Investor

Answer: Last week I joined ARLnow founder and leader, Scott Brodbeck, for a live podcast discussing a range of local real estate topics including market conditions, the struggle of buying, Missing Middle, and more! Scott and I hope to continue doing live podcasts when there is a good intersection of news and real estate. Look for us to go live on social media so that you can listen in or ask questions live on the podcast.

The full podcast transcript is copied below, if you’d like to search for specific words and look at where it’s discussed in the video:

Scott: [00:00:00] All right. So thank you for joining us today. We’re going to talk for about half an hour this afternoon about the state of the Arlington real estate market. This is the first time we’ve done anything like this live. So it’s a bit of an experiment. So bear with us if some of the technology does not go perfectly.

So Eli, you are noted by our readers from your Ask Eli column for just having mounds of data from which you pull insights. What is your take on the current state of the real estate market in Arlington, where we have 8 percent interest rates, and it seems like a weird place. Help us out. What’s going on?

Eli: Yeah, so it is a weird place. And where we’re at now is oftentimes, not just this year, but in other years, you get some scary feelings about what’s next. Things start to slow down and it’s generally a fairly significant slowdown from earlier in the year. And so we are experiencing fairly normal seasonality right now.

The metrics are [00:01:00] aligned with what we usually experience this time of year. Demand is petering off. Inventory is slowing down. Properties are sitting on the market a bit longer. There’s more price reduction. So this happens this time every single year, and oftentimes people make the mistake of getting lulled to sleep and thinking that they can just let the holidays come and roll easily into

the next year and buy. But that’s what everybody plans to do and oftentimes we see demand in the market quickly turn by the second or third week of January. But what we’re seeing is a little bit extreme of a version of some of those data points. And it’s because both buyers and sellers are getting pulled away from the market because of primarily the high interest rates.

There’s a lot of both parties sitting on the sideline. And so the change in days on market that we’re experiencing now is more significant [00:02:00] than compared to earlier this year than what we would experience in a normal year. We do have a larger percentage of properties on the market that are reducing their price, but we’re talking about just percentages.

So right now in Arlington, I think something a little under 40 percent of homes have reduced the price that are sitting on the market. That’s normally like in the mid thirties. And so it’s similar, but a little bit more extreme version of that. We’ve got low inventory, but an extreme version of it, right?

We are down 20, 30 percent in the amount of inventory that would normally be coming to market this time of year, even though it’s normally still pretty slow. And all of that, even though demand is particularly slow because of high interest rates, there’s enough sellers sitting things out and sitting on the sideline and keeping supply low that it’s like this balancing effect on the supply demand. And prices are mostly staying level. There’s more deals [00:03:00] out there right now than you would expect in early part of the year, but we’re certainly not bottoming out, even though it might seem that way to some sellers who after three weeks don’t have an offer and their hair’s on fire a little bit, but that’s normal for this sort of this time of year.

Scott: So if you were to compare this market to let’s say 10 years ago, I don’t remember where the interest rates were 10 years ago, but it certainly wasn’t at two and I believe lower than eight, correct me if I’m wrong, 

Eli: –four fives ish. In the early part of the decade there. We had moved into a low interest rate environment due to the stimulus and everything from the great recession

and it was low rates. And so I think generally, if I recall, we were in the fours and fives. 

Scott: So is this at all comparable to that market where the interest rates were a little slightly higher than they were a few couple of years ago? I don’t know. I was not in the real estate market myself at that point.

Eli: You know, the most recent memory people have of major shifts in the real estate market [00:04:00] is the great recession, right? Is kind of 11, 12, right? And people have been looking for patterns that would suggest we are moving into a similar pattern as that, but it’s just a totally different situation. It’s a wildly different set of economics that we’re dealing with. It’s not comparable really at all. That shock was one brought on by collapsing mortgages, enormous supply, people unable to afford their homes, short sales and foreclosures, which were sending tons of inventory to the market while at the same time, demand was down because markets were collapsing in general, stock prices were down, people were losing their jobs. And that’s why prices dropped. And so the recovery phase was a winding down of all that inventory and a rebuilding of demand as people started to get more confident around 11, 12, 13. We don’t have [00:05:00] that kind of inventory, right?

And so prices are not falling. I think it, one, speaks to the kind of the stability and strength of the Arlington market and the local DC area market. That’s what a lot of the markets in the country are experiencing just because supply is so low. So it’s not allowing the week in demand and the interest rates to really push prices down.

