Tuesday, December 2, 2008


We received an email on Sunday from a reader who signed off as Confused in Charlottesville. In the subject line was "Why?" In the body of the email was simply "MLS# 459636. New listing."

The details: 705 Montrose Avenue, a 1296 sq. ft. 2 bed, 2 bath aluminum-sided cottage, ca. 1953. Located in the Belmont area.

Asking Price: $197,400.

It's very simple, Confused in Charlottesville. The listing tells you everything you need to know: 705 Montrose is "Adorable" and a "2 Bedroom Ranch" and it's "in the City!" It also has "Off-Street Parking, Hardwood Floors, and Fenced Back Yard!"

All of this may be true. What the listing doesn't mention, of course, is that the last transfer was in the year 2000, for $82,500, that busy corridor Avon Street is a couple doors down, nor what the crime history is for the neighborhood.

Nationwide, real estate has increased in price on average 100% from 1998 to 2006, according to Robert Shiller of Standard & Poor's Case Shiller Index fame. And nationwide, prices have been declining since the bubble's peak in late 2006. Even, lately, in this area.

705 Montrose has "increased" by 139% since 2000.

That is, in money terms,
$114,900. In eight years.

Nearby are eight other cottages in Belmont. They're at a similar price point, on the market since July, and none have sold.


Larsen B said...

I'm going to do the math for this seller.

Let's increase the last sale price by 100% instead of 139%.

So the current asking should be $165,000.

Now let's decrease this bubble asking price by 25%.

This makes the figure $123,750.

This is still an inflated asking price given the neighborhood and the house, when IT IS LOOKED AT REALISTICALLY.

And the selling price should be even lower.

Anonymous said...

I like this blog a lot, it's done a good job keeping me updated on the real estate listings and pricing situation around here, so thanks for that.

What I don't like about it though, it aside from listings there's not much useful information, definitely not much of anything that I didn't know already. "Stuff's bad" "there was a housing bubble that's popping" "we're in a recession" "speculators bought too many houses that they couldn't afford." Well no shit! Shocker!

What would be a lot more interesting is where this market is going. What's the bottom? What SHOULD that house be selling for usually? Or houses like it? Say you'd have to live there for the next 20 years, what would be the most you'd pay for it?

These kinds of projections aren't really that difficult to make as housing prices are really closely tied to income. Just to see some charts like this for Cville would be amazing:

So, yeah, some actual analysis would be great. See what Larsen did in the comment above mine? Totally idiotic. That's not thoughtful analysis, that's just making shit up and it's stupid and it's worthless.

Now I apologize if you've made those posts already and I just didn't see them- I have only had this in my reader for a month or 2.

Real C'ville - The Bubble Blog said...


We appreciate your comments and have taken a few moments to address your questions.

Larsen B, who is a frequent emailer and periodic commenter, has actually done a reasonable analysis of what he thinks this house should go for. We can follow his logic. Nationwide, house prices rose 100% in less than 10 years, as per the link in the post. The Asking Price for 705 Montrose is 139% over its last Sale (transfer) Price from eight years ago. Larsen B doubled the last transfer price by 100% to accord with the nationwide rise, rather than the 139% figure that the Seller/Seller's Agent came up with. He then deducted 25% off that new price. We assume this is to account for the current, ongoing decline in house values. Larsen B came to the conclusion that an Asking Price of $123,750 is appropriate for this house...but that the seller should accept a lower offer.

It's not the formula that an agent would use, but it does have a logic to it. Another way to figure out what a "reasonable" asking/offer price is would be to add 1.5% to the previous sale price, for 8 years. Or drive by the place: and what does your gut tell you? What your "gut tells you" counts for a lot in a "Buyer's Market." Apparently we're in a "Buyer's Market," though in November, it was a "Buyer's Market" for ONLY 104 PEOPLE IN ALL OF CENTRAL VIRGINIA. The worst thing a seller can say to an offer is "no."

As we've said in the past: "Asking Prices" are "Suggestions." Perhaps "Suggestions" should be revised to "Desperate Hope" in the current economic environment.

As the coming Winter months progress to Spring, sales get even slower, the Recession continues, many "Asking Prices" will fall below what some Sellers actually paid...and the Seller will have no choice but to get out before complete financial ruin.

