Ghost Town

113 Atterbury Street $237 / sqft. $799,900


Orange County records show that every single house on this street is owned by an investor or the builder. The other houses aren't listed for sale, however.

For some reason, I can't find this address on any map. Buyers aren't biting; 309 days on the market. Maybe they can't find it either.

What a view

For $273/sqft, this house offers you the opportunity to bathe in front of your neighbors

Stress

When the bubble burst in San Diego, the city that first saw the end of the bubble, it was greatly effected by foreclosures at the bottom end of the market; the subprime implosion. As subprime mortgages were pulled from the offerings, volume disappeared. Prices had risen to a point that, without subprime mortgages, there were no buyers. So prices had to drop to return to a point where the population could afford houses. The irony is that the subprime mortgages was touted as an "affordability product" that allowed more people to enjoy home ownership. Instead, subprime mortgages made housing unaffordable.

I don't get the sense Chapel Hill saw much of the subprime fallout; I do think that we'll see more of a problem when the Negative ARM loans recast (scheduled to begin this fall) and we will probably see problems with regular-old ARM mortgages now that interest rates are starting to creep up. There will be more stress in the Chapel Hill market in the near future.

5526 Spring House Lane. $154/sqft. $649,000.

Here's an Orange County property that's currently on the market as an REO -- it's a foreclosure -- it's not in the Chapel Hill school district.

It was originally purchased in 2005 for $870K ($206/sqft) and was bought back by the bank (US Bank National Association acting as a trustee for Credit Suisse) for $739K in March of 2008 ($175/sqft).

The reason foreclosures often go for much less than the market price is that banks have rules about keeping non-performing assets on their books. They are in a hurry to get rid of real estate. For some reason, US Bank National Association was not, and is not currently:

Orange County property records show this foreclosure occurred on March 19th 2008. The property did not get listed until March 7th 2009. This property sat unoccupied for a full year before making it to market? It could have been listed once, de-listed, and then re-listed to give it a fresher look. Regardless, the property is on the market for 25% off it's 2005 purchase price and it's still been on the market for 52 days. An obvious question is: if the market won't snatch up a property when it's owners are aiming to price it below market value, then haven't the owners over-estimated the market value?

How it will burst

130 F-9 Estes Drive

I don't have enough data to definitively prove that the appreciation seen in Chapel Hill during the bubble years was driven by the exotic loans and the subsequent self-reinforcing euphoria over home ownership (and in particular, mortgage equity withdrawl -- MEW). What I have is this: a simple argument that appreciation is due to changes in the desirability of an area (and not simply its desirability), and a pretty short list of things that have changed about Chapel Hill in the last 10 years.

I also have evidence of a significant real estate bubble that happened during the same period and its subsequent burst in many metropolitan areas. I have two dots that are not very far apart and I see how one could draw the line. We have rampant appreciation in Chapel Hill occurring at the same time as rampant appreciation took place in the rest of the country. The bubble burst elsewhere, it's going to burst in Chapel Hill.

How will it happen?

Sales volume will dry up across the board. Foreclosures will represent a majority those sales that do take place. Volume at the bottom of the market will return, but the mid- and high-end properties will languish. These sales will be to new home buyers and investors, but the move-up buyer (the buyer that in normal times makes up 80% of the market) will be stuck in the homes due to depreciation. Eventually, the debt-riddled mid- to high-end properties will succumb to foreclosure. Once a neighborhood has been overtaken by 3 or 4 foreclosure sales -- or even sales reflecting mild depreciation, they define the selling price for the neighborhood; no sales are possible at the previous "value."

This last point is subtle but important. A bank will only loan 80% of the appraised value of a house. If a buyer wants a loan on a house that's asking $300K and has $60K ready for a down payment, then if the bank appraises the house at $250K, they will only loan $200K. The buyer has to come up with the remaining $40K for a total downpayment of $100K, or the sale falls through. (Incidentally, the National Association of Realtors has been complaining loudly about appraisals not coming in high enough.)

I exaggerate when I say no sales are possible at the previous value; they are, but they require buyers with enormous down payments. The number of such buyers are few, and, given that they're frugal enough to have saved up in a time when everyone else was digging their debt hole deeper and deeper*, they're probably smart enough to know that time is on their side.

(*some such buyers merely cashed out on the bubble and may not be the clever buyer I'm envisioning)

What have we seen in Chapel Hill so far?

Volume is down: first quarter closings dropped 42% relative to first quarter 2008. Volume in 2008, mind you, was down 29% from 2007.

Meanwhile, the average price is up 11% from last year. WTF?

So far, it doesn't seem like many foreclosures have come through Chapel Hill. That's the next step.

Today's property:

130 F-9 Estes Drive, $71/sqft, $49,900.

I believe this property is a foreclosure as it matches the free data I found here and the complete lack of effort by the realtor in the listing supports my belief. (I'm not ready to pay $40/month for the foreclosure.com subscription service.)

This property sold for $58.5K in 2008 after being sold at $65.5 in 2007. That's 23% off 2007 pricing.

This looks like price weakening at the bottom of the market...

Was Chapel Hill's appreciation justified?

