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 As a real estate investor and professional, I'm often asked this question. My clients and friends ask. My colleagues and I ask each other. And I ask myself, again and again.
I can't know the answer with certainty but am working to identify sources that may provide clarity -- certain fundamentals, economic data and information on our collective optimism/pessimism regarding our local real estate markets. Based on what I am seeing, learning and experiencing in the DC real estate market, I sense we may be at or near the bottom.
So I have been working on a strategy as an investor to guide me and my clients here in DC.
In this context, the paragraphs below reflect my current stream of consciousness. Perhaps I will find the time to organize them a little more coherently. Perhaps I will not. For now, I hope you find this information helpful and that you make good real estate investment decisions. If want to commiserate or would like help with such decisions, please contact me at
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or 202-253-6177.
First, as in politics, all real estate is local. My local market (the Metro Washington DC Area) is impacted by its local economy and your local real estate market is impacted by its local economy (Think about the difference a healthy local job market makes on local demand for rental, re-sale and new construction). This first fundamental actually permeates every other real estate investing fundamental, if you ask me. As we say, Location, Location, Location - which is about the region, the town or city within that region, the neighborhood within that town or city, the block within that neighborhood and the lot within that block.
Second, a downturn in real estate impacts different markets (and locations) in different ways.
Different markets are impacted to differing degrees and for different periods of time. As a veteran real estate investor said to me, think of a real estate downturn like a flood that washes over and may submerge your market.The most vulnerable locations are like the lowest lying areas, which flood waters reach first, which are under water longest, and from which flood waters recede last. Well, based on data on real estate values, DC and its immediate suburbs appear relatively well insulated; on relatively high ground. According to the Washington Post (See “Real Estate Trends” September 20, 2008), the median price for a single family home in the District of Columbia rose from $430,000 to $497,000, comparing January through March sales data for 2007 and 2008 Parts of Florida, California, Nevada and Arizona are often cited as particularly hard-hit - like low lying areas. It seems the ongoing real estate downturn washed over those areas early on and that certain urban real estate markets, like the DC real estate market and Manhattan's market, have been dampened but not totally flooded. (In DC, we are wondering how much longer the downturn will last and whether we too will be totally under water or whether the waters will recede before too long – Note that while values have not plummeted, transaction volume is down in our Capitol City - According to the Greater Capital Area Realtors Association, through the end of September, 2008, the number of closed single family home transactions was down 20.6% compared to the same period a year earlier).
(As an aside, if the appreciation in median sales price that is cited above seems a little odd to you, you are not alone. To some of us, these figures seem too strong to be completely accurate… At the Eng Garcia Real Estate Group, we are trying to uncover the story beneath these figures. I suspect that gentrification in many neighborhoods is actually driving up prices because homes are increasingly more nicely upgraded – so that, in the end, buyers may be paying more but also getting more, which may in part explain how prices can seem to rise in a market that feels like it is declining -- This is just an early hunch, but we are trying to figure out ways to get at this dynamic).
Next, let's get back to basics. To seize the best emerging real estate investment opportunities, we need to look at real estate like an asset that is expected to perform. Ask yourself, what is the price-to-rent ratio? Can the rent roll cover my fixed and variable costs? Can I eek out a little profit too? Imagine that! In certain parts of the Metro DC area real estate market, I think we are seeing declining prices and rising rents -- just what real estate investors need to make the numbers work. (Critical: You gotta pick your spots, people – Call me if you want to talk about the areas on which I have set my sights).
Because real estate is cyclical, I am trying to learn from previous downturns and the experience of others who have been through them. Along these lines, at the Eng Garcia Real Estate Group, we read research, and ask experts what they think. We have been combing through articles lately -- and are seeing more and more articles suggesting that we are at or near the bottom. Banking industry veterans will tell you that, typically, when banks effectively drop prices on foreclosed and distressed pre-foreclosure real estate assets and emphasize, above virtually all, the removal of real estate assets from their balance sheets, then you know that you are at or near the bottom.
