The Coming Real Estate Bubble
Andrew Harrer/Bloomberg via Getty Images
By Megan McArdle

Three-and-a-half years ago, my newly married household acquired an actual house, a 1,750-square-foot slice of paradise in Washington's Eckington neighborhood. In real estate euphemism, the house is what's known as "lightly renovated," the neighborhood "transitional."

"Lightly renovated" meant that some stuff had been done, most of it badly, but the HVAC dated from the Paleozoic, and the yard ... um, better not to speak of the yard, unless you're a Hollywood location scout looking for somewhere for your heroin-addict protagonist to bottom out.

"Transitional" meant ... oh, you can figure it out. We had gone north of H Street and east of North Capitol to the unfashionable precincts of the city's Northeast quadrant. The most common response, when we told people where we lived, was "Where the hell is Eckington?" The second-most-common response was, "Wow [rapid eye-blinking]. I could never live there. It's too far from everything." *

Now some of the same people who politely suggested we were crazy for buying so far east are lamenting that they can't afford to buy in our neighborhood. Lest you think this is schadenfreude, let me point out that some of these people are friends I very much want to live near me; I would even give up a little of my real estate price appreciation to make that happen.**

The point is, something insane has happened to Washington real estate prices in those intervening years. There's a feeding frenzy over single-family homes in neighborhoods that are barely within walking distance of a metro. This cri-de-coeur was recently posted on a local real estate blog:

My husband and I are in the process of purchasing our first home.

Our realtor has put a focus on the Edgewood and Brookland neighborhoods since it previously looked like you can still get a house for a reasonable price.


However we have been baffled by these two recent purchases.

Are we really looking at spending nearly $600,000 for an up and coming neighborhood? Have we missed some big announcement for something coming to the area? Are we ever going to find something in our price range of under $500,000 if we want to stay in the District?

We are becoming discouraged.

Brookland and Edgewood are two neighborhoods even deeper into Northeast than ours.
These seekers are not alone; I've heard this from a lot of people who want to buy a house. The bidding wars, which were common enough when we were looking, are now frantic: People are waiving inspections and practically any other contingency the bank will let them get away with, and also paying 20 percent to 50 percent above the asking price. I feel like I've seen this somewhere before ...

Of course, I can name reasons that prices should have zoomed up in 2012 and 2013. Washington's job market is far more insulated from economic vicissitudes than the rest of the nation -- indeed, the extra government spending creates jobs here (though not as many as you might think). So it's not necessarily surprising that more affluent professionals are trying to get their hands on the one thing Washington isn't making any more of: single-family homes.

But that doesn't really explain why the same buying frenzy is happening in San Francisco.

OK, tech billionaires. But what about New York, where you also hear the same stories about Brooklyn neighborhoods? Finance may not have suffered as much as you wanted, but the Masters of the Universe have not become richer, or more numerous, since 2008.

Of course, there's a nationwide housing recovery. But what you see, when you look at the S&P/Case-Shiller index, is that the recovery is uneven, even in urban areas.

For urban residents, S&P/Case-Shiller dramatically understates things, because it covers the whole metro area.
If you look at Trulia's (TRLA) estimates of price per square foot, you see things much more clearly: San Francisco, New York, Washington and Boston now have prices above their 2008 levels. San Diego, Seattle, Los Angeles and Chicago don't. Which is why occupants of the former cities are spending so much time complaining about the crazy cost of real estate.

Now, I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?

I can tell a story about these cities in which they're somehow special and the money will just keep rolling in. But I can also tell a story in which people are paying more than they should for houses in my neighborhood on the assumption that today's $750,000 house will be tomorrow's $1.5 million retirement fund, even though incomes in D.C. can't really support an entire city's worth of seven-figure homes. I might even tell a story where today's ultra-low interest rates give several cities full of smart upper-middle-class professionals a badly contagious case of money illusion.

Which of these stories is correct? I'm not sure I know, and indeed, the answer may be different for different cities. But there are two things I do know: I'm very glad we bought our house in 2010. And I'm not going to count on any of our newfound equity until I see what happens when the Federal Reserve really begins to tighten up the money supply.

* Less common, but no less remarkable, were (from a cab driver) "I didn't realize anyone lived there" and (from a staffer at a liberal think tank) "I could never live there -- I have kids." As if we crazy denizens of Eckington might poison them when she wasn't looking.

** Cheap talk, of course, since we've no intention of moving.


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