Northern Virginia Housing Market Update:

I've mostly given up blogging about the (now-deflating) housing bubble, because the housing bubble blog and its commenters do such a fantastic job that there isn't much left to say. But every once in a while I come across something interesting enough to share.

22201 has perhaps been the hottest zip code in Northern Virginia, or at least in Arlington, during the bubble. It's the home of the hippest (and most improved) neighborhood, Clarendon, not to mention GMU Law School. And the top of the market has suddenly completely dried up. According to data from this website (a must-go-to for anyone in the real estate market in No. Va.), in August 2006, there were twenty-five condos for sale for more than $700,000 in 22201. Meanwhile, there was only one sale, in the 700-800K range. Also in August, there were twenty-six single family houses for sale in 22201 for over $1,000,000. Meanwhile, only two sold. Even these sales only closed in August, and were likely agreed to in June or July, when the market was more robust. OTOH, more moderately priced condos and homes are selling at a much better rate. In the $300-350K range, fourteen condos sold, with sixteen on the market.

Conclusion: We are in the classic first stage of a down market, with luxury condos and the highest-priced homes leading the way down.

Ted F (www):
That one $700k+ unit was in my building, and sold for 8% more than an identical unit on a lower floor did in April (not to mention more than 2.5 times what the sellers paid for it). It's also the mirror image of my unit's floor-plan, so I question (though am honored by) your characterization of it as luxurious.

The 22201 glut at the high price range is almost entirely because of two new buildings that are overpriced, The Monroe and The Joule, each of which is charging more than $500/square foot when units with better amenities and more parking that are closer to the Metro are selling for less than that. (Not to mention the fact that half the units of the Joule are going to smell like charcoal chicken at all hours.)
9.19.2006 12:39am
I'm curious, here in Chicago those numbers wouldn't be an indication of a deflating market, but just the end of the sales season. Generaly if you have a home for sale or an apartment for rent you're out of luck until May or June if you don't get an offer by the end of August. Do you have a year round market over in Virginia?
9.19.2006 12:55am
David Sucher (mail) (www):
"...classic first stage of a down market."

So now you are characterizing what everyone has said was an unprecedented housing bubble as something so ordinary that it has a "classic" form. That means that there is probably a recovery in sight. And that means that all the huffing and puffing about bubbles may be for nought.
9.19.2006 1:18am
ThirdCircuitLawyer (mail):
Prof Bernstein,

I don't know if you saw this article in the Times yesterday.
TO hear some people in the real estate industry tell it, one of the biggest problems with the housing market is what is being said about it in the news media.
Skip to next paragraph
Adam Palmer

Agents and industry executives say reporters, editors and news anchors are making a cooling market sound worse than it is. While the number of sales may have dropped from 2005 (which was a record-setting year, the end of a five-year run) and more homes stay on the market longer, real estate professionals note that sale prices in much of the country are still higher than they were a year ago.

Richard A. Smith, vice chairman and president of the Realogy Corporation, the nation's largest residential real estate broker, said there was a "constant flood of media that is so negative" that it was discouraging many potential buyers and sellers.
9.19.2006 1:56am
We're all doomed, doomed I say.
9.19.2006 2:15am
BGates (mail) (www):
David S, who said something needed to be ordinary to have a classic form? The NASDAQ quintupled over a five year period. That was unprecedented. Then, in classic bubble fashion, volume dried up and the price collapsed. If that indicates to you that a recovery is in sight, you should be able to clean up in the options market, because no one else thinks so.

ThirdCircuit, real estate prices have doubled in the past 5 years in many markets, and incomes have not. If the papers don't report that, isn't it still true?
9.19.2006 4:22am
I don't think the papers are driving this. Although there are some speculators in the market, most people just want a place to live. So we look at our salaries, what we would pay in rent, and what we would have to pay to buy. When renting looks like a much better deal, we don't even shop for a place to buy.

At least that is what sensible people do. I'm not sure how to describe the behavior of all those people who bought telecom stocks at the peak and thought they would retire by 35, but I imagine that they are more sensitive to the news. It doesn't seem to do them all that much good, though, because they always seem to end up losing money.
9.19.2006 6:23am
davod (mail):
I tend to the notion that the media makes things worse. I watched a finance show last week and the commentators must have been taking acting lessons. Their phrases for the real estate market were straight out of a description of a natural disaster. The Chicken Little syndrome. Recently all the news programs have been doing the same. This has to have an effect on the market.
9.19.2006 7:06am
Some Guy (mail):
Speculators and idiots.

Speculators drove up condo prices, I'm glad that a lot of them are about to take it in the shorts. Hopefully, the glut in condos coming online this Fall will make mid-end real estate more affordable in DC.