We are looking for signs that things are changing - typically the media starts talking about these signs and, little by little, the idea of a rebound gains enough momentum that it seems to add momentum, itself. Lately, there are signs the tide may be turning in the DC area. Economists and experts are pointing to subsiding and even dropping housing inventory, increasing sales of bank-owned properties as a result of banks slashing prices and making every effort to get real estate assets off their ledgers, and increasing flexibility from banks where sellers are seeking their approval of short sales (pre-foreclosure sales where the seller's lender is asked to approve a final pay off amount from the seller that is actually "short," that is, less than is owed and than would be reflected on the final pay off statement that typically must be paid in full to release the lender's lien to the satisfaction of the buyer).
There is no question that at this moment, the data are all over the place.
Some anticipate a real estate “bounce” following the elections, particularly if Obama wins, from a change in administrations and anticipated changes in Congress too.
And other signs are clearly mixed. The mortgage market is unsteady. Still, some believe it will steady, become more predictable, even become more liquid, and thereby help the real estate market. Locally, there are signs of a steadying if not rebounding real estate market. At the same time, other elements in our local economy point to problems that can keep the DC area real estate market down.
Below, I've inserted an article from the Washington Post in early September, where the writers sight increasing sales in Fairfax County, a bell weather for our local economy, but they also point to slightly rising unemployment. Of course, the liquidity crises also makes it difficult to assess our situation, as lenders are currently extremely risk averse and consequently borrowing is more difficult. With ever changing lending guidelines it is difficult for consumers, their loan officers and their Realtors to target the right properties. Thus, in the face of this mixed data, even a double digit uptick in Fairfax County home sales does not necessarily signal a recovery. Indeed, the Post article cites an expert who indicates that it is "premature to predict a recovery based on such market shifts."
Perhaps the salient question is: If we are at or near the bottom, when will we see Washington DC area real estate values rebound? Immediately below, James "Mad Money" Cramer shows you that he is not afraid to tell you precisely when. His prediction that Manhattan prices will head up, up and away come mid 2009 is probably not correct, especially with all of the additional carnage Wall Street has suffered since Cramer submitted his article early last month. Still, it is interesting insofar as it describes a number of trends impacting sales and values in his home town.
In case you, like I, are leaning toward increasing your exposure to real estate in the near term, let me leave you with three more thoughts: Location, Cash-flow & Design! I feel pretty darn strongly that certain fundamental drivers of value need to be re-emphasized in today's market. Those who wait too long to get into the market may get caught in the upswing, where they will have less leverage to negotiate and more competition from fellow buyers, driving up sellers' confidence. Even in DC neighborhoods like Columbia Heights and the H Street Corridor, two great investment locations in my opinion, if you get in now, you can find deals - often distressed, bank owned or pre-foreclosure properties - without making critical compromises.
In this market, you must make the numbers work (depending on your profile, this means anywhere from cash flow neutral to positive), you must acquire in the best available locations (particularly for rental purposes, which often means near public transportation and retail activity) and you must try to obtain trophy properties of architectural distinction if possible and that are certainly well-designed with regard to space planning, light and function. Now is the time to obtain what is, within your price range, top shelf housing stock, and nothing less.
Ask yourself, is it about the Price or the Property? Obviously, we all care about both – a terrific property at a terrific price. But the question is, as between the two, which is it? Right now, even the “best” properties are vulnerable to extremely aggressive buyers. But, when the market swings up, the sellers of such properties will be the first sellers to have actual negotiating power over buyers. These sellers, who occupy the highest real estate ground, will be the best positioned to enjoy the benefits of decreased buyer leverage.
So, if, as between the two, the Property, as opposed to the Price, drives the strategy, then perhaps now is the time to go get yours! In my opinion, here in DC, now is the time to satisfy your real estate wish list!
PLEASE FEEL FREE TO EMAIL ME AT
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OR CALL ME AT 202-253-6177 TO DISCUSS.
PLEASE SEE THE TITLES OF THE ARTICLES BELOW!
ON JUNE 30, 2009, BUY AN APARTMENTOur resident financial expert calls the end of the housing-market free fall—to the day.
