Expect A Slower Market Until February

Question: Does the Arlington market change in the winter?

Answer: November marks the start of the traditional “winter market” in Arlington that is defined by fewer homes being put up for sale and homes sitting on the market just a bit longer than they did earlier in the year. The decrease in new inventory will be obvious to anybody who has been searching for a home in 2019, but you’ll barely notice the increase in how long homes are taking to sell because the market is moving so quickly that even a slowdown will mimic spring markets in previous years.

Sharp Decrease In New Inventory

Historically, the fewest homes hit the market in Arlington from November-January, with the pace of new listings in December coming in at nearly 1/3 the rate of new listings from March-May. With inventory levels in 2019 already at historical lows, this winter will feel especially short on housing supply.

Month Contribution to Total New Listings
Buyer Demand Cools Off

Historically, the percentage of homes that go under contract within the first ten days decreases from November-January, with November and December (holiday season) having the most noticeable reduction in quick sales. However, with the pace of the Arlington market at all-time highs in 2019, you can expect the drop in demand in November and December to feel like peak spring demand in previous years.

Percentage of Homes Under Contract in First 1-10 Days
Is The Winter The Right Time For You?

The winter can be a great time to buy if you’re more focused on value because demand decreases so you may pick up some negotiation leverage.  However, if you’re searching for something unique and struggling to find properties that fit your criteria, the odds of the perfect place hitting the market in the winter decreases.

Given how low inventory is heading into this winter, I’m not sure buyers will find as many deals as they have in previous years. Demand is still strong from buyers who haven’t found a home yet in 2019 and low supply makes it a strong market for sellers, even during the holidays.

If you’re considering buying or selling in Arlington or the surrounding DC Metro communities and would like to learn more about the impact seasonality will have on your process, feel free to reach out to me at Eli@EliResidential.com.

Making Up For A Questionable Housing Report

Question: I recently read an article by the Sun Gazette that median price per square foot was down since last year in Arlington and the rest of Northern VA. Is that what you’re seeing in the market, despite reports of prices going up?

Answer: I read that article as well and was equally confused by the statistic that $/sqft was down 6.8% in Arlington in the first nine months of 2019 compared to the first nine months of 2018. While this data point may be technically correct, it doesn’t accurately represent what’s happening in the Arlington/Northern VA marketplace. Even without having access to the data behind it, does anybody believe that with all the news about the Amazon-effect on Arlington’s real estate market, that people are paying less per square foot in 2019?

Price-per-square-foot Is Actually Up (obviously)

The truth is that while the median $/sqft did drop year-over-year in the first nine months of 2019, it was actually due to a shift in the type of inventory that sold, not because buyers are getting more for their money. As I pointed out earlier this year in an article about a national news story on Arlington’s real estate market, it’s easy to find market data that sounds interesting (aka generates reader clicks) but doesn’t tell an accurate story.

When I drilled into the 2018 vs 2019 data on median and average $/sqft, I found that within comparable sub-markets (e.g. 2BR condos, 4BR single-family, etc) median and average $/sqft increased year-over-year. In fact, if you use average $/sqft instead of median, like the article references, there was a 9.5% increase across Arlington. In this case average is a better statistical measure than median, but of course the median $/sqft made for a better story.

Accurate Headlines From The First Nine Months

While I have the data together comparing the first nine months of 2019 to the first nine months of 2018, I’ll go ahead and offer up five headlines that accurately represent the Arlington real estate market through September 2019:

  1. The market is up, but not by as much as you might thing based on some new stories. The average purchase price in Arlington jumped 5.8% to just over $722,000.
  2. A lack of inventory drove total sales down by 8%, with the biggest drop-off showing up in the condo market which suffered from a 12.3% drop in sales, led by a 13.6% drop in two-bedroom condo sales.
  3. The price range of the middle 50% of homes jumped from $380,000-$864,300 in 2018 to $415,000-$916,000 in 2019, a 9.2% increase in the lower limit and a 6% increase in the upper limit. This indicates that the Amazon-effect is impacting lower price points faster than upper price points which makes sense because investors and other speculators are more likely to purchase at lower prices.
  4. Good properties sold much faster in 2019 with 62.7% of homes selling in the first 10 days, compared to 46.4% in 2018. The craziest stat? 85.5% of 2BR townhomes/duplexes sold within the first 10 days.
  5. Price growth in the 22202 zip code, the area surrounding Pentagon City and Crystal City aka National Landing aka Bezosville, led all Arlington zip codes with a 13.7% jump in average sold price.

