Tuesday, July 31, 2007

Dep't of Ouch

by Tom Bozzo

Some friends of ours from the Old Neighborhood Play Group had the distinction of being among Those People who brought early-bubble-period big city sales proceeds into the Madison market and thus helped price us out of certain neighborhoods. (Not that we're looking back; we love our now not-so-"new" house and neighbors.)

Putting our friends' many other virtues aside, I'd thought of them as having been fleeced thoroughly in the purchase of their house in the old 'hood. Since they recently moved to a larger house in Madison's '70s suburbia, I just got a chance to test my view over at the city assessor's website. It was confirmed. They bought in May 2003 for X. They sold in July 2007 for 0.945X. Their house was conventionally listed, so they probably paid 6% in commissions to real estate agents on the sale. Thus, net proceeds from the sale were about $48,000 less than the 5/03 purchase price. Solving for X is left as an exercise.

Some of you may consider X to be rounding error in prices in your home markets, but it's real money here in the upper-Midwest. OTOH, if you think X sounds like a lot of money relative to the price of houses in your area's nice older neighborhoods, then there's a decent chance the bubble never inflated in your area, in which case you may not need a hard hat so much as a parachute should a full-fledged credit crunch develop.

It's just one data point, for sure, but it goes to show that market softness isn't limited to condo flippers. Houses may be "fungible," but transaction costs are substantial and will wipe out gains in flat markets. And if you think that prices are now looking swell, caveat emptor!

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(Ballpark solving for X.) I see Madison is still relatively inexpensive.

Mostly true, though other yuppies from Chicago, Minneapolis, and coastal cities helped inflate prices in other neighborhoods more.

There are yet other parts of town that inflated little, but what that means for the low interest rates -> higher present value of stream of housing services story is a subject for another post.
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