By James J. Cramer Published Sep 7, 2008
Printed in the September 15, 2008 issue of New York Magazine
For more than a year, I’ve been a huge bear on housing. From the moment the credit-crisis storm began to form, I’ve been shouting in my usual unhinged way about just how bad the devastation would be, and carrying on about how anyone who bought a home in this environment would lose money immediately. At various points along the way, my house-hating judgment has been questioned, but I’d say I’ve been vindicated by the relentless decline in home values we’ve seen, the worst since the Great Depression. Even here, in our so-called real-estate-superstar city, prices may not have fallen, but the rate of acceleration has started to soften.
These days, I don’t know a soul who hasn’t jumped on the real-estate-is-an-awful-investment bandwagon. When I interview the once-rabid bulls on housing—those who make their livelihood building and selling homes, like Bob Toll, the CEO of the best home builder in America, Toll Brothers—I get grim predictions of nary a turn in sight. When I pressed Toll recently as to whether he sees any light at the end of the tunnel, he quickly answered yes: “The light of an oncoming train!”
Well, I now have another contrarian point of view to proffer: The converted bears, as well as the panicked sellers desperate to bail out and nervous buyers afraid to jump in, will be dead wrong nine months from now, when housing prices bottom. In fact, I’ll call the precise date of the housing-market turnaround. It will begin on June 30, 2009.
Let me give you ten reasons why everyone who now thinks there’s no end in sight to weakening home prices will look like a fool in nine months and will miss the best opportunity to buy since the 1989–1991 real-estate crash.
1. Two years ago, we were building twice as many homes as in 2008, and the decline in new-home building is now accelerating. At this pace, we could see new-home construction fall an additional 25 percent, back to levels last seen when we had 60 million fewer people living in this country. By next June we won’t be building enough homes to accommodate demand, and the gap between supply and demand won’t be made up by unsold inventory.
2. The housing bears seem to forget that Congress passed a bill authorizing $300 billion in FHA loans, which give troubled homeowners a fighting chance to pay their mortgages or get current on them. By nine months from now, the FHA will have taken millions in terrible floating-rate loans with high interest rates and turned them into 30-year mortgages with much lower rates. That’s going to reduce the number of foreclosed homes, and the supply of available homes, dramatically.
3. Bargains! Prices have already come down to the point where there are real values, and by June of next year, I believe real-estate prices will have fallen 25 percent nationwide from their previous highs, with some of the hardest-hit areas of the country down as much as 50 percent. At those price levels, homes will seem irresistible to the many millions of potential buyers who have stayed on the sidelines.
4. The last holdout area, New York, is nearing its bottom. The Wall Street brokerage houses will let employees know their bonus situations—or lack thereof—next month. Look for a further softening of prices in the city and even more so in the Hamptons, as hiring vanishes and Wall Street payrolls contract drastically. When the last areas fall, the bottoming process begins in earnest. By next June, Wall Street, and its power to drive down home prices, won’t hurt us anymore.
5. Right now, mortgages are expensive relative to their historical benchmark, the 30-year Treasury note. By next summer, I believe that Fannie Mae and Freddie Mac will be nationalized to shore up their flimsy capital foundations. Once the loans that Fannie and Freddie repackaged are explicitly guaranteed by the government, they’ll become the world’s best investments, as they’ll offer much higher yields than Treasury notes, with no more risk. That will cause a steep decline in mortgage rates, making it easier to borrow money and buy a home.
6. Come June, the bulk of the reckless 2-and-28 loans—the ones with the low teaser rates for the first two years that sucked people in and then reset at much higher rates, dragging people under—will have moved through the system. These loans have been the biggest source of foreclosed property, so the rate of foreclosures should decline sharply once those loans are off the books, tightening supply and soothing anxious buyers’ nerves.
7. We may not think of ourselves this way, but we are still a growing nation: Four million babies are born each year in this country, vastly exceeding the nation’s death rate. Household formation, meanwhile, has held steady at about 800,000 a year. Families have been camped in their apartments or crowding in with their in-laws for some time now. That pent-up demand is bound to find expression and put upward pressure on prices, as credit again becomes easier to get.
8. Immigration. It doesn’t matter who gets elected, John McCain or Barack Obama. Both are much more immigrant-friendly than George Bush. Before W., we could reliably anticipate about 1 million illegal immigrants arriving each year, but that number’s gotten a big haircut, in part explaining why Florida, Arizona, and California have been particularly hard hit by excess home inventory. Look for that to change, triggering an influx of new immigrants, and home buyers, starting on Inauguration Day and building as we head into mid-2009.
