Bacon's Rebellion

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The Housing Slowdown: Political Dynamite in Northern Virginia

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James A. Bacon
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We warned more than a year ago that it might happen, and now it’s happening: After five years of double-digit increases, Northern Virginia property values are expected to increase only one percent this year, according to the Washington Post. The region hasn’t seen a drop in prices yet, as I feared might happen, but that still could come. As Bill Turque reports of Fairfax County:

The number of homes sold in the first five months of 2006 fell more than 20 percent, to 8,232, compared with the same period in 2005, according to an analysis by county staff. Listings of homes for sale have increased more than threefold since May 2005. Houses in Fairfax are now on the market for an average of 56 days, compared with 21 days in 2005. Multiple bids are not as common. And in May, homes sold for 97.3 percent of list price, compared with 101 percent in May 2005.

Fairfax County is wrestling with the implication for taxes. Soaring values allowed the County to cut its tax rate to $.89 per $100 of assessed value, the lowest in modern history, while still increasing the average take from homeowners. Fairfax homeowners are paying an average of $328 more in taxes than last year.

The pain of $328 per year in higher taxes is bearable, I’ve argued, when homeowners can console themselves that their property values have increased $50,000 to $60,000. For years, people could remortgage at lower rates, offsetting the higher taxes, or just borrow against the higher value of their homes. But now the refinancing boom is spent, climbing interest rates make it more expensive to borrow, and thousands of homeowners with Adjustable Rate Mortgages will find themselves paying more. Northern Virginia politicians are facing political dynamite.

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5 responses to “The Housing Slowdown: Political Dynamite in Northern Virginia”

  1. Anonymous Avatar
    Anonymous

    I work in the real estate industry (in NOVA) and I can attest first hand that things are not good.

    Increased property assessments are forcing a lot of the boomers to sell and move away from the area. I spoke with a person just yesterday that said his new assessment was the main reason they were selling their place after living there for 25 years. It went up 51% in one year!

    Another scary trend I am seeing is the fact that many sellers are moving out of the area, not just the boomers. They say the cost of living is out of control, the traffic is terrible, and the pace of life is not worth what it costs to live there.

    That’s really what is driving the inventory of homes for sale up as far as NOVA goes. Usually, folks sell a home and buy another one. That’s not happening in NOVA. They are selling their home and leaving the area.

    There is almost no denying at this point that the last two years worth of gains in home values are going to get wiped out. And, most folks agree that it’s going to get worse before it gets better. I can give you the names of dozens of people who have already had to bring money to the table in order to sell their place so they can head to The Carolinas or Georgia, etc.

    I have read that in NOVA almost 85% of all home purchases over the last 5 years were done with ARM loans.

    Now, that’s a scary thought.

  2. Ray Hyde Avatar
    Ray Hyde

    Yep, we need more places, and people are going to make them, if not here, then in some other state.

    You should not have to borrrow against equity just to pay the taxes. If that is happening it is only more evidence that real estate tax is just a mis-named income tax. Consoling your self with higher assessment does nothing to help you take that $328 out of your pocket.

    The whole assessment/tax rate thing is a shameless political shell game, and it is a current tax on income you have not yet earned. As such, it is a hidden form of borrowing.

    At the same time, there is still a projected shortfall of 200,000 some homes in NOVA compared to projected demand. But, if people really are leaving, both the demand and the economy could decline. Today, it was reported that WalMart stock was downgraded because rising energy costs are cutting into consumer spending. Yet, this very fact could increase the value of close-in homes.

    Overall, I see a leveling off of the huge increases seen lately, but not much of a decline. There is still too much demand for new homes, although I suspect there is alot of room for doubling up, if it comes to that. All of this, of course, is tied to the availability of building permits. As long as we do not pay enough taxes to pay for the services we receive, residential construction will be seen as a tax loss to the community, and the availability of permits will be restricted.

    Once those two problems are resolved, then the values of homes will subside to near rational levels, and the government will have to stop picking our equity pockets. Whether you are in government or commerce, the only real money that can change hands is the money that is available for cash flow, and that depends on income.