Idiots also are to blame. What kind of moron says yes to an interest only loan? The kind that DESERVES to be bankrupt or foreclosed on. We'll see how the idiots play out.

That said, 3BR houses are still in the $1-$2M range down by me in Arlington Heights.
9.19.2006 9:06am
Al Maviva (mail) (www):
My understanding is the foreclosures in the D.C. metro area have averaged 1 in 66 over the last five years, and in the last three months have doubled. I have a friend who is a town councillor in a local relatively posh town. He has to evaluate tax rolls on occasion and says the rate of tax liens about to attach houses in nice neighborhoods in his town is the highest he has even seen, by an order of magnitude. You think the media is inventing that bubble bursting noise, Third Circuit? It sounds to me like a lot of people gambled with their house purchases and lost, and now can't afford the situation they are in. - this in an economy that has been pretty kind to the class of people able to buy decent houses in this market. Evidently, the greater fool theory has its limits.
9.19.2006 9:09am
DavidBernstein (mail):
Ted, the data also show the average condo price in Arlington down about 10% year over year in Arlington, and, while I don't have April vs. August data handy, I'm quite confident that prices haven't been rising in that period, though any given building or unit can be an exception. In 22314, someone managed to sell a rare 3,000 sq ft townhouse for asking price, $684K, about the same as they would have gotten last year at this time. Meanwhile, the smaller units in the same development have plunged about 15% in that time. Conclusion: someone really wanted that particular size unit.
9.19.2006 9:28am
Al Mavia,

Your understanding is completely wrong. I have it on good authority that foreclosures have dropped tenfold since 1996, and I have a friend in a very posh town who sees the tax roles and reports that tax liens are at an all time low!

Funny how maleable the facts can be when you don't provide any spectifics and post anonymously, isn't it?
9.19.2006 9:53am
Ted F (www):
David, 22201 data is too chunky to make meaningful year-to-year comparisons in average price. The average is at least as influenced by all the cheap under-$300k studios that were sold in August. If three million-dollar homes had been sold instead of two, the difference would essentially disappear.

Arlington County tax records have a marvelous feature to allow one to see home prices in the same "neighborhood" (which can be as small as a building), which can permit closer unit-to-unit comparisons over time.
9.19.2006 11:11am
Here is a very rough/simplified example of why (unfounded appreciation assumptions), once housing starts to fall, it will fall until rental/ownership costs are again in equilibrium:

2001 $400,000 home $3,000 per month to own vs.$3,000 to rent
Coin flip between renting and buying

2002 $500,000 same home $3,750 to own vs.$3,000 to rent
$9,000 extra per year to buy, but buyer assumes future
appreciation of >5% per year ($25,000) decides to buy

2003 $600,000 same home $4,500 to own vs.$3,000 to rent
$18,000 extra per year to buy, but buyer assumes future
appreciation of >5% per year ($30,000) decides to buy

2004 $700,000 same home $5,250 to own vs.$3,000 to rent
$27,000 extra per year to buy, but buyer assumes future
appreciation of >5% per year ($35,000) decides to buy

2005 $800,000 same home $6,000 to own vs.$3,000 to rent
$35,000 extra per year to buy, but buyer assumes future
appreciation of >5% per year ($40,000) decides to buy

2006 $800,000 same home $6,000 to own vs.$3,000 to rent
$35,000 extra per year to buy, but the future
appreciation rationale has disappeared.

Do you see the problem? Not only has the justification for an $800,000 price disappeared (5% appreciation was never guaranteed), but so has the justification for $700,000, $600,000 and $500,000 prices. Once the accepted wisdom is to assume zero appreciation, who will buy above $400,000.

This is very basic and ignores taxes, inflation, transaction costs, and etc. but I think deserves a rebuttal by those who foresee a soft landing.
9.19.2006 11:48am
I've mostly given up blogging about the (now-deflating) housing bubble,

Because law professors should stay in their lane and talk about law, and not about real estate? =)
9.19.2006 11:57am
Some Guy: "What kind of moron says yes to an interest only loan?"

All kinds. Highly liquid investors who don't care much about their credit rating and understand that losing $15 or $30k on an investment property is no different than losing it on a highly volatile investment in any other market. Mostly though, it's young families who can't afford the 30-year amortized payments on a $400,000 house but want a yard for the kids and a decent commute anyway. Maybe you consider them dumb--even though they're confident they'll make more money in the future and they're aware they can refinance to a 30-year at a later point--but I tend to think of them as American Dreamers trying to find somewhere to raise the kids. You can scoff if it makes you feel superior, though. After all, there's the off chance they get unlucky, get laid off, and get foreclosed on. And isn't that a hoot? Lord knows I get a kick thinking about those stupid suckers at Enron who decided to invest in the employee pension plan--and the morons who put 20 years into Ford hoping for a pension! Ha! Ha!
9.19.2006 2:17pm
Connie (mail):
Apparently your link broke thehousingbubbleblog . . .
9.19.2006 2:53pm
sksmith (mail):
Why would you conclude from your personal experience in one zip code that the country is going in a certain direction (particularly as an educated social scientist who understands the fallacy of making such conclusions based on personal experience)? Besides, I could have told you this four months ago. There is a house on my block in Kansas City that hasn't sold all summer.