And so there’s not really a lot of similarities to what we had happening 10 to 15 years ago. And this interest rate shock is significant if rates come down a little bit, like they did moving through the recession, which helped to stimulate some of the market. If we drop by a percentage or two, I think, hold on, right?

If the average rate comes down to five and a half, 6%, which I don’t think it will anytime soon, but if something happens that causes that to happen relatively quickly. I mean, hold on, there’s going to be a wave of buyers coming off the market. And are off the bench and much faster than sellers will come off the [00:06:00] bench and decide it’s time for them to move.

And things could get pretty interesting.

Scott: That would be exciting. Although there are a lot of people saying that these interest rates are going to remain higher for longer. So we’ll see what happens. We’ll do a quick reset here for anybody watching live. Uh, we’re talking with ARLnow real estate columnist, Eli Tucker. He’s been doing our real estate column for four years and you agreed, Eli, thankfully to do this little experiment with us where this is for a podcast, but it’s also going out live. We’re accepting questions. If anybody’s watching on Facebook right now, you’re welcome to type a question into the comments and we’ve never done this before. So, please forgive us if it’s not working exactly as we were intending. Eli, you talked about the demand is still there in the market and DC area potentially remaining strong. I wanted to ask you about two potential factors that might be playing into the market right now. You have 10, 000 plus employees.

We don’t know how many exactly moved here for the job versus we’re already [00:07:00] there. But you have a very large private employer that keeps hiring people down in the Pentagon city area. Do you see any evidence that is contributing to increased demand on the ground in Arlington? 

Eli: Yeah, I have found a handful of new Amazon employees who have moved into the area shopping around listings, open houses and things. So you are seeing some signs of that. I don’t think that it is enough that it has caused a real material effect On the demand in the Arlington market, because they’re not only buying in Arlington, right? They’re going to be looking across the DC metro area, Fairfax County, Alexandria. And so I’m not sure where we would find support to say that these new employees moving here are creating some sort of new demand, but I haven’t gotten that sense at all.

I think what we saw, the biggest impact that we will feel is that [00:08:00] initial spark that we got, particularly in the condo market when they announced at the end of 2018 and what that did to the condo market from late 2018 to early 2020 until COVID shutdowns sent condo market into a tailspin. That market appreciated up 8, 10 percent in that time, which is totally abnormal for the condo market.

And so I think it’ll be more incremental, what we see and feel. And I think it will be hard to truly measure, especially with all the other employment that’s happening around here, and all the people coming and going. Turning over of political offices and things like that. I think it’ll be hard to truly measure.

Scott: So another factor that’s potentially weighing into the real estate market, although on a small scale at this point, to be clear is Missing Middle. We’ve done numerous stories on the passing of the Missing Middle ordinance in Arlington. It essentially takes what were formerly area zone just for single family housing and [00:09:00] opened it up to buildings of up to six units a piece.

We’re seeing a fair number of duplexes townhomes in terms of permits for that kind of construction. We’re also seeing some six plexes mixed in there, mostly around the Metro corridor. But we’re just at the beginning of this, cause it was only a couple of months ago that they opened up the permitting process and in terms of.

Missing Middle units getting built, I’m not exactly privy to how many are under construction, if any, but we’re in the very early stages of this. And even if there was a flood of applicants, the county in their approval of Missing Middle limited the number that can get approved in a given year. So this is a bit of a small scale thing. But nonetheless, I’m sure a lot of people are wondering. Is it having any impact, excuse me, on the real estate market here in Arlington? 

Eli: From a data standpoint, from a pricing standpoint, no. There’s absolutely no impact to the market at this point from Missing Middle The impact to the [00:10:00] market is all of the noise and the conversation around it. That’s where all the energy is coming from and the policy side of things.

And also, unfortunately for the handful of neighbors who are seeing Missing Middle approved applications or Missing Middle pending applications right next to them, where it’s going to directly affect their parking and their experience and privacy and things on a day to day basis. That impact is very real. But from a market standpoint, I think we are a long ways off from seeing it move the needle in any meaningful way.

I think they started accepting applications July one, if I’m not mistaken. And in the first month or so, there were quite a few applications coming in. But it’s really slowed down to a trickle since then. Maybe one new application a week, a lot of applications getting rejected and sent back for review [00:11:00] and a handful, I think maybe seven or eight total have been approved.