9. The biggest problem areas are now restricted to those three states—Florida, Arizona, and California. The rest of the country has begun to stabilize or is deteriorating at a slower pace than six months ago. The most problematic markets have been cordoned off, limiting the collateral damage.
10. Finally, the absolute worst areas, those with the highest foreclosures, like Bradenton, Florida, and the Central Valley of California, bottomed this summer. The first to fall are the first to return. If they’re headed upward, the rest of the country will follow.
You can see these ten reasons playing out in the stock market, as the stocks of the major home builders—Toll, Centex, KB Homes, D.R. Horton, and Pulte Homes—flattened out in July and have been climbing since. These stocks peaked and started dropping nine months before the housing market began its tumble. If they predicted the top nine months before it happened, why shouldn’t we believe they’re forecasting the bottom nine months from now? The big home builders’ stock prices have already made major moves north, but I expect more upside from KB Home and Centex, as they still have lots of unsold homes in inventory and decent enough balance sheets to hold out until we reach the bottom. For those who want to roll the dice, I suggest buying Lennar, the home builder that pulled its horns in last, took a beating, and could be poised for a strong recovery. Toll’s already risen too much to recommend, and I’d steer clear of Hovnanian, which I think is still in too much trouble to touch right now.
Of all the areas I expect to boom next June, New York looks to be the most attractive because buyers from overseas will flock to it—even more than they already have. Just as the dollar appears to have bottomed, European real estate is starting to collapse. Foreigners will flee to this market as a safe haven, one that has already experienced the decline that they are just beginning to see. If you’re a seller, hold tight if you possibly can. You’re almost—almost—through the worst of the downslide. If you’re a buyer, use the time between now and next June to scout in which neighborhood you might want to buy. On June 29, call your broker.
------------------------------------------------ VIRGINIA HOME SALES RISE, BUT AREA JOBLESS RATE GROWS
By Dina ElBoghdady and V. Dion Haynes Washington Post Staff Writers
Washington Post Staff Writer
Tuesday, September 23, 2008; D01 Home sales in Fairfax County rose 10.7 percent last month, the county's first double-digit increase in a year and a half, according to the most recent data from the company that tracks local real estate listings.
The flurry of sales activity suggests that prices have dropped low enough to lure buyers to the Washington area's largest county. But the uptick in sales is not widespread throughout the region, and unemployment data for August show a steady slowdown in the region's economy. "The big unknown is to what extent the financial trauma we've seen in the news in the past week has scared buyers away," said Barry Merchant, senior policy analyst at the Virginia Housing Development Authority. "We know it has shaken people's confidence in the economy and their own personal situations." Fairfax's median sales price was $375,000 in August -- meaning half the homes sold for more and half for less. That's nearly a 22 percent drop since August 2007. The last time prices fell lower was in April 2004, said John McClain, a senior fellow at George Mason University's Center for Regional Analysis.
"Perhaps we've seen enough cut out of prices to see a return to normalcy," McClain said. "We're seeing buyers move back in from the sidelines in the past few months."
Sales have dropped in Fairfax each month since March 2007 until they went flat in May and June, according to Metropolitan Regional Information Systems, the local multiple listing service. Sales rose 8 percent in July. The trend contrasts sharply with almost every other county in the region, except for Prince William and Loudoun counties, both of which have been devastated by an unusually high share of aggressively priced foreclosures. Sales in those counties have been climbing for a few months as buyers have been snapping up deals.
In Prince William, the number of homes sold shot up 100 percent last month as prices plummeted nearly 42 percent since last year to $251,384. In Loudoun prices dropped 24.6 percent to $335,000, and sales rose by 28 percent. But it's premature to predict a recovery based on such market shifts, housing experts said.
In past slumps, a surge in sales typically signaled the start of a rebound. But this slump is unlike any in recent history. Never before have prices climbed so high so quickly and then dropped so precipitously, which makes it tough to predict what's next.
"It's a sign that we're in the early stages of recovery, but in a downturn as severe as this one, the recovery is going to be much longer and slower than most people would like," Merchant said.
