to see more on foreclosures in the area and #'s of them every month so people can get more data and realistic facts instead of 1 sided everything is good in NOVA...we're different.

I would be floored if the Post showed the historical data and magnitude of the problem. I was pretty floored when they released the 2000 baseline that many of us were talking about that had to be used to get a bearing on what housing 'SHOULD' be priced with factoring in standard inflation for the last 7 years.

It would be nice for them to show a more realistic view of the issues in this area instead of covering them up.

Posted by: cavatellie | June 13, 2009 1:36 PM | Report abuse

Cavatellie, agreed on all counts. Here is an interesting little web app that I came across recently. It allows you to project house prices forward from saner times (say, mid to late 90s) according to inflation:

http://re-calculator.com/index.php

Results will blow most people's minds. We've been so conditioned to the off-the-charts pricing that we actually believe that 10-15% off the tippy-top is a good deal. Needs to be more like 40-50% off peak, in my opinion...and according to the data.

I have a feeling that once the top end of the housing market crumbles, it will bring the rest down with it. Higher interest rates should do the trick. If the gov't would just stop wasting trillions of taxpayer dollars in a vain attempt to keep the bubble inflated we'll see an end to this mess, and then financially responsible people can get on with their lives.

Posted by: wireknob | June 13, 2009 5:55 PM | Report abuse

Wireknob that's a great link. I'll forward that onto my friends. Take a look at the article in the Post a few years back that they interviewed me for (link above)...it's amazing that I got so much hate mail over that and those people look silly.

There are so many projects that have been canceled in the area which proves that the condo market is not really based on demand. We only had 1021 Clarendon, Market Commons, 1801 Wilson, Phoenix, Odyssey, Hawthorne and the other by Seti Bella while about 6-10 others were canceled or turned into apartments. And most of those listed have a lot of foreclosures in them. I lived in 1021 and rented from a person and I left because his unit went into foreclosure. Talking to their MGMT team, about 1/2 the people are behind on condo fees and when I checked last year, at least 15 units were in foreclosure and those have increased on the sight.

In talking about increase in price average, the condos really distorted the market because if you were getting 300K+ for a 1BR then a SFH is worth way more. Worse, the Bromptons (the million dollar townhomes in Courthouse and Cherrydale) really distorted the SFH market also by starting off at enormous prices and of course upping the average price in the area. Now a lot of those are for sale or in foreclosure and the ones in Cherrydale are being sued to be demolished for the ones that never were finished due to fake demand.

It just is mind blowing that so many people have their heads in the sand about realistic prices (and don't talk about location people because Arlington has tons of land that can be used, its not LA or SFO)...especially condo owners expecting 350K for a 1BR and that doesnt include the ridiculous condo fees of $200 a month at least. The issue is SO MANY people bought at the peak of the market and are praying for a rebound but those with common sense will never buy from them...and their only hope is lending again that is not strict, which will not happen again for years and years. Many will be forced to sell at a loss or foreclose which needs to happen to bring things back in alignment with salaries and what you are getting your money for. A 1BR condo is not worth more realistically then $200K in this area. No more. a 2BR no more then $300K.

Like you said, when inflation goes up (which it will and will have to), it will force prices even lower. Anyone who has savings wants high inflation and low prices.

Posted by: cavatellie | June 13, 2009 9:21 PM | Report abuse

Wireknob..using that link, a 1BR condo with normal inflation, salaries, and appreciation should barely be worth $160K if things were not allowed to get out of control. Just an amazing eye opener but no one will want to believe logic or real math or numbers. Too many in denial.

Posted by: cavatellie | June 13, 2009 9:29 PM | Report abuse

Home buyers should always stick to a price ceiling of no more than 2.5-3.0 times their gross income with a 10% to 20% down payment, respectively. And it's best if you only go by the salary of the primary family breadwinner lest you fall into the two-income trap. While low interest rates may make a higher price affordable based on monthly payments, buyers should still stick pretty closely to the above formula. Why? Because, if you follow the market up when interest rates drop, you will be dragged down when interest rates inevitably rise. That's how you find yourself underwater: If you anchor yourself in water up to your neck at low tide you will drown when the tide comes back in.

Low rates were the genesis of the housing bubble. As the Fed pushed rates down in the early 2000s, home prices skyrocketed as folks found they had increased buying power. The inevitable denouement of the story has interest rates rising and prices plummeting because very few can afford the inflated prices at normal interest rates. That's why we're seeing all the panic with interest rates going above 5.5%. This would normally be a very low rate, but because many overextended themselves when interest rates were artificially low they can't tolerate a return to normalcy. The Fed is now trying to keep the tide from coming back in, but fighting the forces of nature is a losing proposition.

To be sure, there were many other causes of the housing bubble. Low rates were only the match and kindling. When the housing mania originally caught fire, prices could only rise so high. That's when the mortgage lending fiasco was introduced to allow buyers to purchase homes way beyond their means, even with the low interest rates. Housing prices then climbed to stratospheric levels. If not for the shenanigans in loan underwriting and fraudulent appraisals, the bubble would not have grown nearly as big because even with low interest rates there is a limit to what people can afford. Now we've created a tsunami, and many homeowners will be swept away.