This isn't a prediction. It's common sense.

WHERE'S THE BOTTOM OF THE HOUSING MARKET? If we knew where the bottom of the housing market is, for Cville/Alb or anywhere else, we'd be on the front page of the Wall Street Journal. Every day for the next year. We'd also be the Chairman of the Federal Reserve and the Secretary of the Treasury, simultaneously. And we'd have a good shot at unseating Mr. Obama in 2012.

Nobody knows where the bottom of this housing market, or any other housing market is, because of not only subprime foreclosures, but of the coming Alt-A and Prime foreclosures, many of which were ARMs--adjustable rate mortgages--that are going to "reset"--move to a higher rate--in the next 12-18 months. These mortgage holders cannot re-fi at the current lower rate of 5.5% because they have little, or no, or negative equity in their properties. More foreclosures mean more inventory, and prices continuing to go downward. Toss in the current recession and consumers cutting spending, which leads to fewer jobs and fewer buyers vicious cycle.

And toss in MBS and CDOs (mortgage backed securities and collateralized debt obligations) many of whose value is questionable...it's murky.

PRICING: We do natter on about historic income to price ratio of houses: 1 to 4. C'ville/Alb area is far beyond this. And we blather about how typical annual appreciation should be between 1.5% and 3%.

A house is not an "investment" instrument primarily. It's to offer comfort and security and reflect the habits, tastes, and predilections of its occupants. We often present a property with its current asking price and its transfer (sale) history. A rise of 50%, 100%, 200%, 300% in 5-10 years is only possible in a bubble.

As for what to offer on a house? Sure, if you spend $400K on a house today and live in it for 20 years, you'll most likely do fine. There will be the next 3-7 years where you'll be underwater or just breaking even, but then equity will begin to accrue.

But if you're not the 20 year resident and you spend $400K on a house in this market, where there is 18 months of unsold inventory, and that same house last went for $225K in 2004, you've just overpaid. And could you turn around and sell it for $400K in 6 months? A year?

We're going to stick our necks out here and say probably not. You're most likely immediately "underwater." In fact, our guess is that many of the purchases made since 2007, if not earlier, would not be able to fetch the same price now as then. "Many" properties, we're saying; not "all" properties.
For owners who aren't planning to sell, and who can afford the mortgage they agreed to pay, this makes no difference.

But for those who need to sell, or who can no longer afford the monthly bill...this is a big issue. To use understatement.

We're not CalculatedRISK, we're not Ritholtz.com, we're not HousingWire, Economists View, Roubini, Brad Setser; we're not the WSJ, NYT, Bloomberg, etc. That's why we link to them. We're the area bubble blog that offers observation, tools, examples, links, and some opinion--ours, and the commenters'.

And some of the most valuable contributions on this blog come from readers, in the form of data and questions like yours.

Larsen B said...

Bubble got my back.

Thanks, guys.

Anonymous the things you think are missing have appeared on this blog. Few times.

As for me, I'm not buying right now. But the sh*t's going to hit the fan around here. When? Summer? Fall? Next winter? Who knows.

But it will hit the fan and then it will be cherrypicking time.

Anonymous said...

I'm with Larsen and the bubblers. If you consistently read this blog then you realize what we do, this market has no place to go but down. You have a large number of people who purchased in the last 4 years, and some of them are going to end up losing money.
I don't wish that on anyone, but if you bought here that recently then you are going to be really hardpressed to break even or make a profit. I know several buyers who have been waiting this market out, and they are in no hurry to buy at current local pricing. I guess we'll all be watching to see who can hold out the longest. My bet is on the buyers.

Anonymous said...

I stand by what I said about Larsen- there's absolutely no value in that analysis, he picked numbers out of the air "well 100% nationwide so bring it down to that first" (that doesn't mean anything, and besides wasn't Cville up 175% in that same period or something crazy?) and then "25% off that because well things are bad" (ok a number he pulled straight out of his ass. Utterly worthless.)

