Are people so real-estate-crazy they can’t see how insane this has become?
By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:
On the surface, the housing market in Washington, DC, is moving along at a good clip, though there are indications it’s not as active as it was earlier in the year or last year. Despite the free-money party, we all assume rates are eventually going to rise.
When I ask lenders what’s different now, they say that property values aren’t being artificially inflated by appraisers like they were, there are no more no-doc interest-only no-money-down loan programs. Buyers actually have to have skin in the game.
Fair enough, but that’s just the part about qualifying and getting someone into a house. What about keeping them there through a downturn?
What if home prices soften when interest rates go up? Will those once well-qualified people stay in their homes even if these homes are no longer worth what buyers paid for them? If buyers put 10% down and their homes drop 20% in value, will they walk away or wait it out?
The thought of a downturn is terrifying, but markets ebb and flow. The manipulation of interest rates in an attempt to prevent normal market corrections from happening was fine for a while, but this just feels excessive.
When buyers are bidding up the price of every single house as a rule, then money is just too easy to get. When buyers have to waive home inspection along with appraisal and financing contingencies to get a house that in a more balanced market would never garner such attention, I’m suspicious. When someone outbid my client and several other buyers to pay $1 million for a house listed at $850,000 – a house that had only one bathroom – something is just not right.
But there’s something even more concerning.
Venture capital firms are out there dumping millions into all sorts of real estate companies. Why would investors throw money at a regular real estate brokerage doing nothing different than the typical brokerage which is: hire agents, keep a percentage of their commission, and pay them the rest. It is reminiscent of the late 90s tech boom when VC money was dumped into companies that lacked a discernable business plan other than that they were something “tech.”
Real Estate Brokerages are not an exceptionally profitable business, no matter how high-producing the agents are who work there. Top agents make 90% of their commission in the split. So a brokerage only gets to keep 10% of the money that comes in the door, then has to spend it on signing bonuses, overhead in the form of luxury offices, and salaried staff needed to entice those top agents. How can this be a profitable investment for a VC firm?
This is the usual progression of everything good in business: the people in it ride the wave up, then people on the outside see money being made and they jump in too. And that’s when it all falls apart – when the predators arrive.
Are people so real-estate-crazy that they can’t see how insane this has become?
I remember 2007 all too well. I was doing a job I loved working for a builder I loved when all of a sudden, people stopped showing up at our gorgeous model homes and writing contracts on the spot. Buyers turned from desperate to fickle. They would blow off appointments and not contact the lender; they realized the tide was turning back in their favor. Our company was hiring people right up to the day it instituted layoffs.
Same old story – people never think the party will end. But it always does.
My observations lack hard numbers. But I’m out on the street, not in an office crunching numbers. I see what goes on down here and it isn’t always pretty. I hear what people’s fears and hopes are. I am getting the consumer sentiment first hand from my clients. That to me is better than any indicator backed by a statistic, especially when you hear and see the same things from multiple clients.
So what will keep this market moving?
Sellers need to stop pricing with obscene increases from what the comparable sales show. Buyers want to lock in before rates go up. But they shouldn’t be willing to overpay. There is more property sitting on the market in DC than there has been in the last few years.
I had a great listing priced right at market value this fall, supported by recent comparable sales, and it took, gasp, three weeks to go under contract. I have clients who I just told a couple weeks ago to not buy a condo they were prepared to make an offer on; the price was just too high. They found something better for $130,000 less.
I love my job and this industry. But I can’t take responsibility for every single home buyer out there, just the ones under my advisement.
If the bottom falls out of the housing market again, will the lenders get blamed like last time? Will the real estate agents get blamed, like last time? Or will the people who overpaid for these properties act like adults and take responsibility for their decisions and recognize that no one forced their hand?
I can say one thing: I have changed my approach to doing business. I’m no longer leaving the decisions solely to my clients. I used to present them with the information and their options and let them decide. Now, I still present the information and options, but before they have a chance to make a foolish decision, I tell them what not to do: “Don’t buy this house.”
It sounds ridiculous when I’m saying it, but I don’t want any of my clients left holding the bag if the bottom blows out of this thing. By Melissa Terzis, Realtor, City Chic Real Estate.
Meanwhile, in San Francisco, one of its “biggest new-housing construction booms in history” is maturing just as the tsunami of money from the startup boom begins to recede. With consequences. Read… This Will Bust San Francisco’s Insane Home Price Bubble
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Should read …..
Do not look for rational explanations, the prospect of easy money turns human beings into gibbering idiots.
Stocks, house prices, “yet another asset type” are going up in value.
I have heard of someone who has made lots of money, I want in.
I am making money, I need to borrow money to carry on investing and make more money.
Gibber, gibber, gibber ………………………………
The bubbles burst; I am going to be ruined.
No more gibbering, till next time.
Tulip bulbs ….. gibber
South sea company …. gibber
UK Railways (1800s) …. gibber
The new internet (pre 1999) …. gibber
Sub-prime ….. gibber
Property …. gibber
BTL … gibber
Apple …. gibber
Social media …. gibber
Emerging markets … gibber
Easy money ….. gibber, gibber, gibber
Much more appealing than working for a living.
