The Unreal Estate Market and Me

Weekly Standard, December 10, 2006
By Jonathan V. Last

The real estate market is a complex beast, one only dimly understood by the mere mortals among us. Thank God we have real estate professionals. Unlike, say, journalists, Realtors undergo hours of rigorous training. They even have to pass a test. So they're a lot like doctors, maybe even priests.

If Realtors are indeed a priesthood, then David Howell is their oracle. After I bought my first home, a condo in Old Town Alexandria, in the spring of 2004, I began receiving a monthly newsletter from the local real estate giant McEnearney. Prominently featured in the three-page mailing is MarketWatch, a column penned by Howell, the managing broker of McEnearney's office in McLean.

Unfortunately, the pronouncements of this particular oracle, while absolute and pure, are sometimes hard to understand and, over time, even harder to reconcile.

When I first started reading Howell's column, in 2004, the real estate market was roaring. He wrote: "Ten More 'Boom' Years? The National Association of Realtors' Chief Economist David Lereah expects the current real estate boom to continue for the next decade. . . . And if you have been reading this space for any period of time, you know that we feel just as strongly about the health of this area's housing market."

In his first dispatch of the following year, Howell asked: "2004 Was Another Record Year -- Could 2005 Be Even Better?" The answer was affirmative. "Despite predictions from many this time last year that the local real estate market would begin to taper off in 2004, it was another record year for home sales in Northern Virginia. . . . Is there any way the market could improve over these staggering numbers? Yes -- with a key exception. We believe that the number of sales will increase in 2005. . . ." In nearly every column he wrote in early 2005, Howell gleefully related the market's enormous gains in sales prices. And although he would sometimes hedge his bets, writing that such runaway increases probably wouldn't last, even he didn't seem to believe it. "While some in the national press continue to talk about a housing bubble that's about to burst, we maintain that 2005 will set new records for the number of sales," he wrote in his February/March column that year. "We had also projected home price appreciation in the range of 7% - 9% for the year. . . . It turns out that, if early indications continue, we were wrong. We weren't optimistic enough! The average price of homes that settled in January 2005 climbed 21% from January 2004 sales, and the median price jumped by 26%. We know this is too early to say that this trend will continue, but we are also seeing the lowest inventory of available homes on the market at any time in at least the last 20 years."

It's hard to square disclaimers about slower appreciation with such statements. But then again, the path to wisdom is an arduous one.

One thing that wasn't hard to understand was Howell's dislike of the media. He has gone after publications from the Nation to Fortune, and he really dislikes The Washington Post. In March/April 2005, he assailed a Michael Kinsley opinion essay in The Post that argued that the housing market was due for a correction -- and that the correction would be good for the country. Howell insisted that there would be no downturn and that, regardless, there was no upside to a real estate crash. "[Y]ou and your colleagues similarly do not understand the dynamics of the residential real estate market," he thundered. "Local real estate professionals do."

By summer 2005, the number of purchase contracts was decreasing precipitously. This caused worry for some people who thought that drops in contracts were often followed by rising inventory and falling prices.

But the oracle was there to steady us. "Has the market finally topped out?" Howell asked. "No, it hasn't. In fact, in most senses the market has never been better." In the July/August 2005 MarketWatch, Howell explained that "the rate of home price appreciation appears to be moderating just a bit. We have stated for some time that the 22-25% home price appreciation that we have witnessed for the last two years is not sustainable over an extended period of time. . . . We fully expect that prices across the board will be rising between 12% and 15% by the end of the year."

By autumn of 2005, the oracle was again troubled by the unbelievers: "[I]t would appear that any number of media outlets have decided that there is money to be made in spreading baseless fear that the real estate sky is falling. . . . Is the market softening? Absolutely. Are properties taking longer to sell? Absolutely. Is there substantially more inventory on the market in Metro DC than this time last year? You betcha." Then Howell dropped the hammer:

"Is it possible that some area home prices might actually go down? Possible -- but not probable. What we are seeing is the expected return to a more normal market after two white-hot years that were anything but normal. Instead of 20-25% appreciation, expect the average price to rise 7-12% next year. . . ."

In his March/April column this year, Howell began with a quote from a local lawyer: "Real estate here will never depreciate." The quote was from 1891. Later in the column, Howell casually mentioned that "we would not go so far as to say that values can 'never depreciate.' Twice in the 1990s, the average sale price of a home in Northern Virginia dropped from the previous year."

Somehow, I'd missed that small fact in his prior columns -- maybe because he'd never mentioned it in all the months I'd been reading MarketWatch.

By spring of this year, overall inventory in Northern Virginia had increased 442 percent from the previous year, Howell said. Houses were sitting on the market longer, and Howell had all but stopped including figures for average and median sales prices in his columns.

Clearly, the oracle was testing my faith.

Then came the June/July MarketWatch. "When demand drops and supply increases, prices fall. That's Economics 101, right?" Howell asked. "Wrong. Remarkably, 4.6% represents the increase in the average sales price from the first five months of 2005 to the first five months of 2006. . . . While 4.6% is a far cry from the 20% - 25% annual increase that we have seen in the last several years, it is nonetheless a truly remarkable number. A note of caution: This does not mean that all homes are worth more today than they were this time last year because that clearly is not the case. Some homes, based on neighborhood-level supply and demand, have fallen in value."

So, it seems that declining prices had moved from the realm of the improbable to the "clearly" obvious. If I hadn't seen it happening in my own neighborhood, I wouldn't have believed it.

The September/October MarketWatch gave the "Top Ten Reasons to Be Optimistic About Northern Virginia's Housing Market." Reason No. 1: "The softening of the market. Believe it or not, that's a good thing." (Take that, Kinsley!) Howell also noted that the market has history on its side. "The compounded average annual increase in the average sales price of a home in the metro DC area over the last 30 years is 7%. . . . We won't see that in 2006, but an individual's housing decision should be a long-term decision. Feel good about owning a home here -- unless you have to sell right now."

Fortunately, I don't have to sell right now. My wife and I can wait for those 7- to 12-percent annual increases, which I'm sure are right around the corner.

That's what we thought, anyway. But Howell's October/November column was more sober:

"Most of the major statistical indicators of the health of Northern Virginia's market are trending down, but we still believe that there is a 'soft landing' going on, not a crash. Inventory of available homes is up; the number of contracts is down; it is taking longer for properties to sell. . . . As a consequence, the average sales price of a home in Northern Virginia has actually dropped about 6% -- on average -- from this same time last year. Nonetheless, we remain confident that the market is experiencing a wholly expected and normal adjustment after several years of ultimately unsustainable price appreciation."

Hoping to rid myself of confusion, I sought wisdom from the only source who could ease my anxieties -- the oracle himself. I called Howell and asked him if, in hindsight, he had been too optimistic.

"Maybe a little," he responded. "But honest to goodness, I don't think very much. . . . Yes, my projections were probably a little on the rosy side. But there are still folks who are talking about a bubble bursting or prices really coming unglued. . . . Are prices down now compared to where they were a year ago? Absolutely. But if you look through a slightly different side of that same prism, prices today are still considerably higher than they were two years ago. . . ."

So, I found my consolation -- and I remain confident in David Howell. If you get too bogged down in numbers, you might encounter bad news. But oracles serve deeper truths. After all, Howell does this for a living.