WSJ: "Beyond Auctions" Article on Buying Foreclosures

There's a fantastic article today online in the WSJ: "Beyond Auctions: Ways to Buy Foreclosed Homes."

It explains why there are actually very few bargains to be had in foreclosure auctions, and why buyers (especially first time buyers) need to instead focus on bank owned property (REO). There's a good list of do's and don'ts too. It goes on to say--and I find this to be true--that "Some of the banks will sit [on a property] until they hit their target number -- they may get 20, 30, 40 offers before they're ready to take one....Potential buyers should...put in a realistic bid. You can't expect to bid 50% of the asking price and hope to get it."

Of course there are tons of foreclosures in the Northern Virginia area as a whole, but painting the entire area with one brush stroke can be dangerous. Take a closer look at the foreclosure stats below.


















On the bottom, you can see where Washington, DC, falls compared to other major metropolitan areas. But even that average (about 88 per 10,000 homes) is misleading...Looking at the top part of the chart, I've broken it out by county. You can easily see that DC, Arlington, and Alexandria are a very different market than PG, Stafford, Loudoun, and PW. Are there parts of Arlington that have more foreclosures? Of course. But the moral of the story is to make your decisions based on your specific situation--where you want to live, what type of property you want, etc....and not by a perceived "bargains" of price or availability. You may be surprised at the details behind those "opportunities."

Read more: Blog Post - "I want to buy a foreclosure."

Data Source: GMU Center for Regional Analysis

Read more: Alexandria Real Estate News

Read more: Falls Church Real Estate News

2008 Regional Outlook: "Fundamentals Sound"

George Mason University has updated their 2008 Outlook for the Washington, DC, metro area. It’s fairly consistent with previous presentations (perhaps slightly more positive, in my opinion.) Here are the key findings:

• Local job market continues to be very strong, with Washington, DC, having the lowest unemployment rate of the largest 15 job markets (US average = 4.4%, DC = 3.1%.) (See slide 5.) As I have commented here before, the job market is a great indicator of the housing market to come—people go where the jobs are, and they need a place to live. Because this area doesn’t have particularly high vacancy rates in rentals, that translates into pressure on rents (thus providing an incentive for renters to buy), or more demand for homes.
• This area has significantly fewer foreclosures (as measured per 10,000 units) than most large metropolitan areas in Florida, California, and the rust belt. DC (22), Arlington (27), and Alexandria (34) have the fewest foreclosures of any local county. (See slide 13) Think about those numbers for a minute. For every 10,000 homes in the District, just 22 are in foreclosure. This is consistent with other posts I’ve made about this area having two different markets—close in neighborhoods versus outlying suburbs.
• Days on market has increased significantly. (However, this can easily be misinterpreted—see my post on “Some Sellers Get It—And Get It In 30 Days!” Total units sold have declined (duh). Total active listings have increased (again, duh.)
• Percentage change in inventories has slowed dramatically and is consistent with 2003 levels. (See slide 23). We still have quite a backlog to work through, but at least for now it doesn’t appear to be getting any worse.
• Outlook: “Fundamentals are sound, 2008 will be moderately better than 2007.” (And by “better,” of course, they mean better for sellers.) “Housing prices will be flat until at least Spring & will be a mixed story across the region—some jurisdictions will be negative and others showing increases.”

So in summary, all real estate is local, and the DC market is, all things considered, not a bad place to be right now.

(If you found this interesting, see my related post: When will the DC real estate market turnaround?)

When Will the DC Real Estate Market Turnaround?

March 22, 2008.

I'm just kidding, of course. I wish I had a crystal ball to be able to answer that directly. No one knows for sure, of course; it ranges from the NAHB's projection of 2008 (ever notice how industry projections are always six months from the date of the projection??) to this Barron's projection of 2011.

Lots of people are confident that this is part of a normal and predictable cycle. Everyone knows that real estate moves in 7 year cycles as in this article. Or maybe you believe in Hoyt's 18 year cycles, as described here. On the other hand, you can be confident this is part of the 50-60 year cycle, shown here. This one is my favorite: it's all aligned with the nodes of the moon, which means it's an 18-20 year cycle.

So there you have it: the market will turn in either 1, 3, 7, 18, 20, 50 or 60 years. Everyone all clear on that?

But when do you start counting the years? This article from May 2005 says that the bubble won't pop at all until 2009-1010. My point is simply that you can read predictions far and wide, and they're just that: predictions--but no consensus, at least not yet.

National projections don't mean much to an individual market though. In our case, the good news in this area is that the Washington, DC, area is often considered a contender to be the first to turn around (see article here) because of its extraordinarily strong job market and relative, i.e., long-term, housing shortage (see slide 38 of GMU study here.) and also my commentary here.

So is this a good time to buy? Maybe, maybe not. It depends on your particular situation. Buyers should think of the following criteria:

(1) Renting as an alternative: Do the financial analysis of rent-vs-buy using this calculator. Consider the mortgage interest and property tax deductions, the alternative use of funds (assuming you invest them, not spend them), and capital gains exclusion on sale.