9.19.2006 2:57pm
Truth Seeker:
2001 $400,000 home $3,000 per month to own vs.$3,000 to rent
Coin flip between renting and buying

Coin flip? Let's see, by buying, in 20 years you'd own the house free and clear and it would probably be worth a million. By renting, in 20 years you'd have a big bag of rent receipts and probably be paying 5 times as much rent.

There's no comparison, it is utterly fooling to rent.
9.19.2006 3:11pm
Truth Seeker:
"fooling" should be "foolish"

In 30 years since I moved out of my parents' house I have paid a total $1350 in rent. Every house I've owned (8 of them) sold for more than I paid.
9.19.2006 3:16pm
Perseus (mail):
What kind of moron says yes to an interest only loan?

All too often, people who fail to do their due diligence and in typical American fashion, want instant gratification and feel entitled to the American dream of homeownership.

People need to learn: Don't Buy Stuff You CANNOT Afford.
9.19.2006 4:41pm

Even these sales only closed in August, and were likely agreed to in June or July, when the market was more robust.

Who doesn't remember the great housing boom of . . . July?
9.19.2006 4:42pm
Christopher Fotos (mail) (www):
Ted, the data also show the average condo price in Arlington down about 10% year over year in Arlington, and, while I don't have April vs. August data handy, I'm quite confident that prices haven't been rising in that period, though any given building or unit can be an exception.

A 10% decline year-over-year isn't the collapse of a bubble. Or, if it is, bubbles are a lot more benign than I was told in Econ 101.

No personal offense but in my opinion, this has been the most overhyped series of posts at Volokh.
9.19.2006 5:24pm
DC Lawyer (mail):
As another Arlingtonian, it's clear to me that the original post and some of the responses are too facile. What you are seeing is not a decline in price.

You are seeing a lot of condos coming on-line at once, a temporary supply bubble. In 22205, housing prices continue to climb. My own house value has doubled since 2001. Over the county as a whole, you are seeing (largely due to a greater number of houses offered for sale) less bidding up and longer periods on the market. You are not seeing declining prices for comparable properties, nor will you.

We expect 1.5 million people to move into Northern Virginia over the next twenty years, and they are NOT all going to want to live out in the sprawl with hideous commutes due to poor land use planning and inadequate transportation infrastructure.

Sit tight Arlington. The bubble is no where near burst; the market has merely slowed a little.
9.19.2006 6:10pm
DavidBernstein (mail):
1.5 million people aren't moving anywhere if they can't afford houses there. Arlington will likely hold it's own better than other areas of No. Va., but it will still go down. Comparable houses have indeed declined in value, I've already seem some identical (not just comparable) ones selling for less than the previous sale, and prices have retreated to at least early 2005 levels (which is still more than double early 2000 prices). I indeed see many houses now listing for less than the County assessment, which is usually conservative, and is based on mid-2005 prices. The 10% decline has occurred mostly in the last three months (prices dipped a bit last Fall, climbed back more than halfway in the Spring, and are now well below the lows of last Fall), which is rather extraordinary. Even the NASDAQ bubble, involving a much more liquid asset, and much more extreme bubbledom, took three years to unwind. Expect a decline in bubble markets in real terms of 30% or more (we already have about 15% in many markets, including inflation). Whether this comes about mostly by nominal price drops or mostly by gradual undermining of real prices by inflation, remains to be seen. But don't take my word for it, here's the data from the link I noted:
2006 2005 % Change
Total Sold Dollar Volume: $ 146,627,867 $ 199,721,549 - 26.58 %
Average Sold Price: $ 488,760 $ 535,447 - 8.72 %
Median Sold Price: $ 420,000 $ 490,000 - 14.29 %
Total Units Sold: 300 373 - 19.57 %
Average Days on Market: 62 19 226.32 %
Average List Price for Solds: $ 513,792 $ 541,217 - 5.07 %
Avg Sale Price as a percentage of Avg List Price: 95.13 % 98.93 %

That's August. Here's July:

2006 2005 % Change
Total Sold Dollar Volume: $ 148,231,309 $ 181,548,516 - 18.35 %
Average Sold Price: $ 523,786 $ 580,027 - 9.70 %
Median Sold Price: $ 465,000 $ 510,000 - 8.82 %
Total Units Sold: 283 313 - 9.58 %
Average Days on Market: 49 15 226.67 %
Average List Price for Solds: $ 549,365 $ 582,554 - 5.70 %
Avg Sale Price as a percentage of Avg List Price: 95.34 % 99.57 %

