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
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Many experts agree that metal roofs are a great defense against wildfires. Click here or call 1-800-543-8938 for details from our sponsor, the Classic Metal Roofing folks.
Classic Metal Roofing Systems, the leader in fire safe roofing for residential applications, manufactures products that are 1/20 the weight of most tile products and eligible for Class A, B, or C fire ratings as determined by roof preparation.