(2) Stability: Is your financial situation stable for the next 3 years? e.g., Is your job secure? Are you expecting any life changes like marriage or children that might prompt a move? If you're not going to live in the property at least 3 years, it's nearly impossible to break even in this market due to transaction costs.

(3) Responsibility: Do you want the responsibility of owning a home? The maintenance headaches all become yours, but so do the benefits like stable payments (depending on your mortgage type), the ability to paint or remodel, permission to have a pet, getting away from your current neighbors, and building a "home" with furniture that you didn't have in college. (I moved 10 times in 10 years prior to buying my home--boy was I ready to not move again!)

Once a buyer has considered these points, it may make sense to at least start the process. Depending on which areas you are searching, you may find that the market is trending flat or even up. This is particularly true in areas that are close-in to major job markets (e.g., parts of Northwest DC and Arlington). It takes a buyer months to get to know a particular neighborhoods they're searching, and after that it gets easier to recognize a property that is a good value versus the other inventory--the trick is that you have to be ready to jump on it when you see it, and that takes some prep time.

If you're considering starting your search, contact me to discuss specifics on neighborhoods, and whether it makes sense to buy now or wait.

Q3 Trend Report - What are you waiting for?

The Metropolitan Regional Information System (MRIS, the group that runs the Multiple Listing Service) has released its Q3 Trends in Housing Report. It’s an interesting read. You can view the full 22 page report here.

Some highlights:

- Job Growth: Over the 12 months ending in August 2007, over 47,000 new positions were added-—5.8% above the 15 year average. Interestingly, all of the government job growth came from local governments, not Federal. The local unemployment rate dropped even further, to 3%, the lowest in the nation for any major metro area. Even more jobs are expected to be created in 2008.
- Residential housing market – “remains in an adjustment phase at 3rd quarter 2007, though there are signs of creeping back towards equilibrium….Average metro-wide prices in July and August were more than 4% above prices the same time last year…The average days on market has consistently declined since the beginning of the year.” This next part is critical: “But the gains are uneven, with desirable areas inside the Beltway showing strong price gains and shorter listings, while the reverse is generally happening as distance from Washington increases.”
- Outook: “By spring 2008 we expect that consistent demand (generated by steady job growth, net migration, and a rising immigrant population) and a decline in construction will stabilize pricing, leading to an uptick in sales activity, with improvement in market conditions appearing by summer.”

So what does this mean? A few points:

Not surprisingly, and consistent with other posts I’ve made, the job market is a huge driver of where the real estate market will ultimately head. More jobs = either a) more people moving to the area or b) higher salaries (more employers competing for the same employees), or some combination of both. People with higher salaries are more likely to buy, and people moving to the area need a place to live, whether it’s renting or buying. (More demand for rentals will translate into higher market rents, which will in turn make buying a more attractive option.) Either way, it's going to result in an uptick in housing. So if job growth is good, eventually the real estate market will follow.

Next, the point about uneven gains is clear to anyone who has been tracking specific neighborhoods in the past year. All those foreclosures and short sales you read about? The overwhelming majority of them are in the outlying suburbs – Herndon, Leesburg, Woodbridge, and similar areas.

But what about 1BR condos in 22201 (that includes Ballston & Clarendon)? So far in 2007, the average 1BR condo stayed on the market for 40 days. In January, the average 1BR condo in 22201 sold for $305,644. By August? $363,252. Granted it’s come down a bit since August, to $320,183 in October, but if you’re waiting for 1 BR condos to bottom out in the orange line corridor, you just may have missed it. (Side note - January was the lowest price of any month in that zip code in 2007, and not surprisingly, since fewer buyers means more negotiating leverage. Implication: This is a great time of year to get started with your search!)

My point isn’t that you should try to time the market down to the month, but rather to take a more macro view that the coming months are in fact a good time to buy. If you don't buy in a buyer's market, when should you buy? Never? I doubt you believe that or you wouldn't be reading this post.

This too, like any other buyer’s market, will eventually turn to a seller’s market. The tricky thing about changing markets is that you don't know when it changed until long after the fact. It's not like the Post will suddenly have a headline that reads "Real Estate Market Bottoms Out This Month." Think longer term, and if the circumstances of your life have you thinking you want to buy, pick the one or two neighborhoods that you're interested in and really dig into that data to see whether the micro trend reflects what you've been reading in the papers. Then make the "buy or wait" decision. You may find that what you "save" by waiting isn't a savings at all. (see rent vs buy calculator post here - this one has great options that aren't normally included that allow you to account for condo fees, tax brackets, and rate of return for the alternate use of your funds .) If you're thinking of buying in Woodbridge though, I'll save you the trouble: wait.

Data Source: MRIS. All data deemed reliable but not guaranteed.

How Low? It Depends...

