Saturday, April 22, 2006

Bubbly bubbles of bubbles

Lockboxes outside a condo near Dunn Loring metro- investors are bailing out!

It's popping. I had the fortune of making a deposit on a new townhome in May 2002. It was finally completed in September 2003. By that time there had been 10-15% appreciation in the value. In spring 2005, the market value was up almost 60% from the price I paid. Of course, at that time, we were still in the two year window where there are no free tax profits, so we couldn't sell. We were seriously thinking about moving up in fall 2005, but a few things held us back. I was still getting on firm ground with my business, so getting a loan might have been tricky. (Not to mention affecting the financing we did for my company.) We also didn't have anywhere we really wanted to go that we could afford.

Fast forward to the present and the neighbors on either side of me are trying to sell their places for what would have been great prices last spring, but are decidedly overpriced for this spring. My neighborhood was heavily subscribed by investors, who drove the prices up dramatically even before I locked in mine. There were hundreds of people waiting in line on the first day to make deposits...

All of these silly investors are really annoying to me. As my wife said today, it's just like the day traders who didn't know what they were doing in the internet stock bubble of the late 90's. As long as prices were generally going up, anyone could make money. But at some point, prices were only going up because people were taking advantage of the fact that everything was going up. A lot of dollars were flowing into the market, but very little of it was based on the fundamental reasons for owning stock. As soon as that kind of market changes direction- it tends to drops quickly. If you were only holding the stock because you thought a bigger idiot was going to buy it, you wanted to dump it as quickly as possible.

What generally has kept residential real estate more stable than the stock market is that the ration of owner-occupants to investors was pretty high. You can't live in a stock certificate, but you can keep a house that's a bad investment. If you're under water on your mortgage, you might not have much of a choice. However, when the ratio of investors soars, as it has in recent years in the DC region, the market can easily get distorted. There is a false demand for property. And the investors are willing to take losses. And they're mostly getting out now. It's going to be an ugly couple of years for people that want to sell their homes around here- supply is way up, and false demand is gone.

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