As you can see, average sold price has gone down from 580K in July '05, to 480K in Aug. '06. For that matter, average sold price was $618K as late as June '06. Some of the sudden decline is attributable to a changing mix of sales, but based on what I've seen, I think estimating a 10% nominal reduction in prices since the seems reasonable (even with regard to the mix of sales, that's partly a result of the top of the market drying up, which signals inevitably falling prices).
9.19.2006 6:34pm
DavidBernstein (mail):
P.S. Unlike many of the regulars at the Housingbubbleblog, I don't expect nominal prices to go down to pre-2000 levels, or anywhere near that, at least not in the D.C. area, in part because prices actually went down from 1989 to 1999, so some reversal was due.
9.19.2006 6:37pm
Truth Seeker -- when rents and mortgage payments are equal, it is foolish to rent. However, we're now at a stage in many markets where mortgage payments are more than double the rent on equivalent units. At that point, if appreciation dries up, there's no reason to buy.

And don't kid yourself that you build a lot of equity with those first years of mortgage payments. It takes a lot of time to start making significant payments on principal. If you're moving within 3-5 years, you'll often be in the hole after maintenance, property taxes, and realtor fees are factored in. It takes a lot of appreciation to bail you out.
9.19.2006 8:41pm
Ted F (www):
Truth Seeker, I'm an owner that thinks a lot of the bubble-talk is overblown, but you overstate your case.

As an owner, I'm throwing away $2200 in after-tax-deduction money every month on interest payments, taxes, and condo fees--I seriously doubt that you completely avoided "throwing away" money in interest and taxes in your home-ownership years. I also suffer opportunity costs from having hundreds of thousands of dollars of wealth tied up in home equity when it could be invested at 5% in CDs, or obtain higher expected returns in riskier investments. If, at the same time, my property value declines 20% over the next few years, I'd have been better off financially selling my place this summer and renting for $3000-$4000 a month. If I had been able to find a place I liked as much as my current home that I could rent for $3000-$4000/month, I might have done it.

Yes, I'm certainly better off because I bought instead of rented in 2001: my property appreciation over that time offsets what I spent in interest and taxes and fees. But that's only true because of a 50% appreciation in those five years, and I can't expect that level of appreciation over the next five years.
9.20.2006 4:17am
Richard Riley (mail):
Suburban Maryland data point - at least according to, my house near the newly redeveloped downtown Silver Spring stopped appreciating in mid-2005, but has kept about the same value for the last year. That jibes with my subjective perception of house prices there - stable at a historically high level, though not appreciating any more. In Montgomery County, my area is mid-market rather than high-market. I don't know what the prices are doing in expensive Chevy Chase and Bethesda.
9.20.2006 9:22am
Of course, lower prices are the natural result of rising interest rates. If one can afford a $4,000 per month mortgage, that buys more house at 4% than it does at 6%.

Using this calculator, and this historical average mortgage information, on July 1, 2005 a family making $120,000 per year with a $20K downpayment could afford a $2,800 mortgage, which at the then-prevailing interest rate of 5.53% would equal a $511,000 purchase price.

The same family, using the 6.78% mortgage rate prevailing on June 30, 2006, could afford a $450,000 house, a 12% reduction in purchasing power from the prior year. David's data shows actual reductions of less than would be expected solely by looking at reduced purchasing power based on interest rates.
9.20.2006 10:00am
Looking again at David's data, I don't want to overstate the case. It depends on which month you choose. I did this again for August:

5.82% (8/5/2005) results in $496K sale price

6.63% (8/4/2006) results in $457K sale price

which is only about an 8% reduction in purchasing power, consistent with the 8% reduction in average purchase prices reported by David's data.

In any case, the rising interest rates would appear to go a long way toward explaining the lower sale prices reported.
9.20.2006 10:11am
we're now at a stage in many markets where mortgage payments are more than double the rent on equivalent units.

Anecdotal, I know, but this is not true in my zip code in northern Virginia.
9.20.2006 12:47pm
9.20.2006 8:10pm
dave s (mail):
I live in 22201 (and I always thought 22203 was where the swells lived) and have seen houses sitting on the market for a long time for the last several months. A lot of this is a matter of shared expectations: if you think there will be 5% appreciation for the next ten years, you can stand to pay a lot more on your mortgage than you would pay in rent. If you think, as I do, that we have now reached a plateau at which we will stay for a long time, you will not want to pay much more than you would pay in rent - and houses will stay on the market for a very long time, and sell only for prices much lower than they fetch today.
9.22.2006 7:41pm