Mirroring what is occurring in many of the nation’s top housing markets, conditions in the Washington, D.C. metropolitan area, which includes Northern Virginia and the Maryland suburbs, show that the market correction is winding down during the first half of this year, according to Stephen Fuller, director of the Center for Regional Analysis at George Mason University.
The first in a series of reports commissioned by the Northern Virginia Building Industry Association and the Maryland National Capital Building Association, the study — "Understanding the Local Housing Market" — suggests significant repercussions for prospective buyers who delay their purchases much longer in hopes that they will find even better deals in the local housing market. Excess units on the market are already beginning to dwindle, and prices are expected to stabilize by the middle of the year, the report concludes.
The area’s “housing supply increased rapidly as investors dumped their units onto the market in an effort to capture the value gained in the preceding years,” the study says. Simultaneously, higher energy costs, interest rate fears and media speculation over the housing slowdown exacerbated the temporary softening in demand during the latter part of 2005. The process of “normalization” continued last year, and it accelerated when energy prices rose further during the second quarter.
Housing Demand ‘Solidifying’
Housing demand in the Washington, D.C. metro area is now in the process of solidifying, according to the George Mason research, in response to several factors: interest rate stability, declining energy costs, rising consumer confidence and positive factors associated with the industry entering into the prime spring home buying season.
“Annual price appreciation for 2006 is 1.8%, lower than the long-term average of 7% gain, but a sign of a return to a healthy long-run condition,” the report says.
Similar to many of the prime growth areas in the country, builders in the Washington region have had a difficult time keeping up with demand.
“The Washington area rarely produces enough new housing to accommodate the demand generated by new workers moving to the region to fill its new jobs,” the report says. “Job growth and housing prices have been shown to have a .95 correlation; that is, areas with above-average job growth have rising housing prices.
“On average, over the past 10 years, new household demand in the region has exceeded new housing unit production by approximately 15,000 units. This excess demand has driven prices up and has also driven many workers to markets outside of the Washington metropolitan area (e.g., Winchester, Baltimore) who would have preferred to live closer to where they work. Rising gasoline prices and growing traffic congestion have refocused these commuters’ desires to relocate back to the Washington area, further increasing the local housing demand and underpinning housing prices.”
The average price for an existing single-family detached home in the area declined 2.7% between December 2005 and December 2006, the study finds, and average condominium prices were 4.8% lower, with changes in price varying widely by specific locations, some of which have continued to experience price appreciation.
Inventory Run-Up Slowing Down
Looking over the past 15 years at the percentage of the supply of available units sold each month, the study shows just how overheated the local market became at the height of the recent boom and also suggests that home sales have been proceeding at a relatively normal rate even during the worst of the current slowdown.
For the first seven years of the 1990s, which included a recession, about 10% of active listings were sold each month in the region. In 2003 and 2004, when price appreciation reached its most dramatic levels, between 40% and 50% of the active listings were being sold each month. Homes were selling so fast that listings were only at about 50% of their normal level. By December of 2005, the ratio of sales to listings dropped to 26% and it was down to 16% in December 2006.
“The rapid run up in inventories has slowed dramatically in the Washington, D.C. metropolitan area,” the report says, “indicating a transition to a better balance between buyers and sellers.” Early last year, the total number of monthly listings was more than double the number of the same period a year earlier, but by December active listings were only 23% higher than the same month in 2005.
“Eventually, the month-over-year change in the total number of listings will approach zero. This ratio indicates that the imbalance between supply and demand is being reduced and that the prospects for the area’s housing market are good,” according to the study. “A normal market is good for both buyers and sellers.”
The Best of All Investment Options
Looking out to 2010, Fuller expects to see a return to average annual housing price appreciation of 7% and annual supply shortfalls of approximately 15,000 units.
The report concludes with a strong “buy-now” message for procrastinators: “The 7% average annual housing price growth trend for the Washington area is a good guide for judging the investment value of housing. An annual 7% compounded rate of price increase over 10 years doubles the initial rate; that is, a $250,000 investment will increase to $500,000 in 10 years and $1.0 million in 20 years. This has been the experience of the Washington housing market for the last three decades."