Finally, a (mostly) balanced article from the WP: How Low Will It Go? Well, Where Do You Live?

Though the first half of the article (the 'above the fold' part) describes a Manassas homeowner who has lost $200K since buying last year, the article goes on to describe the stark differences between that Manassas market and the closer in areas which are seeing increases.

The Chicago Mercantile Exchange started trading a new instrument that is essentially a futures contract on the residential housing market. That index is predicting a 4% decline in the Washington area. Moody's Economy.com is predicting a 6-7% decline through the end of '08. But neither index makes a distinction by neighborhood, and as anyone who lives here can tell you, there is a world of difference between living in Manassas and living in Arlington.

The article also points to GMU's Center for Regional Analysis, which I've discussed several times in this blog, as well as my first-time home buyer classes, before. They think the national forecasters underestimate the strength of local employment, and they are predicting a 2% increase this year, then 4-5% in 2008. Who's right? Time will tell.

The Best "Rent vs. Buy" Calculator

Thanks, Mary Ellen, for sharing this cool link with me: One of the best Rent vs. Buy calculators I've seen, especially for the visually-oriented and "what if" type of people:

Rent vs. Buy Calculator

Check out the "Advanced Settings," especially on Buying, where you can enter such things as condo fees (count on at least $250-300) and costs of buying home (about 3% for closing costs is a good rule-of-thumb) and selling (count on 7-10%), maintenance costs, It even lets you enter the return on alternate investments and inflation rate, and the capital gains exclusion (see "Tax Benefits of Home Ownership" post). This is simply the most thorough calculator I've seen.

The only downside to this particular calculator is that it doesn't allow for different financing scenarios--say an ARM loan or interest only loan. (No, interest-only loans are not instruments of the devil; in fact for some borrowers it is a fantastic option. They've been abused quite a bit in the past few years in this area, and now there's an unreasonable backlash against the product.) Nonetheless, it's an excellent tool overall and includes many "hidden" costs of homeownership.

Of course, the breakeven point always depends on your assumptions, so what are some "reasonable" ones? Reasonableness is in the eye of the beholder, but a conservative estimate of property taxes in this area is 1%. Long-term appreciation rate is of course a huge driver; the long term average, according to the GMU study I've reference in previous posts, is 7%, though of course 2006 was much less than that. GMU estimated 2.2% appreciation in 2006, currently is predicting somewhere between 0-5% in 2007, and expects a return to the long term average of 7% by 2008-09.

Here is the NY Times article that accompanies the calculator. Interestingly, the article is an argument to rent over buying, which is the best option for lots of people. These types of articles paint the market with a broad brush, by necessity--they have a national audience. But if there's one thing everyone knows about real estate, it's location, location, location. All real estate, like politics, is local. Don't take someone's word for it that buying is the right answer for you--use your own assumptions and tools, like this one. But in my experience in this area, with rents and income levels being what they are in DC, combined with the long-term market view (if one were to believe the historical data and housing shortage projections, anyway), the numbers almost always add up to buying.

Buy Now or Wait?

That's the title of an article that will run in Express (the Washington Post's metro giveaway publication) this April as part of a special issue on the Spring real estate market. How do I know? Because I'm one of the real estate agents that will be quoted in the article.

So how did I answer that question? Of course, "buy!" Well, I am in sales, after all. Though I don't have a crystal ball, I do have solid arguments for buying now.

First, for anyone who already owns and is considering trading up (or down), now is as good as ever. Your boat will rise and sink with the tide, so if you sell now (low), you'll also get to buy your next place low, so net net, you'll make out okay. And interest rates, hovering around 6% for 30 year fixed, are definitely in your favor.

For new buyers, if your personal situation (finances, where you are in your life, etc) call for buying, then I say do it. Over the last 30 years, DC real estate has risen on average 7% a year. Does that mean you are guaranteed this? Of course not. The investment should be considered "long term"--in this case, at least 3 years. If you're not going to stay there 3 years, don't buy!

The one thing I keep coming back to, and I mentioned this in my interview, is the local job market. George Mason University's Center for Regional Analysis does a fantastic analysis of the local job market and its impact on local housing, and the bottom line is that the job market is, and is projected to remain, incredibly strong. Jobs draw people to the area, and people need somewhere to live. The rental supply has shrunk over the past few years, so you can bet that rents aren't going down anytime soon. It's basic economics: demand for housing is going to go up. The supply of housing will not keep pace. That means higher prices in the long run. You can view the GMU studies here: http://www.cra-gmu.org/forecasts.htm and more specifically here: http://www.cra-gmu.org/forecastreports/2007%20Housing%20Market%20Forecast.pdf

Will the market drop a bit more? Possibly. Maybe even probably. But is it worth missing out on your dream house to save 0.1% more? (check the annual drops for the area...they aren't that dramatic after all.) And what if interest rates rise? And you're continuing to pay rent in the meantime? That's certainly money you're never going to get back, no matter how long you wait.