Interesting Article on the Housing Market

I was reading an article in the economist about renting and buying. The article made a compelling argument that renting is much cheaper than buying at the present time.

 

http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37631.asp

I live in Reston (Fairfax county, 20% increase for 4 years running), and I recently bought a tiny, 30-year old townhouse with a 30-year mortgage instead of an ARM because if the interest rates are raised and the bubble bursts, at least I can stay in my crappy house until I lose my job.

Anyway, this guy believes there is a P/E ratio for a house which is very simple: can you rent your house for more than your mortgage? Right now the answer for me would be... maybe... which means I may be in trouble.

Quite simply, would someone pay your mortgage payment to rent your house. I think that the local DC market has falling rental prices (no demand) to the point that many apartment complexes are turning into Condos for purchase. I don't think there is a bubble (yet) but if it keeps going at 25% for another year or two people will be hurting.

Everyone must also consider that the current financial growth has been based on consumer confidence, confidence from refinancing homes and buying consumer goods. All those ARMS with increasing interest rates should scare people.

 

I ran numbers until I my fingers fell off last summer, and when you look at all the costs and savings from owning (including the equity and tax shield) renting right now in the Courthouse/Clarendon area of Northern Virginia was cheaper by anywhere from $150-$300 per month even if you owned the home for as long as seven years.

Only by looking at nutso stuff like "what if I take a 15-year Fixed Rate and pay more than the amortized payment each month" could I even get close -- and then literally every free cent I had was tied up in the house.

Since I couldn't buy something I would want to hold for 20 years I decided to keep renting. Rents are totally upside down right now and there are some decent deals.

 

Yeah man........... My kid already mastered "Basics in Looting"

 

From the article that Mel B posted.......... this here about the bubble.

"It will begin to occur, real estate agents say, only when people decide that
a mansion in Fort Wayne is more appealing than a small apartment in New York or San Francisco."



That's why I think large cities are safe....... (well....... at least I hope so....)

I see more and more college age kids just moving here in Chicago in masses. There are buyers out there.

Rising interest rates could hurt though.

 

But in DC you can start by attracting the urban 20-something market, and then build the income and eventually the schools. I'd certainly look at some land in Anacostia as a good investment at this point (but I wouldn't go actually moving in yet).

 

Also, DC has the most liberal charter school law around. Within a couple more years, it'll be simple: you don't like your kid's school? pick another one.

 

No, I agree. Of course with DC's steady supply of young people flowing in, there'll be constant replacements for the families moving out. You build the right type of housing (condos and small townhouses) and you'll still have a promising area of growth even if the schools never improve.

 

I bought a home in an emerging area of the south side near hyde park a couple years ago. Within 2 years, comparing what I paid and comps to sales, the value has jumped about 15% each year, which is great.

This was risky as the public schools in the area awful. Also, there was the assumption that the booming north side would eventually spill over to the near west and south sides. I'm thinking of "flipping" this investment and moving to the next place, but I can't go a block without seeing new developments. I do worry that the gains are going to be lost on overdevelopment, especially if there is a limit of people that will move to an area with schools that aren't going to improve at the rate the housing values are.

 

Brian.......... I think that you will just have to do your homework a little more carefully. Some areas are already extremely overdeveloped. Additionally, some developers are not building anything close to quality right now so you will have to watch out for those kinds of places. Koenig & Strey and Builders Design group come to mind.

About the schools.......... that's a tough one. I just don't see public schooling getting any better anytime soon. Especially with all the budget cuts on the way.

Regardless, congrats on your wise investment!

 

In regards to school quality, there is a somewhat disturbing trend in the bay area (or at least in the silicon valley area from what I hear) where parents are sending their kids to public schools in the better neighborhoods by providing a fake address.

My friend bought a house in a new development with some new high tech high school nearby and he told me that he had tons of people knocking on his door, asking him if he was going to rent out the room above his garage.

We bought our first house from a family that got caught sending their daughter to a public school in Los Altos with a fake address. Apparently, the school sends people to check out each address and wants you to produce bills with your name on them. After they got caught they had to either take their daughter out of that school or move to Los Altos. Fortunately for my family, they chose the latter.

The school district in Cupertino allegedly had so many students that didn't belong there, that faculty members were following students home to see if they really lived in the area. (I heard this tidbit from my friend who heard it from a coworker so it might not be true)

 

Here's another take that points out some technical similarities between the current housing market and the NASDAQ bubble. His take is not at all cheerful.