And from anybody that I’ve talked to and the numbers that I’ve run, I’ve looked at this from a number of different angles with a couple of developers and some architects, and it’s really hard to find situations where you can justify paying more for land for a teardown for Missing Middle at this stage than you would for single family.

And so I think most of the folks buying up or looking for Missing Middle, especially with the lawsuit out there that provides a big question mark as to what this all looks like and a lot of potential risk, I think that it’s very hard for somebody who’s paying attention to the market and understands the market to pay more for land than they would be able to profit and do well with a single family house.

And so I don’t think it’s moving the needle very much. And there’s just so many unknowns right now. For me as [00:12:00] a real estate agent, where it’s my job to value things, to understand what the appropriate acquisition price should be, what the likely out sale is going to be for a four unit or a six unit, that’s really hard right now because we don’t really know what these are going to look like. We don’t really know how the market is going to respond to different product categories and in locations that haven’t really had those types of products in them. So when you have that much unknown in what the outsale is going to be, you have to be particularly careful in what you’re acquiring them for.

So I think that we’re going to slowly learn about how the market is going to interact with missing middle, where it works, where it doesn’t work. There’s going to be some mistakes and successes. There’s going to be some great ideas and some bad ideas. And I believe this was intentional from the county that it will probably be three, four, five years before there’s enough examples and we’ve seen enough where more people are willing to put their money in confidently and actually [00:13:00] start to intentionally buy up Missing Middle and implement it. If there’s profit there. We may find out in three or four years that there’s very little room for missing middle to be profitable in a lot of areas and that’s possible.

So I think we’re a ways off from seeing an actual effect on the market. Some people I think would applaud that. I think a lot of people would also say you totally missed the point and we missed the boat here in the policy. 

Scott: You mentioned that it’s hard to get it to pencil out and people who know the market might be avoiding it.

What are you seeing in terms of who’s building it? Is it smaller builders that don’t do as much work in Arlington? Do you see any of the bigger builders dipping their toe in the water to see how it goes? What are you seeing from that standpoint in terms of who is building this out there? 

Eli: Like most one-off development in this area, it’s a combination of those things. There are some small folks names I don’t recognize, but there are also some bigger players getting involved. I don’t think [00:14:00] that they would have any problem with being mentioned in this, but Classic Cottages, they’re a huge player in the single family development game in Arlington. And as far as I can tell, they hold the most pending and approved permits of anybody. There’s not a whole lot out there. And I think they probably have four or five, maybe five or six in process or approved. And I spoke with them and one of the fears that people have is that these are going to turn into rentals.

And I certainly understand that concern. I don’t think that the numbers work out in a lot of cases for these to be rentals in a lot of the areas, but Classic Cottages has no intention to rent, right? This is for resale. They plan to build to a similar style and quality as their 2 million dollar single family homes, right?

It’ll be tuned to the price point, but they’re very conscious of their brand and their name, and they don’t want to spoil what they have in the rest of the market. I think that any builder who has a brand in Arlington, I think we will see some of the mid sized to bigger [00:15:00] players getting involved eventually.

I think that they’re going to be very careful to deliver a product that represents also the quality of their single family product. And so it is a combination. I also think that a lot of the applications in are just from homeowners. I’ve looked back at some of the public records and sales history, and it doesn’t look like there’s been, for many of these, a sale recently. To me, that indicates that a lot of these applications are from, you know, existing homeowners.

 They might’ve been renting the property out or they’re living there and they’re just curious that they’ve heard all of this money that can be made for Missing Middle. It costs nothing to put an application in. It’s fairly simple to do. You have to provide some plans and permits. That’s not very difficult. I am not convinced that a lot of those folks have truly run the profit and loss models that a builder would to bring it to market. And so, for a lot of those folks, I wonder, and I’ve wondered [00:16:00] publicly on some of my articles that I don’t know how many of these will actually make it to construction because when it comes down to starting to spend a million bucks plus on construction, that’s where really the rubber meets the road.

And you start to get into the land disturbance stuff with stormwater, which is really challenging in Arlington to get through those. And none of that has not been done yet to get to an approved Missing Middle permit. So I think that there’s also a lot of homeowners who are maybe going to get to the approved application and then try to find a builder or an investor who wants to buy a lot from them with an approved application.

