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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What bothers me most is that there are A LOT of people working 2 jobs because there isn't a lot of full-time work available. It isn't that people just suddenly can't afford their mortgage. Maybe it's because they lost their job. My sister has a master's degree in business and has been out of work for a year. I know a lot of people choose to walk away from their homes but a lot of people were forced out.

March 21 2014 at 2:33 AM Report abuse +1 rate up rate down Reply
1 reply to Cate's comment
Pamela Duncan

So many people are unaware of the damage that the Dodd-Frank bill has wrought in the housing market, and its lasting ramifications.

May 05 2014 at 1:41 PM Report abuse rate up rate down Reply

Blah blah blah schadenfreudenude blah blah blah cri-de-coeur blah blah blah vicissitudes blah blah blah............wasted my time reading this tripe.

March 19 2014 at 5:45 PM Report abuse rate up rate down Reply

This is one of the most poorly written articles I've seen in some time. PLEASSSSE take it off and put on something with meaningful facts that are relevant for the majority of buyers & sellers. We don't need more guiessing-game conjuctures that result in scare tactics.

March 19 2014 at 5:04 PM Report abuse rate up rate down Reply

Land does not change places, people change places. Keeping your neigborhood clean and investing in a good school system is important in making homes and neighborhoods attractive to purchase. What makes property valueable is location and a peaceful enviroment with its neighbors keeping the value steady to higher. The price difference has to do with sacrifice or investments made, or not keeping your house up to date or neighborhood attractive. there are to many transients that keep the value of housing moving up and down depending on their situation. If we learn to put together neighborhood associations within these neighborhoods we can maintain value and through working together as a community. This is not hard to do, but takes an effort many fail to want to take. Your Purchase of a house is one of the largest you will ever make, we should learn how to protect it. There is no reason for house values to be all over the place if we work as a community. There should be a fair market value per house all over our nation as to stop the greed if a few.........

March 19 2014 at 4:15 PM Report abuse rate up rate down Reply
Tom Harrell

i guess if ya read this article, you'll go right out and Buy that $150k tract home for $250K and think ya just made the "BEST" deal of your LIFE !

That's what they want everybody to beleive.

Problem is, the $150K house is STILL only worth $150K (or less) and when the Neighbors (who can't afford THEIR $150K house either) file Bankruptcy that $150K is gonna drop Back to the $100K that it should have been appraised at in the first place.

March 19 2014 at 3:53 PM Report abuse rate up rate down Reply

what a dumb article...waste of time to read.Says literally nothing

March 19 2014 at 3:27 PM Report abuse rate up rate down Reply

My wife and I both buy our groceries selling real estate and it is not as rosy as some of the wizards seem to think. Shady reporting by the bozos who do those things are just as guilty as the flippers. I don't know what kent_hern does for a living, but I'm sure that he feels that he earns it TOO. Our market, 50 miles south of Washington, is somewhat flat. We have had the flippers, foreclosures, and shortsales, but what we don't seem to have is confidence in where the next check is coming from, or if they are going to get whacked by Obamacare next week.

March 19 2014 at 3:14 PM Report abuse +1 rate up rate down Reply

well written and intuitive

I wish most of the commenters weren't so ill-informed- you make very good points

March 19 2014 at 3:10 PM Report abuse rate up rate down Reply

Realtors share a big portion of the blame for the housing bubble.
The sole function of realtors is too increase their own greedy take.
They do this buy maximizing the amount the buyer spends, regardless of weather the buyer can actually afford it. That is not something that concerns realtors. They also maximize their take (percentage of the sale) by constantly over valuing property.
Realtors should get a set amount for each property sold, period. Not a percentage of the sale price.
The current percentage based system allows realtors to continually drive the bubble ever upward, just the way they like it.

March 19 2014 at 2:31 PM Report abuse +4 rate up rate down Reply
2 replies to kent_hern's comment

A home sale that needs a mortgage loan needs an appraisal by a licensed apprsaiser.

March 19 2014 at 3:55 PM Report abuse rate up rate down Reply
1 reply to lionfig's comment

Yes and before the collapse, appraisers who lowballed properties were not given further work by realtors or mortgage brokers. Now, there is a pool and the appraisal goes to whomever it goes to. It's a blind process that works as intended, where in the past, "professionals" could cherry-pick.

March 24 2014 at 7:44 PM Report abuse rate up rate down

If you had any knowledge in real estate, you would understand that an agent cannot over value a home. That is why we have appraisers. The sole function of an agent is to find your buyer a home to live in and to represent them ethically with a financila transaction. A buyer spending an "extra" $20K only comes out $600. If a buyer cannot afford it then they will not get approved for the loan. $600 is hardly an amount to get worked up over when you are selling homes sight unseen with a cash buyer.

March 21 2014 at 2:39 AM Report abuse rate up rate down Reply

You are so very right. I am not a real estate agent, but I have owned five homes, and when you are looking at home prices, they are based on "comparables"--what similar homes in the neighborhood sell for--similar square footage, similar features, etc. And yes, if you can afford a big spread in a great real estate issue, have repeated open houses, run terrific ads, you may get closer to your desired selling price--but that is, as you mentioned, not based on value, but how well that property has been marketed. I couldn't agree more.

March 19 2014 at 2:23 PM Report abuse +2 rate up rate down Reply
1 reply to bloomgard's comment

An ad in a magazine does not make someone pay more for a home. That's called marketing. You need exposure to as many different kinds of prospective buyers.The home will sell based on comparables in the neighborhood and if the home offers desirable items. If someone WANTS it, then they will make an offer. You may have your opinion but it is wrong. No one pays more because of a magazine ad.

March 21 2014 at 2:45 AM Report abuse rate up rate down Reply