Charlottesville Housing Inventory for the start of 2008

As one of Jim’s buyer clients, I would say a year or two from now will be an excellent time to buy.

Currently too many sellers think it’s 2005, and are expecting what their neighbor got that year. Personally we have bid on two homes and found each seller to be quite unreasonable:

Home 1- our first bid was $45,000 off the asking price, seller countered $9.5k off, we countered again at $28.5k, seller countered the same $9.5k off (i.e. “take it or leave it.”). We left it, and the home eventually sold for $33k off the asking price (plus any seller subsidy). We had been willing to pay up to $20k off the ask so the seller missed out!

That home was priced according to what the seller owed from his purchase one year prior. I’m sorry you paid too much, bro…but don’t expect me to get in your pyramid!

Home 2- This home was trashed, needing $30-50,000 in repairs (without the benefit of a home inspection, which may have turned up more under the surface). Offered the seller $100k less than his ask. His reply: “I already turned down an offer of $25k more.” (A week later, the house went under contract for only $25k less than his ask, proving that there are still suckers out there).

On the flip side, last year I heard this great quote: “Sellers want last year’s prices, and buyers want next year’s prices.” True.

Jim — You say housing “seems to have appreciated” between 2005 and 2007. That isn’t right! Using your stats, the average house price (not seasonally adjusted) for 2005 was $347,143. The average (again not seasonally adjusted) for 2007 was $354,769. That might look like a gain — albeit a tiny one — but it ain’t, because between 2005 and 2007 there was, of course, inflation. Using the government’s calculation for the consumer price index, the median price would have had to have risen during this period to $373,587 just for the homeowner to stay even with inflation. So the stats actually show that the homeowner with a median price house has lost almost $19,000 of his equity over the past two years, or, put differently, just over 5% of the total value of the home.

So that’s the story. Housing prices are down 5% in REAL terms over the past two years, using your stats. And of course real — i.e., inflation-adjusted — terms are the only terms that count.

I’m still predicting 20% or more real depreciation over the next 4 years. We’re 25% of the way there.

Thanks, and all best,

Anonymous Coward

Hi Jim.

Hey, fancy math is fun! And it ain’t even that fancy — 10 mins w/Excel and the U.S. Dept. of Labor CPI stats and we have a nice set of results.

As for 3-5 years, well yes, we’re in agreement on that — at least as a long-term outlook. Your mother’s traditional perspective is wise and seems to me to be where we’re headed. A house isn’t a short-term investment. Enjoy living in it for awhile! And then you’ll most likely enjoy some nice gains when you sell.

That said, we are at the moment in a situation where prices have risen sharply for years. And that means that the question facing buyers now is where prices need to go to get back to that stable equilibrium of *reasonable* price appreciation that you’re talking about. This is where the iron law of mean reversion comes in. We’ve had about a decade of way-above-trend growth in housing prices. By “way” about trend, I mean about 5x — historical growth is less than 2% per annum ex inflation; growth recently has been, in many markets (including ours) in double digits. So — where are we headed? The odds are for an extended period of below-mean price growth. That is, negative price growth, in real (inflation-adjusted) terms. So the next 3-5 years may be a period of continuously falling house prices. Perhaps not in nominal terms, but that isn’t the relevant measure.

Alright. Back to work. Happy new year, and all best, AC