Home Buying & Selling
Major Price Declines Expected in Washington, DC Area This Year
Major price declines are expected this year in the Washington, DC metropolitan area. Why? The supply demand curve continues to weaken. January’s weak sales were sales were NOT an anomaly. Rather, weak sales continued into February.
Meanwhile the inventory in the Washington area is much higher then last year at this time. In Montgomery County, MD, in February 2007 inventory stood at 3736, but in 2008 that number had increased to a bloated 5722 an increase of over 50%.
In the Washington, DC area, in February there were 34,978 housing units available through the MRIS . This includes Washington, DC, Montgomery County, Prince George’s County, Arlington, County, Fairfax County, Fairfax City, Alexandria City, Prince William’s County, Loudoun County, Manasses City, and Manasses Park City. In these jurisdictions sales totaled a measly 2781. This represents a 12.6 months supply of housing units. The number include condos and single family residences from the MRIS. According to the knowledgeable Calculated Risk “Usually 6 to 8 months of inventory starts causing pricing problems, and over 8 months a significant problem.” By ‘pricing problems’ , Calculated Risk means declining prices. Washington, DC area is at a 12.6 months of supply (well above the ’significant problems’ 8 month threshold) . Expect major price declines in the Washington, DC area this year. In 2008, expected nominal price declines should range between 7% - 16% in most part parts of the Washington, DC area.
Some areas have of a much larger months of supply then others. Prince George’s County has an astonishing 23 months supply, whereas Washington, DC has an elevated 8.6 months supply.
For more numbers please go to MRIS Market Statistics .
The Washington area is not recovering from the housing decline. Prices continue to fall. For real estate, this spring’s real estate season will not be a recovery time in the DC area. Housing busts usually last many, many years. We still have many, many months to go before bottom in the Washington, DC area.
First time buyers - crushed by interest payments
As the number of buy-to-let mortgages have exploded, the first time buyer has gradually faded away. It is not hard to see why. According to data from the Council of Mortgage Lenders, a first time buyer who wants to “get on that ladder” today will need to fork out around 21 percent of their income on interest payments.
First time buyer income multiples are also way up. In fact, this ratio is now approaching 3.5; up from 2.5 back in 2002.
However, here is a very curious thing. The Council of Mortgage lenders also produce data on the average income of first time buyers. If this data is compared to average economy-wide earnings (including bonuses), we see that that the first time buyers have enjoyed faster income growth than the rest of us. The divergence is large; as of November 2007, the differential was 14 percent.
There are two possible explanations for this deviation. Either, there has been a shift in the occupational profile of people who become first time buyers. Instead of bus drivers and nurses, first time buyers are now accountants and lawyers. Alternatively, first time buyers have been inflating their incomes.
This little issue about the veracity of income declarations hasn’t limited the generousity of banks. Since 2002, the average size of a first time buyer mortgage has almost doubled; from around £60,000 to almost £120,000.
Taking the four charts together, this looks like a nasty brew for the banks. First time buyers are beaten down by interest payments, their mortgages are huge multiples of their income, and they probably exaggerated their earnings anyway. Despite the growing evidence of first time buyers struggling, banks have simply increased the size of mortgages.
That is a recipe for a huge increase in mortgage defaults.
help a buy-to-let friend
Over the last week or so, this blog has been trying to clarify the true nature of the buy-to-let housing scam.
However, this blog simply doesn’t get enough buy-to-let readers. So if you know anyone considering taking the road to financial ruin, please send them the following link:
http://ukhousebubble.blogspot.com
Friends don’t let their friends buy overpriced apartments.
Buy-to-let distorts housing construction
Between 2001 and 2006, the UK added almost a million dwellings to the housing stock. At the same time, it has become increasingly difficult for first time buyers to enter the market, while lending standards for buy-to-let speculators have become increasingly lax. With that kind of perverse lending criteria, strange things are bound to happen.
The growth of buy-to-let has been a major driver behind housing construction. To see why, first take a look at how the stock of rental properties have changed in the last ten years.
(Click on the chart for a larger version)
As the chart suggests, long term trends in private rentals have tended to be rather static. Back in 1981, there were around 2.4 million privately rented homes. Ten years later, the number had fallen to 2.1 million. The number remained broadly stable, until 2001, when the number suddenly begin to increase. In 2006, the number was almost three million. Clearly, a lot more people are offering houses for rent these days, but where did all these new rental properties come from?
This second chart provides some of the answer. It focuses on the aggregate changes in the housing stock from 2001 to 2006. The four categories of houses are represented; a) owner-occupied, b) local authority rentals, c) housing associations, and d) private rentals.
(Click on the chart for a larger version)
Changes in owner occupation and local authority sales almost cancel each other out. Local authorities have sold almost a 982 thousand homes, while owner-occupation has increased by 839 thousand. Since a local authority sale has to be first rented out to the buyer, the vast majority of council house sales have initially transferred over into the owner-occupied category.
The remaining two categories - housing association and private rentals - more or less add up to the total change in dwellings. At least half the increase in new dwellings is due to private rentals, i.e. buy-to-let.
