Washington D.C. Housing

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David Berstein over at The Volokh Conspiracy has a post about the decline in housing prices in Washington D.C. area. It would appear that a decline has already begun and looks to conitnue further. He mentions a fact from one of the articles:

Meanwhile, new construction is inflating the housing supply, as condominium developers rush projects to market. According to a recent report by Delta Associates, 47,000 units in dozens of projects are hitting the local market in the next three years, which is about five times as many condo units as were sold last year.

The real estate market has a number of inefficiencies. For an excellent discussion of these, I recommend this paper which I ran across when researching credit expansion issues. Also, read the case studies of the various real estate booms and resulting busts. Investment decisions are made when the funamentals look good and demand outstrips supply, but projects can be completed when the fundamentals are poor because of the long lag times due to planning and construction. I would imagine that in a city like Washinton, these issues would be even more important.

2 Comments

Yes, I understand the economics, but what happens then in reality?

You have all of this new supply with no demand. New homes are empty because no one's buying. Economics tells me that the price will go down until someone buys the property or the housing will be used in another fashion so as to make it profitable (e.g. if you bought a house to live in, you may try to convert it into a rental). But how does this occur in reality?

Does the builder/owner of the home or housing project go bankrupt? Or does he just sell it at a loss? Does the individual with the most senior secured interest in the home snap it up? Or is the home sold by the interest holders at the now lower, prevailing rate and the money is divided between the secured interest holders?

Every loan office wants to be a vice president. So, they make the kind of loans the guy who made vice president this year was making five years ago, when he was a loan officer. What happens now? I hope that David Bernstein gets himself a swell deal on one of the cut-price condos soon to be on sale near George Mason Law School, and can walk to work.

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This page contains a single entry by Bob published on November 28, 2005 1:15 PM.

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