106 Baskerville Circle in Durham County

Acknowledging that housing prices have increased over the last ten years, I have to counter the second of the two arguments home owners like to use to justify current prices:

Our area is better, so the appreciation is justified.

I have a funny story.

So, when I first started thinking about the housing bubble and how it related to Chapel Hill, I ran a quick google search and found this exchange on an internet forum. That's basically all google turned up besides the new Bubble Tea place on Franklin.

In that forum, about half way down the page, "Omamia" says she'd rather rent for a year and watch how the housing bubble plays out -- she's worried there would be a 20 or 30% decline in prices. "MrsSteel" respectfully disagrees. She responds that the reason that Chapel Hill is not experiencing a bubble is because of the *schools* -- "the very best in the area -- possibly in the entire state." According to MrsSteel, 20% declines will not happen.

What struck me as being so funny about that response was that a few days before I found this thread, I had been on the phone with my grandmother, who lives in Wilmington, Delaware. Her neighborhood also saw significant appreciation in the past ten years, and when I expressed concern for her over possible depreciation, she said that she wasn't worried about it. Why? The schools.

"The schools will save us" is a thought that comforts many people.

The problem with that logic is the same problem one might have with buying stock in Dell. Sure, Dell sells a lot of computers, but are they ever going to sell more computes than they are already? Is there reason to believe Dell's current sales expectations are not already built into the stock? Chapel Hill's schools might be better than Chatam county schools, so you would expect to pay a premium on a Chapel Hill house, but that premium was already built into the price of the Chapel Hill home before the housing bubble began. Appreciation during the bubble was not due to any feature of the area before the bubble began.

Fundamentally, appreciation is due to a *change* in the desirability of an area, not simply its desirability. In order to justify appreciation, one has to point at what has changed to make an area more desirable. Did incomes increase, did employment increase?

I will start looking for that data. I don't have the impression that incomes increased during the bubble years. The University is the largest employer in Chapel Hill proper, and I don't have the impression that they started paying higher salaries, or that they increased employment.

Maybe the triangle as a whole? RTP has been expanding, right? Maybe RTPs expansion has something to do with Chapel Hill's appreciation?

I don't believe this is the case and here's my flimsy data to back it up: Durham properties did not show the same appreciation Chapel Hill properties did. I would expect that RTP would have had a similar effect on Durham properties as they would on Chapel Hill properties; RTP is in Durham.



The Durham median-price line is the orange one that's pretty much flat (143K in 2005, 160K in 2008). I need to look harder to find a 10-year plot for Durham.

There are many Durham properties that are listing in the $130/sqft range -- I happen to have found this one because it turns up when you search for Chapel Hill on Realtor.com. How much of a premium should a Chapel Hill property command over a Durham property?

106 Baskerville Circle $131/sqft. Asking $369,000

*Update*

I'll weaken my own argument here: Durham county housing did appreciate during the bubbble; it looks like it saw a 50% appreciation in the last ten years. This is less than the appreciation Chapel Hill housing saw.

Prices rose

102 Windhover Place.

There are two common defensive tactics that current home owners will take when trying to defend the idea that current housing prices are here to stay.

1) Our area didn't see appreciation the way other areas did (e.g. California).
and
2) Our area is better than other areas, so any appreciation made sense.

In this post, I'll address tactic #1.

Did prices rise in Chapel Hill? Yes.

This tiny graph from Zillow shows the median home price in Chapel Hill over the past ten years.



Ten years ago, the median home sold at $178K, Back in March, the median sales price was $356K. Prices doubled. I don't think these figures are inflation adjusted; however, inflation has been in the 2% range during this time. 1.02^10 = 1.20, meaning that if property values merely kept up with inflation without any of that evil appreciation like they had in California, then they should be selling for 20% more than what they were 10 years ago. In this time, housing prices appreciated at roughly 7% a year (1.07^10 = 2).

Put another way, houses currently are 40% more expensive than they should be.

Today's property:

102 Windhover Place $148/sqft. $359,500

This is home is a little bit better than the median in Chapel Hill. Back in April, its owners were asking $379,500 -- a bit above the median selling point in March. In 1998, it sold for $230,000 -- a bit above the median selling point in 1998. The current owners stand to make $120K for having lived in a house for 10 years. Good job guys. Way to house live.

Of course, they only make this money once they have found someone who wants to assume an extra $120K worth of debt. The house has been on the market now for 74 days.

Meadowmont, 18 months of supply

207 Oval Park Place

The rule of thumb, according to the Seatltle Bubble Blog, is that 6 months of supply is a balanced market. Fewer than 6 months of supply is a sellers market, more than 6 months of supply is a buyers market.

Meadowmont has seen 2 properties close in the last 31 days. There are 36 active listings. There are 2 continent listings, and 5 pendings. Discounting the contingent and pending listings, Meadowmont is looking at 18 months of supply.

So, should we count the pending sales? How likely are they to go through? Given the rapid rise in the interest rate on 30-year fixed-rate mortgages, (roughly 20% increase as interest rates went from 4.5% to 5.5%), many pending sales are falling through at the last minute; if a buyer got a quote but didn't "lock in" the rate, then when they go to close, they'll find out they're no longer eligable, the sale falls through, the home ends up back on the market.