Obviously, house sales are churning between these four categories. Many new constructions were sold to owner occupiers, while many buy-to-let investors bought old houses. Nevertheless, the growth of buy-to-let investors has been one of the key drivers behind demand. Behind the investors, we find the banks, who offered lots of easy money to buy-to-let investors, which in turn, provided the financing for this building boom.
What are these new homes and where can they be found? These are the thousands of undersized apartments that now blight every major city centre in the UK. They are poorly constructed, overpriced and offer negative cash flow for any investor stupid enough to buy one.
Was this the kind of building boom the country needed? Of course not, but the housing market is a morass of perverse incentives. A low risk first time buyer wishing to buy a single home can no get a mortgage, while an investor leveraging themselves to the hilt can get any number of mortgages. Therefore, tt should surprise no one that this country ended up with a huge stock of overvalued appartments bought by an army of naive investors.
Realtors prepair for new rules to lie to buyers
Hat tip to patrick.net on this article in the Washington Post today about new rules that the realtors wrote for themselves that allow relisting after 90 days. Basically if you had a house listed that is a dud and way over priced, needs work, etc instead of showing the days on market and drops in price, every 90 days we will see a fresh new “listing”. The idea is to make the house look new and jump it up on searches.
Personally, I can understand how there are some reasons for this, ie it has been sitting for months without a showing and needs work. This will allow them to take it off and get it ready for sale. But lets be realistic here. This is about the failures of the realtors to sell a home and properly advise sellers of market conditions. One thing I think this will do is encourage sellers to fire their Realtor more quickly. The days of just listing it on MLS and hoping for the best are gone, they will actually need to show value to customers.
The part that really bothers me is that is will encourage more appriasal fraud. Many buyers are already suspicious because of this run-up. They are going to be even more hesitant to buy if they do not consider something to be a out of the ball park deal.
From the Post:
“As an appraiser, I like it,” Bradley said of the change. She said she has seen 10 sales fall through in the past six months because lenders would not offer loans at the terms the buyers needed when they saw the patterns of slow sales and dropping prices.
“So many lenders are requiring [reporting of] days on market. When they see 233 days, they kind of freak out,” she said.
If the lenders don’t see those long times before a sale, they won’t call her for clarification about those properties, which she said is “more work on our part.”
“It’s a game we play with underwriters, too,” she said. “We all have to do our jobs and make things go through.”
The other thing this does is help preserve the Buyers Agent. Realtors in general are afraid of the internet, it is a mixed blessing for them. Basically they are worried that people are starting to view the “value” of the Realtor as Americans do the Travel Agent. Why do I really need this person again? That is not to say that everyone should try and buy a house yourself. Most folks are probably better off with someone to help them especially the first time buyers. But again they are looking to get a deal done most of the time and they get paid more if you overbuy.
Debra Leafty, owner of Leafty Appraisals in Gaithersburg, said the change makes hiring a buyer’s agent more important; the agent can find the full history of listings.
Because the history is not erased, Leafty said, she doesn’t think the new rule will change bidding patterns much. “People are going to still look that up and see you’re desperate,” she said.
And she wonders how many people will take their houses off the market anyway. “If it’s vacant, you really can’t afford to take it off for three months. You’re still making payments.”
So basically the rules have changed and even more the old adage of “let the buyer beware” holds true especially in the game that is real estate.
Now over a million buy-to-let mortgages
(Click on chart for a larger version)
Buy to let investors will bring the UK housing market crashing down. These so-called investors are out of control. Driven by unrealistic expectations of double digit capital appreciation, investors have dived in and bought houses with reckless abandon.
Last week, the council of mortgage lenders announced that as of December 2007, lenders had originated over one million buy-to-let mortgages. However, this number almost certainly understates the true level of small time property speculation. Many buy-to-let mortgages were obtained fraudulently, as investors masqueraded as residential home buyers.
In the last two years alone, banks and building societies have originated over 337,000 of these loan products. Buy-to-let investors used those loans to buy rental properties at the top of the market and at a time when rental yields were at an all time low. With the economy slowing, these overpriced properties are prime candidates for being fast-tracked into repossession.
(click on chart for a larger version)
Back in the mid-90s, the buy-to-let mortgages accounted for a negligible share of the market. Today, it accounts for almost 9 percent of all outstanding mortgages. In fact, buy-to-let investors now rivals first time buyers as a source of housing demand. Last year, banks issued 192,000 buy-to-let loans compared to 357,000 loans for first time buyers.
(Click on chart for a larger version)
However, the number of buy to let mortgages in arrears is also rising rapidly, albeit from a somewhat low base. This will be the number to watch in the future. The credit crunch has made banks increasingly wary of these small time speculators. Many banks are now pulling back, and as they do, prices are beginning to soften. Already, the Halifax has reported that house prices began falling last July and are now down almost five percent compared to the peak. As prices fall, many buy-to-let investors will drift into negative equity territory and as they do, default rates will rise.
Already, around 1,200 buy-to-let properties have been repossessed, while around 8,000 were in arrears of 3 months. These are a small numbers compared to the total stock of buy-to-let investments. However, both buy-to-let repossessions and arrears are rising at explosive rates and certainly fast enough to bring the whole rotten trade down with a crash.