Prices are still ridiculously high in most areas around DC. Better prices than last year does not equate to good prices. You will know when prices have corrected when you can afford a respectable home reflecting your station in life for no more than 2.5-3.0 times your gross annual income...and still be able to save for retirement, put your kids through school, enjoy an occasional vacation, pay your bills, save for a rainy day, go out to dinner every once in a while, etc. A careful look at the data shows that the housing bubble still threatens would-be home buyers, and smart people should stay on higher ground until the danger has truly passed.

Posted by: wireknob | June 14, 2009 9:43 AM | Report abuse

Cavatellie, we remember reading that article back in 2006 (wow, has it really been that long?). We felt a sense of commaradarie with you as we too were studying the housing market and coming to the same rational conclusions. We didn't have a lot of company back then. People were also encouraging us to jump into the market, but we're glad we didn't. So far every bad consequence of the bubble that we predicted, starting in 2003, has come to pass. In fact, things got even worse than we dared imagine in those early days. Renting has not been all that fun, but it has been a heck of a lot better than if we had bought. We figure we have another year or two to go before prices correct and we are ready to buy.

Posted by: wireknob | June 14, 2009 10:03 AM | Report abuse

Yep you are totally correct and spot on about everything you posted. Renting has sucked because instead of building equity, we've been just spending it as rent, but again, it's the cost of living. What is 'annoying' is that if the rules and regulations were in place, prices would have remain at affordable levels, and a lot of us could have bought back in 2002 or so and the last 6 years of rent would be going into paying off a home vs rent. So yes, in a way, we've been 'throwing' money away to rent when it could have been going into equity, but I wasn't going to buy in an overpriced market. Right now I'd be underwater. My friends in the article (the other one where we are at Faccia Luna talking about it), wanted me to buy in 2006, and it would have costed me $400K at least for a condo. Right now I'd be underwater for at least 50K-75k.

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/30/AR2006033002349.html

I always found it funny that most of my friends felt that buying a $200K home at say 10% interest is no different then buying a $500K home at 2% interest because the monthly payment. (just throwing sample numbers out there)

It blew my mind..I was like..are you serious? You ALWAYS want lower prices because if rates rise, you are going to go underwater and lower prices mean you can pay it off faster.

I think it's pretty funny that most people refuse to look at 2000 as a baseline and refuse to believe that their house or condo isn't worth what it was in 2006-07. They feel a correction of 10% is 'spot on' where they can not give ANY reason why vs showing them data over the last 7 years and proof that the boom was created by false demand and allowing non qualified borrowers into the market. If you give everyone free money to say buy cars, then I can guarantee you there will be a car boom. It doesn't mean it's real though. That's exactly what happened with us. False demand, leading to false appreciation. Now, showing proof of what prices 'should be' in line with incomes, salaries, inflation, people just get angry (probably because they were duped or feel unintelligent about their errors of buying an over-priced home).

We have a society based on monthly payments and living in debt as a standard. It's just out of control.

Posted by: cavatellie | June 14, 2009 12:34 PM | Report abuse

BTW the City Vista ads on the Post Real Estate section crack me up. 300K 1BR condos for living in the hood off New York Avenue in a completely unsafe neighborhood.

So many companies and buildings detached from reality.

Posted by: cavatellie | June 14, 2009 12:35 PM | Report abuse

wiredknob, goto Googlemaps and do a search for

5th and K street NW washington DC

That's the City Vista Condos in DC that are in the mid $300,000. Goto the street view and look at the neighborhood around it (loop the building in street view).

Anyone that would pay more then $150K for one of those in that neighborhood is just insane. Things like this just blow my mind...people spending some $300K for living in a area that is in no way close to being worth that and is in fact very dangerous.

And we wonder why things are out of touch with reality.

Posted by: cavatellie | June 14, 2009 3:22 PM | Report abuse

I'm slightly optimistic about the economy and therefore housing. We've had painful but necessary restructurings and there's recognition of the need for more effective financial regulations. Locally I don't think we've suffered as much as other areas of the country thanks to the federal government being one of the areas chief employers.

What does this mean for the housing situaton? While I agree that housing prices in the area may have been risen inproportionately to incomes, partially driven by speculation and loose lending practices, I think there was real demand behind the price increases. This is particularly true for the close-in, metro-convenient, more fashionable neighborhoods and neighborhoods w/great amenities and schools. Housing in these areas are limited in supply and while price corrections over the last year or so may make them more accessible to a larger pool of people, a larger pool of people are competing for limited supply.

Last note, I live in the 'hood described as the area near City Vista. Its true that there are run-down and vacant buildings in the vicinity. But on the same block is a new upscale grocery store, gym, hardware store, and cafe/restaurant. Budda Bar will be opening nearby in a few months and there are plans in the works to develop the lots you now see closed up or vacant into hotels, shops, etc. Also, Chinatown and the vibrancy of that area are just 2 blocks away. Just to the north of City Vista is the historical neighborhood of Mt. Vernon Sq. where beautiful old Victorian homes have been restored. Vacant houses here go for about $800k or so - probably out of reach for the previous commentors, unfortunately.

Posted by: nepe | June 15, 2009 8:04 AM | Report abuse

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