Melissa, on this day we call Thanksgiving, your clients should be thankful their broker has integrity and is looking out for their best interests! This may cost a sale here or there, but in the long run, honesty is the best policy.
Thanks Dan. It does cost us some sales, but we don’t want to be the agents that people point their fingers at in 5 years saying “But you told us we would make a killing!” I admittedly make less money than I could every year, but I sleep very well at night.
Happy Thanksgiving to you too!
I know some govt contractors in Miami who are losing their jobs because they were underbid by a new company. The new contractor is eliminating positions and cutting pay. Some of those positions are unionized and they are doing it anyway. Florida is a right to work state and unions have no power here. DC being a company town, I find it hard to believe that this is also not happening there. Real estate is always directly related to earning power, so ask around and see if they are hiring, firing, or cutting back.
I’m closing on my fourth property next month in Central Texas. Most properties for sale go under contract within a week. All of my decisions are based on a ten year or longer timeline: Rent is much higher than the mortgage payment; Population is growing… etc. etc.
The dilemma my colleagues and I have is if we don’t place our money into real estate, where do we place it? Sure, property values can crater. But the positive cash flows wash over that difference over time.
As for people buying their own home to live in, too often selecting a home is like selecting a car. You accept it’s not the best financial deal, but you have to live with it after the sale.
William,
I have been a residential landlord for 30 years in northern NJ. Real estate taxes increase a minimum of 2% per year. Insurance increases about 1% per year. Try to find a licensed plumber or electrician for less than $100 per hour (and they come in twos). For an un-mortgaged house, it takes 3 months per year of rents to pay normal operating expenses (that does not include a new roof, paint job, kitchen, carpeting, interior remodeling, etc.). Price out a new boiler + installation labor + debris removal and permit fees. Rent prices are a function of market price and the cost to do business. It has always been that way. My tenants are regular people. They are roofers, tile setters, painters, kitchen helpers, cleaners in hospitals, hospital technicians, house managers for rich people, etc. I charge about 10% under market for apartments in good condition. If anything breaks, I fix it. I have no vacancies. My tenants take care of their apartments. If there are problems, we work them out. I have no written leases. I have no bad checks. Most tenants stay a long time (like 10 years or more). They are happy and so am I.
But your situation is different. How many months of rent do you need to pay the mortgage. A back-of-the-envelope calculation tells me 8 months. Add 3 months for operating expenses. That means 11 months of rent are spent to carry the property. Without any vacancies. Without brokerage commissions (1 month’s rent) to procure a replacement tenant. Without emergency repairs and capital expenses.
Instead of buying 4 properties, why don’t you buy just one with all cash. Then, you can weather any storm – you have a huge cushion to protect you from unexpected costs. Good luck.
prepalaw – I’m somewhere in the middle of all cash and highly mortgaged. One condo I own was purchased with cash and the numbers are great. When I get a mortgage, I do put 25% down to improve cash-flow and notice the realtor/loan officers rarely see this. My retirement (or backup career for my teenage son) is to manage properties. Now, since the banks will loan me money with two years of W2s, I’ll take the money while I can. I know the loans won’t always be available for me.
I understand what you are doing. The biggest risk is vacancy. If your properties are in decent to desirable locations, then there should always be a market to rent them. I suggest that you several fail-safe calculations to determine your cash flow break-even: how many months of vacancy before you achieve negative cashflow. How much can you lower your rents and still break even.
Good Luck
“The manipulation of interest rates in an attempt to prevent normal market corrections from happening was fine for a while”
no it was not!!!! that isn’t capitalism
“Or will the people who overpaid for these properties act like adults and take responsibility for their decisions”
and right there is the rub…..nobody has to, they will just walk away and or just stop making payments and live mortgage free for years, I’ve seen this happen first hand.
And just like last time when i start to question the insanity i get the same response…..”just buy and if it drops in value just walk away” and when they do nothing bad happens. They even have a name for these morons….(wait, i just thought bout this, i’m calling them morons and yet they get to live mortgage free for years while i pay my fucking bills…) they are called boomerang buyers because they live for months without making payments and banking cash, when they finally get kicked out they go down the street and buy a better house for less with a big fat down payment.
i guess it’s me who’s the moron after all.
yes, prices do seem a tad high for the moment, but if two people want it, it sells.
and i live here, in dc.
Come check out Denver. There’s a bubble of epic proportion forming here. Houses that were selling in the $300s back in 2010 are now selling in the $500s. Anything in the historic areas that’s been remodeled is no less than $700,000. I know that legal marijuana is fueling some of this but it doesn’t make sense. I feel that when the bubble finally bursts, it’s going to be worse than the last one.
Melissa, other folks, gut check please:
We own a house in NW DC that has appreciated. We’re considering moving to NoVa for a yard and better schools for our child. We have three years before kindergarten and don’t dislike our house. Better to sell our DC house now and buy in NoVa in the next year while rates are low, or keep our powder dry and see where the market is in the next 3-4 years?