In Fairfax County, about half of the homes for sale are bank-owned properties, Merchant said.
Unemployment in both Virginia and Maryland rose 0.2 percent to near-record highs in August, according to the Bureau of Labor Statistics, a decline experts attribute to the collapse of the housing market in recent months.
The jobless rate in Virginia rose to 4.6 percent, the highest since January 1996, and Maryland to 4.5 percent, the highest since December 2003, experts say. Unemployment in the District fell by 0.2 percent, to 7 percent. The national average is 6.1 percent and represents a 1.3 percent increase from August 2007.
The bureau is scheduled to release data from the Washington region next week, a spokesman said. Because of a growth in government contracts, unemployment in Northern Virginia and in Maryland suburbs surrounding the District traditionally has been much lower than other parts of the states and in other regions around the country. The local rate in July was 4.1 percent, up from 3.2 percent a year earlier.
Still, with a slowdown in the construction and financial services sectors and the recent turmoil on Wall Street, experts predict that the situation will worsen before it improves.
"There is emerging weakness in the economy that will persist 12 months, perhaps longer," Anirban Basu, chairman and chief executive of Sage Policy Group, an economic and policy consulting firm based in Baltimore, said yesterday.
"The economy is not enjoying any kind of relief," added Basu, who keeps tabs on Maryland's data. "We are rolling from one crisis to another."
Unemployment in Northern Virginia has risen from 2.3 percent in July 2007 to 3.4 percent in July 2008. Jobs are up in contracting, hospitality, government and health care, but down in construction, telecommunications and transportation, said William F. Mezger, chief economist at the Virginia Employment Commission.
"This summer, transportation turned negative because the airlines started cutting flight crews," Mezger said. "What's surprising in a good area like Northern Virginia, the duration of unemployment is several weeks longer than not-so-good areas."
According to the D.C. Department of Employment Services, 23,600 people were unemployed in August. The number of wage and salary jobs dropped by 400. Contracting, transportation, utilities and information services were among the sectors that lost jobs. "We're starting to see people pulling back -- they're not filling jobs they had before," said Barbara B. Lang, president and chief executive of the D.C. Chamber of Commerce. "I think the city is going to be called upon to provide more health and human services" for the people losing their jobs, she added.
LOW PRICES ON FORECLOSURES LIFT SALES OF EXISTING HOMESBy Dina ElBoghdady
Washington Post Staff Writer
Saturday, October 25, 2008; D01
Sales of existing homes rose in September as buyers in some of the hardest-hit real estate markets snapped up foreclosures at bargain prices, a real estate industry trade group reported yesterday.
Sales of single-family houses, townhouses, condominiums and cooperatives rose 5.5 percent in September from the previous month to a seasonally adjusted annual rate of 5.18 million units, the highest level in a year, according to the National Association of Realtors. They were up 1.4 percent from the same time a year ago, marking the first time since November 2005 that sales have been above year-ago levels.
"The sales turnaround, which began in California several months ago, is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island," Lawrence Yun, the group's chief economist, said in a statement.
But turmoil in the world's financial markets this month may disrupt that momentum. Many economists are predicting recession. Unemployment numbers are rising. Interest rates have been climbing. Home price declines continue to put pressure on homeowners who want to refinance or sell. And the number of mortgage applications for home purchases last week fell to the lowest level since 2001.
Yesterday's report reflects deals that were closed in September but may have been signed in July or August.
"What you're seeing is lingering strength from the summer that will be more than offset by what has happened since then," said Michael Larson, an analyst at Weiss Research.
"My gut tells me October numbers are going to be ugly," said Patrick Newport, an economist at Global Insight. "This economy is really going down.
Many analysts who track the housing market had forecast a rise in September sales based on earlier reports from California and other localities. But the increase mildly exceeded expectations and suggests that low home prices managed to pry buyers off the sidelines.
The median price of existing homes in September was $191,600, meaning half the homes sold for more and half for less. That's down 9 percent from a year ago, when the median was $210,500.
Foreclosures helped drag down prices. Distressed sales are currently 35 to 40 percent of transactions, the Realtors group said.
