Thursday, December 08, 2005

Washington, DC Metro Area Housing Report

Over the past 5 years the Washington, DC metropolitan area has experienced price appreciation of 107% according to the 3Q OFHEO Report. One year price appreciation has been a very high 21%. It is ranked 33 out of 265 metropolitan areas in terms of highest 1 year price appreciation.

The huge price appreciation has been the result of a multiple factors; historically low interest rates ( IO / ARMs, negative armortization ) , loose lending standards, strong job growth, tax law changes, people being burned in the stock market, and of course speculation.

Many of the factors fueling the housing boom are coming to an end. Interest rates are rising, lending standards are slowly increasing, job growth in the DC area will continue albeit at a slower pace, and the speculation is ending. The speculators are bailing.

The peak in Washington, DC was probably in August of 2005; the boom period is over. The housing market started stagnating a few months ago and is now experiencing very small price declines. Inventory has rapidly increased throughout the metropolitan area.

According to this article by Reuters "After hitting a high in May, the number of contracts in Washington D.C. and its surrounding Virginia areas of Prince William, Loudoun, Fairfax and Arlington counties have fallen by about half, according to the Greater Capital Area Association of Realtors. Meanwhile, inventory of houses for sale has doubled and in some cases tripled, and homes are staying on the market 30 percent longer."

The high price properties are sitting longer. "Anything over $500,000, especially in the suburbs, is just sitting." said Gay Ruth Horney, of Long & Foster Real Estate Inc. in Maryland's Montgomery County, where inventory rose 5 percent and homes stayed on the market 7 percent longer than in September 2004. "Would-be landlords have discovered that they are not able to achieve rents high enough to cover their mortgages. she said." Seasonally adjusted monthly home sales have fallen.

Due to the rapidly increasing inventory and the changing buyer mentality sellers have been forced to either reduce prices or wait longer for a sale. The market is seeing an increasing amount of "price reduced," "huge price reduction," "price reduced to sell," "25,000 reduction," "price reduced. Must sell," "way below market value", and "just reduced"The housing market continues to weaken in the DC area. Inventory is surging. The boom is clearly over.

So what happens next? Over the next 3 years housing prices are likely to fall in the Washington area by 20 - 25% in real dollars ( inflation adjusted ). The Washington, DC metro area is thus a bubble market.

10 comments:

  1. "So what happens next? Over the next 3 years housing prices are likely to fall in the Washington area by 20 - 25% in real dollars ( inflation adjusted ). "

    Man, I think this is still too optimistic. I would say in the next 12 months, price could fall 15-20%, and 40-50% in the next 3 years.

    You gotta look at the numbers on NVAR website. http://www.nvar.com/market/marketstats/Nov05/index.html
    THEY ARE BEAUTIFUL!

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  2. 'But real estate never goes down in value'
    seems like the Washington area is slowing down- better yet is almost paralyzed. You cannot overbuild and speculate with that kind of frenzy- even with the premise, 'The Washington area is different' With thousands of condos in the pipeline, and thousands still for sale (many not selling) Let us all see if it really is different here- with the huge inventory overload, do not count on that hope.

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  3. My 20 - 25% realdollar price declines figure is for all all housing units in the Metro DC area. Price for condos, I expect to fall more then other areas.

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  4. Yeah, as someone who grew up in the DC area (and loved it), I was always sort of aghast when I heard these new out of towners justifying real estate prices by saying that DC area real estate "never goes down."

    DC had something like 800,000 residents in 1955. It had more like 500,000 in 1995. Do you think that affected prices?

    There were an annual 4-500 homicides a year in DC in the late 80s and early 90s. Do you think that affected prices?

    There are a record number of homicides in PG County right now. Do you think that will affect prices?

    Riverdale and Bladensburg used to be where the DC rich put their summer mansions. Would you pay mansion prices there now?

    They are putting an upscale mall into Landover. Why do you think it will work when a medium-scale mall failed in the exact same location?

    In a bubble, all sense of logic and history goes out the window. And there is no telling people. I think most people are programmed to believe what the "authorities" tell them. They think they are independent thinkers, but if you tell them something that contradicts the Washington Post or CNN, they look confused and go on their merry way. But I guess if someone wants to pay half a million for a cruddy old house in a high traffic, high crime area, it's their business- as long as they don't ask me to pick up the tab when it blows up in their face.

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  5. To the anonymous who grew up in DC- if you haven't been back in a while you would not believe it. I live on 14th Street, SE, which a few short years ago was a war zone. There are lots of former crack houses with 1/2 million dollar price tags dangling off the porches. A year ago anything for sale caused a panic-driven stampede and sold in a day. I have looked out my (rented) kitchen window at a decent looking 3 bedroom for the past four months with a For Sale "Price Reduced" sign out front. The neighborhood is still infested with speculators, renovating like mad to try and get the crack houses up to speed and on the market. There are also lots of houses "for rent" that are sitting there, too. My bet this gets a lot worse before it gets better....

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  6. Prince George's County has benefited from the housing bubble. I have noticed in the past year or so more young profeesionals moving into PG County because that was the only place they could afford to live. I think the upscale mall will work just because there are a different group of people living in PG County.

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  7. If things are different, why are there a record number of homicides and an unbelievable number of carjackings?

    A kid was killed, I think (not sure) at that mall a few weeks ago when he was hit in the head with a pipe during an attempted robbery.

    I really hope you're right, as I love the area.

    But human nature, in a bubble environment, seems to be to ignore all bad news. Just sort of shrug shoulders and say "whatever."

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  8. I think it might be important to say whether you mean that decline will be 20-25% in real or nominal terms. DC housing will decline a lot in real terms; to get back to being 3 times the median income plus deposit, an average house in Montgomery County would be at most around $320,000.

    But of course the Fed might pump up the money supply to keep house prices "stable," so the nominal decline might be less.

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  9. The 20 - 25% price decline is in real dollars. Thus a 500K SFH, if inflation was 10%, might be priced at 412K ( 25% real dollar decline) at the end of 2008.

    A stable high paying job market along with a growing population are likely to keep prices from declining precipitously.

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  10. 'The evidence -- both early data and the anecdotes -- are pointing more toward a hard rather than a soft landing" in the housing market, said Nicholas Perna, an economic consultant in Ridgefield, Conn. 'Prices could come down. Could it be 10 to 15 percent? There's no way of knowing, but what we're getting is more clues that you've got a decline in prices underway (Throughout the Bostom metro area and New England)

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