As the sellers’ market has become so profoundly pronounced in recent months, many of my buyer clients have inquired, “Am I going to be overpaying if I buy now?”. My hedged answer is, “Probably not, if you’re planning to stay at least a few years.” Factors contributing to the current climate include interest rates at historic lows, a remarkable shortage of inventory of single-family homes and a rapid reordering of preferences due to the pandemic. Additionally, the construction industry never quite recovered from the last recession, further constricting the housing supply. It is no wonder prices are climbing around the country and in the Washington region. Swift increases beg the question – is this a bubble?
The housing downturn of 2007-2011 resulted from loose monetary policy, even more flexible loan standards, and an assumption that the value of real estate could only ever go up. Manifestly unqualified people were given 0% down loans and adjustable-rate mortgages. This house of cards eventually collapsed, leading to a major recession that precipitated new regulation and oversight. These days, the standards to purchase a property are far more stringent. Even some of my clients with excellent credit, substantial income, and ample assets are asked to provide a trove of documentation before their loans close. As one recently said, “If I had known how involved this was, I’d have just paid cash!”
Lenders are much more careful because of the pandemic, ensuring that buyers are better capitalized than usual, given the unknowns in the current labor market. The primary difference between the last housing bubble and this recent upward march in pricing is that the increase in prices seems to be largely undergirded by a lack of supply to meet demand and higher standards to borrow money. It is hard to imagine, albeit not impossible that this market is a crescendo leading to a crash. It is possible that prices in some of our suburbs may be a little bit frothy due to the frenetic pace of the market – that they will pull back a little bit or achieve stasis as the pandemic slowly ends. Generally, D.C. area real estate increases over time – it is hard to find a long time over which the region’s housing stock did not appreciate in value.
Information from Bright MLS illustrates that when accounting for the District overall without segmenting by price or type of residential housing, the increase isn’t as dramatic as it sounds. While the District’s median sales price at $660,000 for April 2021 is up 59% from recession pricing ten years ago, it is only up 12% from April 2019 – hardly the dramatic spike that ought to indicate an unsustainable frenzy. Similarly, Montgomery County’s median sales price of $530,000 is 54% higher than ten years ago, but up only 15% from two years ago. In the last rapid run-up in the early and mid-aughts, prices increased more dramatically in less time – increases were double-digits annually for several years; the Case-Shiller index for the D.C. region from March of 2004 to March of 2006 was up 44.7% in those two years. The most recent data for this spring is not yet available, but to compare apples to apples, the same index shows the region up 13% between February 2019 and February 2021. Ultimately, steady, sustainable growth is best for the real estate market.
The shift in preferences we have seen in the last year may prevail in the short run, but I do wonder if it will be as substantial in the long run. Presumably, some of the people who expect not to return to the office will have to at least some of the time. Inevitably, the allure of walkable communities in the city will draw various buyers, including seniors, recent graduates, and young families, back into those neighborhoods after some nightmarish commutes in rush hour traffic from outside of the Beltway.
While we can’t predict the future, the best way to ensure you make the right financial decision is to buy somewhere that you anticipate you’ll want to live for some time and to make the strongest down payment you can afford - all while leaving money in reserves for an unanticipated emergency. If you can make some compromises, buy just a little bit below the top of your budget to avoid feeling stretched. Long-term, the D.C. area market is one of the most stable in the nation, and it is known for rewarding people who hold their properties with gains in equity and wealth.