Low prices helped whittle down the bloated supply of homes for sale, which fell 1.6 percent to 4.27 million at the end of September. If sales continue at the same pace, that would leave a 9.9-month supply of homes, still well above the five- to six-month supply found in a healthy market. But, the drop in inventory is the second monthly decline in a row since inventories peaked in July.
The biggest sales gains occurred in markets with frothy prices during the housing boom. The sharpest gain was in the West, where sales jumped 16.8 percent to an annual rate of 1.25 million. The median price in the West was $253,600, down 18.5 percent from a year ago.
In the South, which includes the Washington region, sales rose 2.2 percent. In the Midwest, sales increased 4.4 percent. Prices were down in both regions, by 4.1 percent and 7.9 percent respectively. The Northeast was the only region to see a drop in sales volume, with transactions down 1.2 percent and prices down 5.4 percent.
----------------------------------------- HOW THE NATIONAL SLIDE IS FELT LOCALLYSLUMP’S INTENSITY VARIES BY LOCATION
By Dina ElBoghdady
Washington Post Staff Writer
Saturday, October 25, 2008; F02
Sometimes the cliches prove true.
"Real estate is about location, location, location," said Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University. "People want to know what's going on in their neighborhoods and not generalities."
But crunching numbers that way poses a challenge for analysts because even populous neighborhoods or cities generally do not have a lot of transactions in any given month, making it tough to draw solid conclusions.
That's why the government and industry trade groups usually examine housing data at the national and state levels, Retsinas said. "Large areas provide more reliable data."
Still, because many people care about the granular details, two research firms -- First American CoreLogic and Fulton Research and Consulting -- pulled data for The Washington Post on several Zip codes in this area.
First American crunched numbers on foreclosures, while Fulton Research analyzed price data pulled from Metropolitan Regional Information Systems, the local multiple listing service. The Zip codes were selected to reflect geographic diversity and varied concentrations of foreclosures.
The trend is clear: While some Zip codes have fared better than others, none has escaped the impact of the foreclosure crisis and the credit crunch at the root of the U.S. economy's troubles.
The more established areas near major job centers came out ahead of the outlying suburbs that were overbuilt during the housing boom, said Dan Fulton of Fulton Research.
"These areas did not have the same number of sales during the boom times as the growing areas, so they were not subjected to the same number of subprime loans," Fulton said. "Therefore, they have more price stability."
Subprime loans typically cater to people with blemished credit or little cash and gained popularity with investors and other buyers when home prices were climbing.
Most of those loans were adjustable-rate mortgages that started with low teaser rates that later jumped. The thinking was that rising home values would allow borrowers to refinance or sell before their higher rates kicked in. But when home values fell and credit markets froze, those borrowers were stuck with unaffordable loans.
Foreclosure rates spiked. Sales and prices plummeted.
Nationwide, foreclosure filings soared 71 percent in the third quarter from the same time a year ago, according to a study released this week by Realty Trac, a California-based firm that sells foreclosure data. Meanwhile, a federal price index also released this week found that home values dropped 5.9 percent for the 12 months ending in August, the biggest decline since the Federal Housing Finance Agency started tracking the data in 1991. Other gauges have recorded even bigger drops.
Some of the hardest-hit pockets of the country are starting to report an uptick in sales, including Zip codes in Prince William and Loudoun counties. The buying activity is driven by distressed sales, said Sam Khater, a senior economist at First American.
"You get to a point where foreclosures flood the market and force prices down so low that people start buying again," Khater said.
About These Charts--analysts at Fulton Research ad Consulting pulled all the closed home-sale listings from January 2006 through September 2008 from the local multiple listing service.
They then determined the number of closings and median sales price by month. With the accompanying chart for each Zip code, the September median prices are listed in the table. To look at a more statistically significant number of transactions, Fulton calculated a rolling three-month average of the median sales prices. For instance, the rolling median price for September 2008 is the average of the median prices in July, August and September.
Those prices were plotted on a line graph. That's the red line on the accompanying charts. Then a trend line was calculated to show the general direction of prices.
First American CoreLogic, which tracks mortgages, added to that information the number of outstanding loans in each Zip code and what percentage of those loans were in foreclosure in September, another indicator of a market's health.
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