Real Estate on the bubble what that mean for Northern VA (Alexandria: sale, apartment)

[Mike from back east]

I doubt there's a textbook daffynition of "bubble burst" other than to give examples by pointing out the tulip bulb mania of yesteryear Holland and the dot-com bubble of recent times. I'd simply make an analogy to other situations, i.e., the now infamous dot-com bubble, as it really did collapse, and with great pain to millions of investors and institutions.

I believe real estate prices have risen in bubble-like fashion (see anecdote at end). But unlike the stock market where you can pay ANY price for a stock, our ability to pay ANY price for a home is checked by the willingness of banks to lend money against our ability to pay a mortgage. Thus I believe there is a self-limiting aspect of any real estate bubble. Prices can only get so high before lenders say 'no' you can't pay that much. So real estate may not be a bubble at all, but just an unfortunate result of Greenspan's incredibly low interest rates that made real estate very affordable and fueled a buying spree, with concurrent investor speculation/flipping. That phase is over and the bill is coming due.

Currently, IMO, real estate is in a soft landing, not a major collapse. There is pain for some, but it is being handled in most cases.

But it could be a hard landing next year. It could be in major collapse next year. I sure don't know. No one does. I wouldn't listen to anyone who says they DO know what's going to happen. All we have is consensus that things are getting messy now.

Maybe the banking / mortage industry can deal with the rate of delinquencies and foreclosures now being seen. Maybe not. If not, could be a hard landing with some bank failures. Maybe worse, maybe a big meltdown of a collapse that takes the whole economy down with it for a hard recession.

I won't speculate on any/all of the possible scenario's, we all know what they might be.

My banker says interest rates will decline slightly in early 2007. IMO this can prevent some foreclosures and keep houses selling, etc. This sounds like a soft landing to me.

One anecdotal case in point. Sold our home in Chantilly, VA in May 2005 for $505k. Exact home next door went on sale this spring for $639k, an increase of 26%, year-over-year. It has not sold. Her realtor way over-priced it. It softened to $589k a few months ago, still an increase of 17% year-over-year. Still no sale. It probably has to be at $529k to get any nibbles. IMO, some realtors are acting like its tulip bulb mania time again, that there will always be a "greater fool" who'll come along and pay. Keep in mind, there is no basement in these homes and all the BR's are small as are all closets and kitchens.

s/Mike

[jmarkd]

Mike,
Looks like
a home comparable to your neighbor's is under contract. Its listed price is $499.9K, so if the seller got 95% of list as is the Fairfax average, $475K was the closing price.

But it could be a hard landing next year. It could be in major collapse next year. I sure don't know. No one does. I wouldn't listen to anyone who says they DO know what's going to happen. All we have is consensus that things are getting messy now.

Good point. There are very few people without a dog in this fight, myself included. The last person I would listen to is a realtor.

My two cents:
As a buyer who's currently priced out of the western Fairfax- eastern Loudon market, my plan is to sit on the fence until spring. I find it very hard to believe that a townhouse ANYWHERE is worth as much as today's asking prices. This opinion is based on common sense as well as the fact that prices are historically inflated along with the price-to-rent ratio.

My wife and I would love to move to South Riding, where there seem to be a million townhomes for sale (many of which were bought by "investors" in the past 2-3 years). I see a huge spread of asking prices in one particular part of the neighborhood, between $360K to $430K for about 20 virtually similar townhomes. If these homes haven't sold in the spring, I may do this: offer each seller enough to break even (based on the sale price in the Post). If someone wants to sell badly enough they'll take the offer and I'll have a townhome for $300K or less. If not I'll rent a place there for $1700.
I believe speculators have inflated this market, and the huge number of "never lived in" condos, townhomes, and homes currently for sale is testimony.

[tarp]

The homes on the outskirts (Haymarket, South Riding, WV Panhandle, etc.) will probably depreciate but homes in more desirable locations will probably continue to appreciate. Remember that right now it's the onset of Fall and Winter and we won't know for sure until next spring. I doubt anyone who bought in 2005 near major employment centers of NoVA will experience any losses. We are going to be getting more jobs and more demand in the near future.

[VT Hokie 2007]

jmark, I agree with you 100%--no townhome should be worth as much as what some of these places are selling for. In fact, I'll NEVER understand how a townhome with no yard can sell for equal or greater amount than a home of equal size with land. It's illogical, but that's what we appraisers work with all the time--especially from pushy bankers desperate to make a buck.