Generally, people are no longer looking at ARM mortgages. If you can only afford the monthly payment when the government is artificially holding interest rates at historical lows, then you'd be in trouble the moment they let go; maybe the government won't let go? Well, looks like last month, their grip wasn't strong enough.

Pending sales in Meadowmont:
331 W Barbee Chapel Road, $593/sqft, Asking 1,550,000
341 W Barbee Chapel Road, $551/sqft. Asking 1,400,000
343 W Barbee Chapel Road, $530/sqft. Asking 1,100,000
339 W Barbee Chapel Road, $517/sqft. Asking 1,100,000
709 Spring Street, $142/sqft. Asking $174,900

I'll keep you posted when and if these homes close or if they end up back on the market. That first home had been looking for a buyer for 593 days before it found one. Let's say all of these homes close in the next week; then Meadowmont would be showing 7 sales and 36 listings; less than 6 months of supply. A seller's market? I remain skeptical.

That last listing is on the other side of 15-501. Seems much more reasonable.

Today's property:

207 Oval Park Place. $308/sqft. Asking $1,395,000.

This house has been on the market since March 17th, 2007. It's been 830 days.

It was purchased in 2001 for 1,089,500. Apparently, the next generation needs to pony up another quarter million to keep the Ponzi scheme going.

Southern Village: 170% appreciation.

203 Edgewater Circle. Asking: $206 / sqft. Price: $634,900.

I'm starting a new theme to my sporadic posts on this blog.

I have been in awe of the incredible reporting on the housing bubble in Irvine California from the Irvine Housing Blog as well as from the Seattle Bubble Blog, the Real C'Ville Blog and the Housing Bubble Blog. The new theme will describe properties in Chapel Hill, North Carolina, which I believe are over-valued. I am looking to eventually buy a house in Chapel Hill, but I don't want, having saved up money for several years, to put a down payment on a house and then watch that down payment evaporate as the house depreciates. The purpose of this blog is mostly to remind myself* of two things:

1) In the past 12 years or so, the selling price of homes in Chapel Hill has grown beyond historical standards.
and
2) The selling prices of houses in Chapel Hill have not yet deflated significantly the way they have in California, Nevada, Florida, DC, and other parts of the country. I think they should and that they will.

(*I don't believe anyone reads this blog besides a handful of close friends. I've always kept this blog for me more than for my readers. That will likely continue.)

There are bears out in the world, and in the past few years, their voices have had more sway. Their basic premise is this: "exotic" financing changed the supply/demand characteristics in the housing market, causing an increase in prices. Exotic financing is now gone, therefore, the supply/demand characteristics in the housing market should cause a return to affordability in the housing market.

Coincidentally, "exotic" it an anagram for "toxic". Well, it's almost an anagram. Maybe you've heard of toxic assets and the ruin that they have brought upon Wall Street? Those toxic assets are these exotic loans. They're being flushed out of the system at considerable expense to the tax payer. New mortgages are no longer exotic, but older toxic mortgages are still out there and will be bleeding the housing market for the next few years or so... we'll have to wait and see.

What I love about the Irvine Housing Blog is IrvineRenter's ability to look into the financing history for properties. He's watched California residents go deeper and deeper into debt to afford their extravagant lifestyles. I would love to be able to look into the financing details of home owners (often called home debtors or fauxowners -- come on, being $500K in the hole doesn't make you an owner, it makes you a debtor) in Chapel Hill. I don't have access to the same data that IrvineRenter has; I'm not in the real estate business, so I don't have access to the same database.

But I do have access to public records online through the Orange County website. I admire IrvineRenter's insistence on home-owner anonymity. While I intend to talk about specific properties, I have no intention of talking about names of actual owners. Like IrvineRenter, I will monitor the "comments" section of this blog and delete posts that mention the home-owner's name.

So that brings me to today's post:
203 Edgewater Circle in Southern Village.

Currently, it looks like sales in Southern Village are happening at the $205 /sqft range -- except, there aren't many of these sales, and there are a lot of houses for sale. This house is not overpriced when it comes to comparable recent sales, but it is way more expensive today than it was in 1998 when this house was built.

In 1998, public records for this property show a sale at $235K, or $76/sqft. In 2002, this house sold for $360K, or $117/sqft. In 2007, at the height of the bubble in every other city in North America, this house sold for $598K, or $194/sqft.

Now, two years later, the owner is seeking a futher appreciation of $12/sqft. If the current owner gets their asking price, then in the 12 years since its construction this house will be sold for 270% of it's original price.

See, now, here's my problem. This is a Ponzi scheme. Future residents purchase the debt burden of previous residents and then kick in extra money for the time and effort of having lived in a house.

What? You make money by living in a house? Sign me up!

The thing about house-living is that it's not hard. Anyone can do it. You can do nothing with your life, contribute nothing to humanity or society, and yet be rewarded by having resided in a house. House-living is the occupation of the future. Right?

I think Southern Village will bottom out in the neighborhood of $117/sqft when this bubble finally deflates.