Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Tuesday, October 02, 2012

Exogenous market forces impact DC's housing market

(Long and Foster is one of the largest real estate brokerages in the US, and the largest in the DC metropolitan area.)

Themail, the twice weekly e-letter on DC good government issues, calls our attention to a recent piece, "What Is Going On in The DC Housing Market?," by Megan McArdle at the Daily Beast.  From the article:

Renovated homes on our block are selling for more than 150 percent of what we paid for our (less renovated home); even wrecks are going at a substantial premium. We’re glad to think that our house is worth more, of course, but we’re also mystified. It seems to me that there remains a distinctly bubbly mentality in the city, which you can [see] a bit of in this comment thread on a local blog [Prince of Petworth]. People seem to have a hidden assumption that every house in the District will eventually be crowding $1 million in value. This doesn’t seem possible to me. Ultimately, home prices have to have some relationship to incomes. And at a traditional salary-to-value ratio of two or three times income, I don’t see where the money would come from to push everyone’s house into the $800,000 range. (Nor, needless to say, would it be a good thing for society if this happened).”

My response:

The problem with McArdle's analysis of the DC housing market is her perspective is too narrow.

She's focusing on her neighborhood and not the more "global" or exogeneous forces that shape the "local" market for residential property in the city and the region.

The market for real estate isn't limited to just people living in DC, but is shaped by people working here, and is also open to nonresidents from the US and abroad who have the money and inclination to own housing units in multiple cities.

And of course, we can't ignore the reality of a market economy. People with higher incomes can bid up and outbid people with less money for desirable goods and services, in this case, housing.  (Also see the past blog entry "Low income, high income, the market and the right to the city.")

As DC becomes a global city, there will be greater demand for housing by itinerants, which pushes prices up. We won't be like London (wealthy Russians and Middle Easterners make up a big proportion of the market, see this report or start reading the House & Home section from the Weekend edition of the Financial Times), but there is impact on the "local" housing market from global buyers. Certainly most people remember the "first" condo units downtown earlier last decade and looking up at night at the buildings and seeing very few lighted units.

So what happens is that the people crowded out of the submarkets that are increasingly global--especially in the core of the city--in turn relocate elsewhere in the city to outlying neighborhoods that aren't part of the global market, in the process the prices go up.

So in the context of the metropolitan market for residential property, DC neighborhoods are being priced upwards, while outlying areas may decline or remain steady (Arlington for example is a very strong market for residential property). 

As more neighborhoods become pricy, people move to the next closest but cheaper neighborhood, continuing the process with the end result of "reintegrating" the neighborhood into those set of neighborhoods considered attractive and repricing upwards the real estate in that neighborhood.

It's not exactly the same dynamic, but Loretta Lees' writings on "super-gentrification" are extendable to the issue, such as her paper on Brooklyn Heights, "Super-gentrification: The Case of Brooklyn Heights, New York City," which makes the point that stratospheric salaries paid to financial industry workers allows them to outbid others for the highest quality spaces. The abstract says in part that:

This intensified regentrification is happening in a few select areas of global cities like London and New York that have become the focus of intense investment and conspicuous consumption by a new generation of super-rich ‘financifiers’ fed by fortunes from the global finance and corporate service industries.

We might not have Wall Street traders bidding up properties in DC, but it's all relative, people with more money outbidding people with less money, for the most desirable places to live.

Ecological succession model, Chicago sociologyNote that this is nothing new, it's a process that's 100 years old or more, at least in the US, and is called the process of ecological succession and is an element of the theories on the city postulated by the Chicago School of Sociology in the 1920s.

What is "new" in the DC/US context is the inward refocusing back on metropolitan cores, whereas previously all the energy focused on moving on up was focused outwardly.  See "Downtowns enjoying robust population growth" from USA Today.

This upends the underpinnings of those theories of the U.S. city, which were based on the idea that people with the most income would always want to live further away from the core of the city.

This is somewhat opposite of residential living patterns in the European city, where the priciest residential real estate typically is in the core of a region, although there is no question that outward suburban migration (especially to suburbs served by the railroads) also occurred/occurs ("Invincible green lawns,"Economist).

Also relevant to this issue are two articles from the New York Times. One is more recent and about NYC, "Homes Dark and Lifeless, Kept by Out-of-Towners," while the other is from 2004 on Charleston, "Charleston: The Case Of the Missing Neighbors."

Both  make the point that itinerant residents--people who own multiple homes in multiple cities and only occasionally stay at them--absorb housing, which increases housing prices, and at the same time depopulate the city.

From the first article:

New Yorkers who stay in town during summer and holiday weekends know the empty-streets, Potemkin-village look that parts of the city take on. But some Manhattan neighborhoods are assuming that vacant feeling the year round, because the people who own or rent apartments there actually live somewhere else most of the time. This explains why, in a city of bright lights, so many windows dotting the imposing facades of Fifth, Madison and Park Avenue apartment buildings are pitch dark every evening.

Wealthy out-of-towners have always had pieds-à-terre and unused investment properties in the city. What is new is how many.

In a large swath of the East Side bounded by Fifth and Park Avenues and East 49th and 70th Streets, about 30 percent of the more than 5,000 apartments are routinely vacant more than 10 months a year because their owners or renters have permanent homes elsewhere, according to the Census Bureau’s latest American Community Survey.

Relevance of the argument to commercial property in neighborhood commercial districts

For what it's worth, a similar process of nationalization/globalization of the commercial property market in the Central Business District in turn has similar pricing effects on commercial property throughout the city, with overpricing of real estate in "neighborhood" commercial districts specifically.