 

Well, I've been assisting a few friends in looking for places in and around DC (Capitol Hill, Brookland, Columbia Heights, Takoma Park MD, and Hyattsville areas). Things are abso-freeking-lutely insane. People are offering to buy houses left and right before they go to market, shortcutting the bidding wars. A crappy house down the block from me (3 bed, 1 bath needing lots of work) went for sale at $415K and sold for $510K on the first day. It's absolutely nutty, I can't say that enough. A good friend on Capitol Hill just turned over her shoe box for $450K in a premarket buy. She paid $175K two years ago and did nothing but refinish the floors.

And sorry to just throw this in here randomly, but I think that you are misjudging the market in DC proper, Sachin. I am an active member of a church on Capitol Hill, have been for a decade. It's a great place to learn about the families moving into the area, and the place is a breeding ground these days. More families that we've ever seen. Mothers on the Hill is completely booming, and splinter groups are forming. I think your suburban flight anecdote is not realistic to what I've seen.

Further, the DC area is nearly recession proof at this stage. The war and terrorism economy is thriving. There are 25K families expected to enter house market in DC this summer and fall. It's going to keep growing and folks will keep pouring in. Even if the schools are only marginally better than the North Korean system, my ear to the ground says that the parents moving to the city are finding ways around that through Charters, etc.

Now, on the flipside, if China floats the Yuan, we're screwed. That will certainly ruin all manner of interest rates and we'll be looking at deeds being handed out with your Powerball tickets.

Ain't I cheerful.
Tim

 

We're about to get into the market, and I'm getting more and more convinced that this is going to come crashing down. Honestly, I have no idea what to do. We're at the point where we'd be completely reaching for a 2 bedroom condo that we may not be able to ever move up from. As someone who's from the DC area, it's kind of depressing.

 

Footer, I'm in much the same boat, but at this point I've said to myself screw it, I'll keep renting.

I took a quick look at craigslist yesterday, and it looks like rents have gone down some from last fall when I signed my lease (unless the majority of the places listed on craigslist are now complete sh!te). I figure

Paying into the 400s for a one-bedroom condo anywhere remotely within walking distance of a Metro just seems ridiculously expensive. It just seems like such an expensive investment to make considering that no one really knows what the market is going to do. Some say it's strong and prices will remain high (and likely continue to grow), while others say that it's long overdue to come tumbling down.

I agree with your description of the entire scene as depressing, and I'd add the words "very confusing" to it, too.

 

Surest sign that the DC area isn't recession proof is consumer sentiment that it is.

Especially in an area such as DC, it's all about the economics. Home price growth is unsustainable while household income remains static. Throw in rising mortgage rates, and it won't matter that 25k families plan to move to the area. They simply won't be able to afford to buy any property. They will rent. Right now, it's cheaper to rent anyway.

 

I'm not certain of all the schools that are in play, but the ages groups at the church are expanding more than ever in the 5-10 range. We have always had a ton of infants coming in and out, getting the baptism, then moving on. But the growth area seems to be in the children and even teens. I don't pay that much attention to which schools are popular, as we have no kids and it never really interests me to chat about schools.

One little point of clarification, the church itself is not really growing that much. We're a small little protestant church that is completely overshadowed by the more popular ones like St. Marks Episcopal and Capitol Hill Baptist. Hence, our growth in children is a pretty significant indicator for the population around the Hill. Could be that the parents are simply filthy rich, but that only explains part.

As far as under valued markets, I'd call Capitol Hill proper to be potentially over valued. Where things have been taking off along this under-developed vein is on the fringes of the Hill, around the fringes of Brookland and Rhode Island Ave and on into the Hyattsville-centered area of PG county. What has yet to happen, from what I've seen is for the non-metro areas of NE DC to really cut loose. But with the NY Ave station coming on line recently we'll see some positive ripple effect in the nearby severly under valued areas up around South Dakota Avenue and east of the cathedral towards Capitol Heights.

By the way, this is just my opinion, but if anyone were looking for indicators of a bubble, I'd recommend keeping a very close eye on the areas on the fringes of Capitol Hill not near to the metro stops. With their relatively high crime rates, poor transportation, and relatively high prices, this area could get soft quicker than others. So far, nothing yet. Eveyone wants to believe that their block or neighborhood will withstand a blip better than others, but we looked really hard at these areas before we bought elsewhere a few years ago and what I saw and have seen tells me they'll fold very quickly.

Cheers,
Tim

 

Well, we've gotten pre-qualified. Now we just have to find a place

EDIT: Oh yeah, and pray that the bottom doesn't fall out of the market once we buy.