    We can beat up on investors and speculators all we want, but if we continue to finance our lives and our government with money taken out of capital investments, then all we can expect is to see our infrastructure decline. Accepting a lower infrastructure cost, and a lower quality of infrastructure, is one of the choices made by those who leave for Georgia, or wherever. If they had to bring money to the table to get out, as anonymous says, then they will probably be accepting lesser houses as well.

    This does not bode well for those that believe higher densities are the answer to our problems. Even EMR noted in his recent post, that the first wave of newcomers to the rural areas are able to enjoy the excess capacity on what he calls the farm to market roadways. And that is only one of the efficiencies to be gained by going elsewhere: at least for a while.

    You would hate to borrow money against your house to pay taxes based on assessment, and then have the equity evaporate. As long as the county depends on taxes based on assessments, they will be in the same boat, having borrowed money against future income based on assessments. When the taxes start coming out of sources that are not tied to assessment increases, then the government will no longer have a reason to artificially raise assessments by withholding building permits.

    That will go a long way to alleviating the cost of living issues that anonymous noted, and defusing the political dynamite.

    But, we will still have a transportation problem.

  3. Toomanytaxes Avatar
    Toomanytaxes

    I have a recollection that, in addition to ARMs, a large number of recent buyers (30%+) have interest-only mortgages. Very scary.

    Local government (and, indeed, state government) spending has become totally out of control in recent years. What is even more scary is the fact that large segments of the business community have become cheerleaders for higher and higher spending.

    During this spring’s Fairfax County budget hearings, most of the supervisors made remarks that suggested they clearly understood the housing bubble’s expansion days were just about over and that there was a strong risk to increasing spending on new and expanded programs. Indeed, several of the more moderate Democrats chastised the head of the school board for asking for 9% increases in face of flat enrollment.

    We will probably see whether the BoS is ready to change its ways come September. Right after Labor Day, when no one is watching, the Fairfax supervisors traditionally discover, and spend much of, the additional revenues that the next tax rate produced. In one recent year, the BoS increased the budget by more than 5% from the April budget. If the BoS has truly “reformed itself,” it will put most, if not all, of the windfall into the rainy day fund and other reserves.

    In any event, the end of the bubble means hard times for many and, probably, more people leaving the area.

  4. Tobias Jodter Avatar
    Tobias Jodter

    Just this week one of our key managers at our Dulles business has announced he is putting his house on the market and relocating to Georgia. My wife’s uncle has his Manassas home for sale and is relocating back to rural PA after 25+ years in NOVA. So anecdotal evidence appears to confirm your analysis. The reason for both relocations is largely due to greatly increased commute times AND the prospect of it only getting worse.

    As far as our local governments being out of control – it is my observation that the local BOS think that the sole purpose of their existence is to increase revenues for the county (i.e. grow the size of government). Strangely, both Republican and Democrat Supervisors alike seem to think this is the goal of local government.

  5. Ray Hyde Avatar
    Ray Hyde

    Thank you, Tobias. It is nice to know that at least some evidence supports my theories.

    I wonder how many anecdotes it takes before evidence becomes data?

    One problem with this is that it might still be that for every person moving out, four are waiting for the right chance to move in. This is similar to the situation with traffic congestion. Just because you offer better service or some other alternative, still doesn’t mean it will be enough.

    I have a pond that is filled by a creek. Some times it is low, sometimes it is over full, but you can’t tell just by watching the water run in or watching the water run out whether the pond is rising or falling. And, just like NOVA, when the pond is over full, then it floods and the water seeks a lower energy level and goes downhill.

    I could tax myself and create more pond infrastructure (higher levees). Then, the pond would be empty less often and and flood less often, with the same water (cash) flow. The question is, whether it is worth it.

    Particularly considering it would probably take five permits, an engineer, and twelve months just to get permission.

    Here in Fauquier county, the Dept of community development and its budget has expanded four times as fast as the population or the county budget as a whole. Considering that this is an organization that is dedicated to saying NO, it does seem a little excessive.

    In most bureaucracies it is easy tosee why the top dogs want to build the pyramid under them. But, for the most part, the BOS’s are not a giant stepping stone to a bigger and better job. Most of them are part-time as it is. Why would my neighbors want to do this to me?

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