Lori writes to point out that Wednesday’s USA Today reports on a study by the National City Corp. that names Charlottesville in their list of housing markets where “prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.” On the list of “metro areas that are extremely overvalued and vulnerable to price correction” we’re the 71st most severe in the nation, ranking just behind Asheville and Cambridge, with our residential property overvalued by an estimated 24%.
I’m just waiting for Jim Duncan to weigh in.
Bubble? Maybe. I have responded in great detail here – http://www.realcentralva.com/2005/08/18/cvilles-bubble/
–Jim
The only bubble I have seen here is the 1990 bubble which really only affected the upper prices, over 600k. This time it might only affect the 1 million + homes. Most other homes went sideways for a couple of years. What I have noticed is that houses seem to be taking longer to sell and the crazy bidding above the asking prices seems to have abated.
In this area though it seems like the rental market is currently overbuilt. Everyone green lighted projects based on the same perceived undersupply at the same time. What this has done is given use a much higher grade of apartment at non premium rent.
Charlottesville housing prices ain’t going down any time soon. There is simply too much demand. Many, many people want to move here. Home prices will go down only when the city and county fail to properly control growth and no one wants to live here anymore — including (and perhaps especially) those of us who’ve called it home for decades.
Meanwhile, we have fundraiser concerts just to raise money so that people who work some of the most important jobs in this community (teachers, firefighters, police officers, etc.) can live nearby (as in, not in the next county). Under the current systems available, unless the government steps in to control growth, look forward to your tax dollars going to this sort of thing in the future.
One of the characteristics of a bubble is denial there’s a bubble. Some people will always dream their birthday balloon will forever rise in the sky and never pop!
Although it is indeed a local determinant whether a real-estate market is in a “bubble”, it is not completely determined at the local level whether it will pop or not. That’s because the major factor for pricing is not only demand, but also and foremost the affordability for any given price valuation.
In the real-world, away from the exclusive wealthy folks and realtors salesmanship, most people buy homes that they can afford. There are 2 primary factors that determine the monthly mortgage payment: loan principal (typically, the sales price of the home – (minus) any down-payment) and the interest rate. The lower the interest rate, the more the price of the sale can be high, to sustain a specific monthly mortgage payment. Should the mortgage interest rate increase, this will create a downward pressure on home sale prices. The inverse is true also: falling interest rates allow for home sale prices to increase.
This is quite simple to understand and indeed many people know this already. However, it is remarkable how little this evidence is brought forth by folks because the acceptance of this precept supposes that at some time, should interest rates increase, existing valuations are at risk. Well, that’s neither good news for realtor commissions (higher prices generate higher compensation), nor is it encouraging for home-owners to face the possibility their homes could stop appreciating, perhaps even depreciate, and in any case, provide less equity to bankroll their consumption levels via equity loans.
Well, when interest rates dropped to today’s lowly levels, prices of homes have been rising. In some markets, like most large metropolitan areas, or other desirable areas like our little Charlottesville, they have been rising multiple times the rate of inflation. Almost anyone who bought a home 10 years ago has been tremendously encouraged by their 200% to 500% valuation increase. What an investment! Right?
What could derail this perfect picture where no home purchase ever seems to be a bad investment? As explained above, increasing interest rates could come into play. These are by and large not determined by local markets. So how can everybody be so confident that it’s all “local” when larger forces are at play? And even more concerning is that some of the more potent economic forces that help determine interest rates are not even within national control, but rather under international command!!!
Alan GreenSpam (misspelling intended) has been fervently trying to cool the real-estate market, which the Fed realizes is getting out-of-control in many markets, by increasing the short-term Fed Funds rate. Count them: 10 quarter point increases over the last year! Yet, and this is his self avowed “conundrum”, long-term Funds Rates have mysteriously refused to increase much at all (these are primary determinants for mortgage rates). So, will GreenSpam (who’s soon stepping down after many years at the helm of the Federal Reserve Board) ever be able to budge the long-term rates? Incredibly, it seems this too is not within his control. In fact, the Japanese, Chinese and many foreign central banks and investors have been giving a cheap ride to American consumers with their seemingly insatiable appetite for US Treasuries. This fantastic “demand” for the US dollar (USD) has been keeping the Federal Bonds at historically low levels. Why would ‘they’ be doing this? Because they export to us much more than we export to them. That’s called the Trade Deficit, which is one the the two you’ve no doubt heard on the news at some point. In fact, not only does the US government run an internal account deficit (1), or CAD, but the twin is at 700 billion USD a year! Now get this: it’s an *accumulating* loan to foreigners!!! It’s been okay with them, since they are like feeding a junkie: Americans consume their goods and they make them cheap and tell us to pay later. A bit like a drug pusher provides low-cost drugs to the addict to hook them.
As everyone has been reading, China is growing so fast and their economy has been growing their own internal consumption by leaps and bounds. Get this: 1 out of 5 people on the planet are Chinese!!! The point being, eventually, foreigner investors (TICS) will ask to be repaid their due. In some cases, they’ll buy US assets with their humongous USD reserves, in other cases, they’ll swap these USDs for other currencies with which they also trade.
Chinese could not buy UNOCAL. Chinese unpeg the Renminbi, and designate a ‘basket’ of currencies. Koreans, Russians and dozens of other national central banks diversify progressively away from the USD. What happens when demand drops? The supply side must adjust their valuations.
Okay, this is getting more involved than I originally wanted to expose you all to. But the bottom line: due to highly probably increases in mortgage interest rates due to the above factors (and much more!), already super-valued home prices in certain markets will either not sell or will have to reduce their market valuation to permit the buyer to actually afford the mortgage payments. Other than the susceptibility of any given ‘local’ market to price adjustments, the primary impetus for this price adjustment is not local in most cases. In simpler terms, when the shit hits the fan, you better hope your fan isn’t rotating too fast!!!
This all requires speculation. Will interest rates go up? Will the city allow new homes to be built? Will demand drop?
Who knows.
I just moved back to Charlottesville, I was quite surprised when I discovered that the Cville Weekly and the Real Estate Weekly are now basically the same paper. The cluster of fancy restuarants over in Belmont was a big shock, too.
Sympatico’s wandering dissertation on banking and finance notwithstanding (lots of good points), it’s pretty straightforward to notice that the huge runup has been due to all the money looking for a place to sit (lenders looking for borrowers) and that’s begun to change. Now interest rates are creeping up, making for bigger mtg. payments, the price runup is grinding to a halt. I think c’ville is popular enough we won’t see deflation in home prices.
My personal economic metric is # of days the ‘for sale’ sign stays up: by that measure the local bubble is over.