And who knows at that time, if anybody’s going to agree that it’s profitable. I would guess that there is a percentage of properties that fall into that category as well. 

Scott: So a bit of a fraught question. Apologies if it touches on a sensitive area But I was wondering what do real estate agents in Arlington in general think of Missing Middle?

We’ve [00:17:00] cited in our reporting a newsletter from a real estate agent, natalie Roy, who seems to be very much opposed to it. And in fact, ran for county board essentially on a platform opposed to it. On the other hand, there are a lot of people assuming in comments, both through elected officials and in our comment section that developers and real estate agents must be all for it because you’re gaining more inventory.

So where, where does the truth lie? 

Eli: You know, Natalie, I think is doing amazing things reporting on Missing Middle and I commend her for that. I think she’s making some great arguments and really supporting a large percentage of the community. Her and I are actually overdue for some coffee to talk about Missing Middle. She disagrees with a number of my opinions on the topic. And Natalie, if you listen to this, we’re still on for coffee. I think a lot of it has to do with where the agents live. And I think for agents who live in Arlington and can be negatively affected by missing middle, they’re in a [00:18:00] single family neighborhood.

Like most people who live in single family neighborhoods and don’t want that disrupted, they’re strongly against it. I’ve talked to multiple agents who are in that situation, or most of their clients are in those positions and they don’t like it. This isn’t going to be a seismic shift in the amount of business that we can do.

Right? You’re talking about maybe if it really becomes effective, a couple dozen, a few dozen new units per year. Maybe. And mostly condo type units and stuff. And so it’s not going to be a game changer for our industry by any means, the way that the code is put together. So I would disagree that the agent community overall is supporting it just because it’s more business for us. Personally, as somebody who spends a lot of time in the housing industry, both as an Arlington resident and has a single family house with a couple of lots around me that I look at and I say, “ooh, that lot behind me could be Missing Middle. There’s a couple [00:19:00] opportunities here in my neighborhood.” I don’t like that as a resident, but I understand it. And I think that there’s progress that can and should be made on how to do this the right way. So I support it from understanding that there are gaps in our housing market that would be nice to fill.

I don’t think that the policy and the code that we have in here is going to do a good job of filling that. But hopefully this is the start of a longer term conversation to bring some new inventory and some new product to market that actually does fill some of those gaps. But without dragging the conversation all too long– No, I don’t think that the agent community is salivating it over all of this new business that’s going to come from it.

I just don’t think it lines up in that way. 

Scott: So it sounds like your answer to this is going to be yes. But just out of curiosity, is the middle actually missing? Is there a dearth of townhomes and duplexes and those kind of smaller scale [00:20:00] housing units that are somewhere between like a condo, one bedroom condo and a high rise and a single family home on its own lot?

Eli: Yeah, there is. So three and four bedroom properties exist, but a lot of those are old properties built in the forties to sixties when a lot of single family in Arlington was built and there’s not a whole lot you can do with it. We don’t have, in my opinion, enough townhouse and duplex product, and we’re certainly not missing one and two bedroom condo multifamily type housing.

That’s a ton of our housing, both rental and for purchase. And so I think when I talk about the policy, not really, in my opinion, working for what we actually the gaps that we need to work. I think the policy is going to ultimately lead to more one and two bedroom condo style development and that’s not what we need.

That’s not really what anybody is looking for. And I strongly [00:21:00] disagree with the way that the policy was structured that allows that to be the overwhelming profit driver for developers and really one of the only good paths forward. What we’re missing are the kind of 2,000 to 2,800 square foot, three to four bedroom, two and a half, three full bath that product where a young family or established family can move there, live there comfortably. It has the conveniences and the features in the floor plans that families right now are looking for. That I believe is where the gap is. And I think that it would be fantastic to find some ways to deliver that. I also think that for much of Arlington, when we talk about real neighborhoods, the suburbs where people don’t want these four to six plexes, they’re just out of place.

Those products, I do think are appropriate in some of those neighborhoods in a lot of cases, right? I don’t really have a problem with a duplex or even a well done [00:22:00] triplex or something, or we’re on a large lot for townhouses, which is not allowed now going in some areas, I think that’s the type of product that there is a gap for, but it’s not the product that is really being incentivized and the code really allows the developer community to create. 

Scott: So somewhat related question, and going back to our real estate market conversation among people my age, and I just turned 40. A lot of people my age who I’m friends with in Arlington, they are in the same boat. They bought a house at some point within the past few years when interest rates were low, or they bought a house earlier and they refinanced.