WHERE'S THE BOTTOM OF THE HOUSING MARKET? If we knew where the bottom of the housing market is, for Cville/Alb or anywhere else, we'd be on the front page of the Wall Street Journal. Every day for the next year

No, no you wouldn't, and I'm not asking you to have a crystal ball or make shit up Larsen-style. What the real interesting question is is "what's the fair value of these places?" I'm not sure but there's no way I'd pay $200k for 705 Montrose. What's a place like that renting for anyways? I rent a much nicer place for $1200 / month, so there's just no way you could buy a place like that as a landlord and be anywhere near cashflow-positive.

Either way, that place has a fair value and determining that is the only useful thing you can do. I don't think you understand this, I think you're looking at this through the lens of a speculator when you say things like What your "gut tells you" counts for a lot in a "Buyer's Market.... I'd counter that this isn't a buyers market, it's still totally messed up because the sales that I'm seeing go through, while lower and fewer in # than a few years ago , they're still too high. A place like 705 Montrose would probably move quickly at $150 and that's still above its fair value in a reasonable, normal market.

PRICING: We do natter on about historic income to price ratio of houses: 1 to 4. C'ville/Alb area is far beyond this. And we blather about how typical annual appreciation should be between 1.5% and 3%.

OK, great, perfect. Where is C'ville at right now?

I totally agree that there is a bubble and I saw this years and years ago when it was totally obvious. I moved here in early 2004 and rented. Buying was considered but it was clear things were insane. Still, I wrote a letter to one of the CEO of CAAR saying "come on, this is insane should I really buy after 5 record years?" I wish I had permission to put his response here, I still have it and it's still hilarious.

Anonymous said...

Maybe I wasn't clear in that last response, but just to clarify....

Everything has a value including 705 Montrose. It doesn't matter if it's a buyer's or a seller's market or if the bottom will continue to fall past fair value (at which point housing would be a great investment.)

If I bought 705 Montrose tomorrow for $80k and the market kept going down down down I wouldn't care because I'd still have made a good deal and in the long term things ALWAYS return to fair value. ALWAYS. Be it stocks, bonds, real estate or dutch tulips. Maybe some things have changed the fair value to push it even lower than it should be (overbuilding? lending standards that are too tight?)

craigger said...

Wow, lovely discussion. What is the value of anything? While quite Zen, it is a good question.

For financial assets (which would include real estate) why not listen to the guy who knows best, Warren Buffett. He says it's the discounted value of cash flows, which in RE's case is net rent after expenses. To simplify the discussion, you can use a preferred equity valuation technique.

A financial buyer without a primary residence tax break for gain on sale would want cash flow in excess of his debt to compensate for the risk of the investment. Or at least 2%.

Let's take 705 Montrose as an example. I think it would rent for 800 bucks of gross rent per month, or about 7000 per year net of all expenses. If it was an investment property and I needed my 8% return (2% risk spread + 6% interest cost). Then I would pay $7000/8% or about 88k.

If I lived in it, I might pay more to have the utility of a "home" (as my sig other calls it) and to take advantage of my tax free gain on sale that would profit from increasing inflation of wages and prices and fixed debt. A reasonable premium would depend on your marginal tax rate, but a risk premium of 0 would be reasonable (aka 7000/6%) or 117k.

If you have a particularly "home" minded significant other, you may even pay a bit more, but certainly not 197k.

If you are willing to pay more, you place more value on emotion than money.

Anonymous said...

Awesome post, that's exactly what I'm talking about. Statistics, thinking, math, awesome.

And I actually agree with your math, it seems right, and it makes perfect sense. We're not in a buyer's market till that house is selling for 120k maximum.

Brooklyn Bob said...

Wait a sec--

Larsen B got to $123K and you're mocking him, anonymous.

Craigger has the math that you prefer. OK then.

You're still in agreement.

As the bubbleheads say, they rely on comments. I've seen other of Craigger's math recently and it's always spot-on.

And if you look around at posts, especially the ones w/20+ comments, you'll find more math and insight.

Another commenter to watch for is Montpellier. I think that guy's a genius.

BTW, since 705 Montrose is in Belmont (Hellmont, Bullmont, Blowmont as the bubblers say) there's not a chance in hell it would rent for $800. Try $1200 gross.

And just for fun, try defining "fair value."