DC's commercial districts have asking prices for rents 50% to 150% higher than comparable districts in other cities such as Philadelphia, Richmond, and Frederick (which is why those places tend to have more interesting and successful "neighborhood" commercial districts than DC).

This is discussed in the past blog entries "Avoiding the real problem with DC's property tax assessment methodologies," "Another example of flaws in commercial property tax assessment methodologies," and "Cleveland Park Retail: My off-hand evaluation, the rents are too high" among others.

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At 8:16 AM, Anonymous charlie said...

McArdle is an idiot. I'd hate to agree with her.

While your points are good, you are neglecting the biggest factor -- credit markets.

We're having a bit of good old fashioned price inflation here in DC, because the interest rates are being set at a national level, so we can tolerate (some) inflation here.

Sustainable -- no. And while Georgetown has the "itinerants" housing you are describing, that isn't the case in the rest of the city. Certainly nothing like Miami or Vancouver.* So there are upward bounds on pricing.

* Arabs and Persians, which are probably the biggest "itinerants" in the area tend to buy in the suburbs, not LeDroit Park.

At 8:26 AM, Blogger Richard Layman said...

upward bounds sure, but that doesn't mean that there isn't room for more upward pricing. It's all relative. The attractive housing in historic districts gets snapped up. People realize that they can live in similar close by undesignated houses for much less (that's in part what originally attracted me to H St.). As that submarket hits the tipping point, the process repeats itself.

But yes, the market forces here are different from NYC, London, inner Charleston, Miami, and Vancouver.

But all that means is that they are different by matters of degree, the forces are comparable and prices will move upward, how much I can't say.

At 9:02 AM, Anonymous charlie said...

We're talking about two things.

What is the upward bound for a DINK couple in the area. 800K? 900K? With one kid, that take it down a lot because of private school.

(Quick math, 250K joint income would support mortage around 600. Lose the car, maybe a bit more. Throw in a kid, a lot less. several kids you're out completely.)

You're talking about diffusion, where the 250K townhouse becomes a magical 800K one.

We're probably already seeing the influence of the top end because of embassy buying (i.e countries have to buy an embassy and an residence) But that is been factored in for the last 50 years, and absent china or india breaking up I don't see a lot of new embassies.

But once you get beyond the point where a DINK couple can afford a house, we're into speculatation again. And we can afford to speculate because at these interest rates you're losing money if you keep it in the bank.

At 9:35 AM, Blogger Richard Layman said...

I don't disagree with any of your points, I guess I could state my take a little more clearly:

- in the context of the metropolitan housing market, more DC neighborhoods are being rated as desirable than had been the case, so there is a revaluing upward of housing in these neighborhoods, which seems counter to the realities of how much people make

(of course, relevant to this is my joke about polygamy being legalized because you need three incomes to buy a house.)

So I see this more as a rejiggering of the metropolitan housing market somewhat.

But yes, over long periods of time, DC neighborhoods with the right transit connections, distance to the core, attractive housing stock and other amenities are increasing significantly in price.

So the inflation adjusted price (damn that I don't own it anymore) of the house I bought in 1988 in the H St. neighborhood is $174000 at 2010 prices. But it's worth double that...

At 10:08 AM, Anonymous charlie said...

When we start looking at housing as an investment, it is sure sign the price of money is too low.

At 10:08 AM, Anonymous charlie said...

This comment has been removed by a blog administrator.

At 10:48 AM, Blogger Richard Layman said...

well, maybe. Historically for nonwealthy households, a house typically is the most significant element within their household wealth portfolio. House equity is a tried and true source of capital for entrepreneurial activity, etc.

At 12:33 PM, Anonymous charlie said...

I'd don't mean to take advantage of your hospitality in restoring comments, and we've probably beat this to death, but home equity is a wealth creation tool because it one of two ways you, as a consumer, can access debt. (Student loans, being the other. I'm not including car loans and credit cards since they are based on declining secured assets)

At 4:01 PM, Blogger Richard Layman said...

At 10:54 AM, Anonymous H Street LL said...

You can buy way more than a 600k house with a 250k income, especially with interest rates so low. Even with significant student debt.

Also, DC is quite reasonable compared to say, New York. Its also more reasonable than SF. And, for example, a lawyer can make the same salary as in those cities and then buy, yes, a 600 or 800k home pretty easily. Not a bad life.

Finally, as long as the population in this country grows its hard to realistically state there will be dramatic reductions in the size of government. It just has never happened in the last 60 or 70 years ,regardless of the party in power. The focus on the central government also neglects factors such as the area having the highest percentage of residents with college degrees, etc.

At 12:25 PM, Blogger Richard Layman said...

the reason that the area has a high # of college degree educated residents is because an extranormal number of jobs related to the federal govt. (including lobbyists, trade associations, law firms, and contractors) require such.

Although of course there will be changes to the federal government and its size, by and large the economy will be stable.

HOWEVER, if the military budget is reduced even by 10% it will have significant impacts on VA and MD.

Plus, you can thank Al Qaeda in part for success in NoVA, as the increased budget for "homeland security" has helped create and support NOVA based contractors.

Of course, the NSA and Geospatial Agency (both in MD) have also benefited. E.g., the growth around Ft. Meade, but also in Aberdeen.

Most economists (I saw a presentation by Stephen Fuller a few weeks ago) see something happening regardless wrt the growth of the federal budget, and that will have some, negative, impact on the region.

Relating to this thread also is the possibility that the mortgage interest deduction will be reduced or eliminated, even if it is in phases, it will impact price appreciation.

At 8:29 AM, Anonymous H Street LL said...

Fair enough. You didn't address my first two points, though.

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