[tarp]

It's not just the size that is a factor. A luxury townhome with granite countertops, ceramic tile and hardwood floors, crown molding, etc. will easily appraise for more than a single family home nearby of the same square footage with none of those upgrades and perhaps less curb appeal. Remember, houses are only worth what people are willing to pay for them, and if the townhouse is more appealing than the single family home, then it will command the top dollar.

I live in a townhouse community in Fairfax with townhouses worth between 475k to 550k. Right across the highway there is a single family community with 0.5 acre lots and some of those houses are barely worth 600k. Why? They are 1980's built, older style split-levels or ramblers and the modern, open floorplans of these townhouses must be in high enough demand that the single family homes are only slightly more expensive.

[VT Hokie 2007]

tarp, you're right. Let me clarify--it never ceases to amaze me how a townhome and a single family residence of relatively equal amenities, utility, functionality, and geography can sell for radically different prices. Market value, as you suggest, is whatever the market will bear, and yet my own personal taste is so pro-land that I can't understand why people would pay $1 million for some townhomes that offer less utility and functionality than the home with land down the street that is selling for $800,000. There are legitimate reasons, I suppose, I just can't grasp it.

[tarp]

Yeah, I agree with you there.

I personally would hate living in my townhouse if it weren't for the fact that I can drive 15 minutes and be at my father's home with 1.5 acres of land in Annandale, and a full sized two-bay detached garage with automotive lift where I can work on my car. My father also has a huge tomato field with over 80 plants. That's what I call a real family homestead.

[Need_affordable_home]

Originally Posted by VT Hokie 2007

tarp, you're right. Let me clarify--it never ceases to amaze me how a townhome and a single family residence of relatively equal amenities, utility, functionality, and geography can sell for radically different prices. Market value, as you suggest, is whatever the market will bear, and yet my own personal taste is so pro-land that I can't understand why people would pay $1 million for some townhomes that offer less utility and functionality than the home with land down the street that is selling for $800,000. There are legitimate reasons, I suppose, I just can't grasp it.

Hello sir, good question! Why some houses cost so much more is a mystery! I have seen the friend's neighboor's house be appraised for more than another house next door and the more valuable house was smaller! He said its because of the corner lot causing insurance to be higher because of some nonsense of having an increased chance of a car driving into the house since the lot is exposed. There are all kinds of crazy reasons why a lesser house or townhouse would be "worth" more.

As for that $1m townhouse, is the neighbor better? Did some crime occur in the $800k house area? Is that neighbor next to a mobile park or downscale neighbor? Are those $800k houses expensive to maintain? Do the $1m townhouses have a location advantage? Are they just asking too much? Many other reasons.

I have neighboors with houses "worth" more than mine even though we have a bigger and better lot and our house is as good. I can come up with one reason, one of my neighboors is across from a small pond. This alone shouldnt account for the big difference though. Id never pay that much more! When I buy a house, I wont be concerned with petty reasons and pay more for less house. Ill buy the best house that is not in a problem area or has any real problems for the lowest price.

[hairmetal4ever]

Originally Posted by VT Hokie 2007

Look, the "bubble" in Northern Virginia real estate will not burst. Home prices will increase at slower rates over the next few years (0-3% rather than 8%), but so long as the unemployment rate remains next to zero and wages remain high, the "bubble" will not burst. It's a simple formula of supply and demand and demand for housing has not been exhausted. A real estate bubble bursting would show a distinct and rapid decline in real estate prices and Northern Virginia isn't even close to that.

As someone with an economics background that makes sense to me-BUT:

Won't demand begin to decrease once prices reach the point that people just CAN'T buy and choose to either rent (most likely) or leave the area (unlikely) instead, therefore driving down prices?

[jmarkd]

Won't demand begin to decrease once prices reach the point that people just CAN'T buy and choose to either rent (most likely) or leave the area (unlikely) instead, therefore driving down prices?

I am either going to rent another year or leave the area.
The elephant in the room that isn't considered by you or Hokie is that a lot of the homes in NOVA--particularly condos--are not primary residences but "investment properties" held by speculators. So it's not a tight market where supply equals demand--one reason the rent-vs-own ratio is WAY out of whack (i.e. I rent a new 3BR condo in Fairfax for $1600/mo., landlord paid $420K in Dec. 2005).