And now they’re sitting there with a low interest rate. Sitting pretty. But they bought what they expected to be a starter home. And there is just no world in which it makes any economic sense for them to trade up and go from a 3 percent interest rate or something around [00:23:00] that to an 8 percent interest rate.

Enviable position if you’re currently in the market and you’re going to be starting with that 8 percent interest rate. But nonetheless, I talked to so many people are in the same exact boat and they’re thinking, do I renovate? Do I do additions? A lot of them are taking that option, but what does that do to the market?

When you have people who bought assuming that they would be trading up at some point and now are like, I guess I stay here. 

Eli: It’s so frustrating. I have eight to ten clients that I have been working with lightly for the last kind of year and a half who are in this position and they can stay in the house they’re in. And it just is crazy to triple or quadruple their monthly payments. To make that upgrade. This is the problem across the board. It is freezing the market and it’s not providing the inventory because when those folks do end up buying now [00:24:00] a starter home a duplex or a large condo or small single family house comes to market and it allows the market to churn and move, which is good because it means more people are moving into the homes that they want to be in that they’re happy. You want that. Housing is such a key ingredient to the American life and happiness, and you want people to be able to matriculate through the housing system and what we also aren’t getting is the folks at the top of the housing system, the empty nesters and retirees selling those bigger homes that they have all this extra capacity and they’re in the same boat. It doesn’t make sense for them to sell because you know, they’re going to downsize and end up in something as expensive unless they decide to pay all cash, but everything’s frozen and I think it’s going to take a while to unfreeze it. I’ve seen studies that say we’re really not going to be able to [00:25:00] unfreeze the market until rates get to about 5%. Like that upper fours, low fives is when a lot of these folks who are sidelined, who don’t want to make that move will start to come back to the table. It’s really tough because you’ve got a lot of people who have worked very hard, who have great incomes, great savings and deserve to be able to move to the next stage of housing in their lives and with their families and they can’t and renovating isn’t pretty either. Those costs have skyrocketed and that’s not necessarily the right ROI long term for a lot of families. And so there’s, when you’re in these situations where there’s not a lot of great alternatives, it’s really hard, and there’s just a lot of frustration in the housing market. Not a lot of good answers. We’ve put ourselves in a really tough spot with people locked into super low rates and now in an environment where they might not come down to that five level anytime soon. I wish I had an answer. 

Scott: I can confirm [00:26:00] that it’s frustrating, even though I count my blessings that, you know, we bought in here in Arlington when we did where it just feels like we’re stuck, which is, it’s not the worst, but it’s also, you went into it with one expectation and now it’s a completely different reality and there’s no indication that it’s going to change anytime soon. So we’ll see. Eli, we’re at the end of our half hour that we said we were going to go here. Thank you again for being gracious with your time. I did want to throw in one bonus question at the end for those who might be interested in the behind the scenes here.

So you’ve been doing the Ask Eli column on ARLnow for a number of years. You can tell me the year it started, but what sort of reaction do you get? Do you ever get stomped in the street and Hey, you’re the real estate columnist guy. 

Eli: Yeah, what I get from a recognition standpoint is people will look at me and they, it’s a familiar face type thing, but like, it’s not easy to say, “Oh, you’re from the columns.”

So if I mention it, or I ask if they read [00:27:00] ARLnow or if I’m at an open house and I mentioned it, they go, “Oh, yes.” But it’s rare that somebody will actually stop me and say, “Oh, you do the column” because it’s a really hard thing to place out in the wild, but I’ve loved it. It has taught me so much about real estate and the Arlington market and all the time and the data.

I really enjoy it. And I know the data that I get into doesn’t really appeal to everybody, but it’s really helped me grow as a professional a lot. And I appreciate very much having the platform, the opportunity to do all that. And it’s really been a wonderful experience. Eight years in, and I hope to be having these conversations and another eight years.

Scott: I appreciate you being willing to be the guinea pig for our first discussion like this. It’s much appreciated. You always bring such insight to conversations like this when you have them with myself or other people you’ve talked to who I know and in the column itself. [00:28:00] So thanks for that, Eli. Appreciate you being here.

Appreciate you taking the time and maybe we’ll do this again soon. Sounds good to me. 

Eli: All right, Scott. I appreciate it.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.