C’Ville’s bubble

In response to cvillenews’ post this morning titled “C’ville’s real estate bubble?” My short answer is “maybe.”

There are three kinds of lies: lies, damn lies, and statistics. 
–Benjamin Disraeli
Figures don’t lie, liars figure. 
–Mark Twain (attributed to)

There has been an awful lot of discussion here and elsewhere about the possibility of a real estate bubble locally and nationwide. Let me begin by saying that all real estate is local. What happens in California (they have 17 of the top 20 “extremely overvalued” markets) does not have a direct, nor a necessarily indirect effect on the Charlottesville/Central VA market. What their data can do is give us guidance of sorts.

When the California Association of Realtors starts issuing an Amendment titled “Market Conditions Advisory,” which states, “In light of the real estate market’s cyclical nature it is important that buyers understand the potential for little or no appreciation in value, or the actual loss in value, of the property they purchase.” The first response should be, “Duh.”

Back to this report by USAToday, where we are the number 71 out of the top 229 metro areas nationwide. Pay attention to the fact that we are not in the section titled “Metro areas that are extremely overvalued and vulnerable to price correction”. In other words, our market is valuable, but not necessarily “overvalued.” This is not merely a case of semantics, but an important insight. One would expect our market to be more valuable than many markets, especially in light of the recent news that we are the Number One Best Place to Live (again, ranked by USA Today).

Note that CNNMoney does not have our market in their Top 50 most overpriced markets.

The Wall Street Journal had several stories yesterday about the potential for a national real estate bubble, and what we can learn from past ones. None were more pertinent to our market than the one titled “Investors Hold the Key to Housing Boom’s Fate. Click “more” for what I feel are the most important quotations. Our market is driven by a lot of factors, and investors tend to be a fairly significant segment of that market; I am seeing less flipping and more buying-to-hold.

To cap off my somewhat more extended short answer of “maybe,” I think that our real estate market is good and active, and those who purchase with their expectations in check will be just fine. We are not trading in stocks, we are discussing homes and peoples’ lives. Should the market begin to level off, as I have said before, with less rapid appreciation, I do not foresee a bust, but a return to more reasonable levels. Should the market level off or even have a slight depreciation, homeowners will still have a home. (Unless they got bad advice and bought more home than they should have using off-the wall short-term ARMs, etc.) No bubble here.

Below is some of my own data from CAAR’s MLS.

Update: Link to National City’s Study (pdf)

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Nearly one-quarter of all homes sold last year were bought by real-estate investors, some of whom were hoping to sell them for a quick profit. An additional 13% were bought as second homes. If these people dump their homes at the first sign of a slowdown, prices could fall faster and further than they have during past downturns.

The experts trying to predict whether the real-estate market will crash are watching investors like Mr. Denny very closely. According to the National Association of Realtors, 23% of homes bought last year were bought as investments and 13% as second homes. Housing experts say that people who don’t live in the homes they buy are more likely to sell at the earliest sign of trouble and minimize their losses.
“The fact that these are second homes and are not primary residences means that they are more negotiable,” said Larry White, a microeconomics professor at New York University’s Stern School of Business. Today’s investors, he says, are much more apt to sell quickly than the developers and construction companies that gobbled up property during the real-estate boom of the 1980s.

To be sure, many people who bought investment properties or second homes won’t sell right away. David Lereah, chief economist of the National Association of Realtors, divides these buyers into three groups: Second-home owners, who tend to be baby boomers who generally plan to use their homes for years; landlords who buy properties for the rental income and are also less likely to sell; and, finally, condo flippers and the like — day traders of the real-estate world — who might quickly pull the trigger.

Criteria used –

Criteria

Solds in 2000 between April 1 and September 1

2000Solds-1

Solds in 2005 between April 1 and September 1

2005 Solds-1
This data shows that the Average Price has increased 57% in 5 years. Pay attention to the fact that I used only Albemarle and Charlottesville. Our market includes (despite what the national rankings suggest) Fluvanna, Greene, parts of Nelson, parts of Madison, and occasionally parts of Waynesboro. I wanted to keep things simple.

Regarding the Northern VA market, courtesy of the WSJ –

 Public Resources Images Mk-Ae917 Dchome08162005211634

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