If you ever run across market data you’re not sure about or would like a customized data analysis, please reach out to me at Eli@EliResidential.com.

Is iBuying the Next Trend in Real Estate?

Question: What do you think about the iBuying trend in real estate? Have you seen an impact in Arlington?

Answer: iBuying offers homeowners a way to sell their home quickly without going to market, using a price generated by an Automated Valuation Model (AVM) like Zillow’s Zestimates. The big players are Opendoor, Offerpad, and Zillow but recently some well-known brokerages have joined the party including Redfin and Keller Williams.

At this time, none of the main players are offering iBuying in Arlington or the DC Metro. Currently, the largest iBuying market in the country is Phoenix with about 6% of transactions going through an iBuyer (half of those are with Opendoor).

How It Works

The process of iBuying is similar for each company and looks something like this:

  1. Homeowner submits a request for an offer and provides some basic information about their home (bedrooms, square footage, etc)
  2. iBuyer makes an initial offer on the home based on their AVM pricing algorithm
  3. If the owner likes the price, the iBuyer conducts a property inspection to determine condition and cost of repairs
  4. iBuyer makes a final offer given the property condition
  5. Owner can accept and close usually within 10-14 days

Advantages

  • Sell quickly
  • Sell as-is
  • No showings
  • No repairs or improvements
  • No contingencies that cause contract to void
  • No cost to get an offer

Disadvantages

  • Sale price likely below market value
  • “Service fees” usually range from 7-10% of the sale price, well above most commissions when using an agent
  • Still pay your normal closing costs (taxes, title fees, etc)
  • iBuyers not operating in most metro areas

When Does An iBuyer Make Sense?

There are all sorts of reasons a homeowner may value speed and convenience over price so iBuying exists for that market, but it should remain only a small percentage of the overall real estate transaction market. iBuying won’t always be the best option for somebody looking for speed and convenience, but with no cost and little effort to get an offer, it makes sense to at least see what an iBuyer is willing to pay.

If you’re in a market where iBuying exists (or when it eventually comes to Arlington), why wouldn’t you request an instant offer from an iBuyer and compare it to what your real estate agent thinks you can get on market? I know a broker in Texas who got more for his house from an iBuyer than he could get on the market because the AVM pricing algorithm over-valued his house.

Will iBuying Last?

I’m not sure how iBuyers will survive an economic downturn when they’re sitting on a huge amount of inventory that’s worth less than they paid for it. It’s a great business model in a hot market, but potentially devastating when the market turns.

Another flaw I see in the current model is that homeowners (like the broker in Texas I mentioned earlier) can take advantage of the process. An owner who does their homework, meeting with agents and getting iBuyer offers, will most likely only choose the iBuyer if they’re over-paying. That’s great for owners who can take advantage of it, but I’m not sure how that can be a sustainable business model.

An additional drawback is that iBuyers generally charge a fee of 7-10% of the purchase price, which is mostly attributed to the risks associated with buying based on an algorithm and a basic property inspection. If iBuyers can figure out how to reduce risk enough to cut this fee in half and sustain themselves through downturns, things will get interesting for the real estate industry. There have always been brokers and investors who specialize in “buy now” or instant offer programs, but what makes iBuying unique is the implementation of technology to determine pricing and to make the process more convenient, as well as the scale of operations. I think the longer-term solution is something that blends the convenience and scale of a well-funded tech company with the market knowledge of a local agent.

What’s Driving Arlington’s 2018 Condo Growth?

Question: Are there specific buildings or sub-markets in Arlington that were responsible for the jump in condo values in the first half of 2018?

Answer: The most interesting data point that came from last week’s mid-year real estate review was that, for the first time in years, condo prices appreciated significantly from the first half of 2017 (9.1% growth). I received a number of emails from readers asking if this growth occurred across the entire condo market or in specific locations or buildings so this week’s column takes a deeper dive into the 2018 mid-year data for condos in Arlington.

 

Growth and Demand Increase Across the Market

The good news for condo owners in Arlington is that appreciation and demand increased across all markets in the first half of 2018. In fact, 63 of the 79 measures for appreciation and demand improved (if you’re a homeowner/seller). To test the market, I looked at average price and three demand indicators (days on market, purchase price to asking price ratio, and number of sales) broken out by zip code, building age, and price range. The data compares pricing and demand trends in the first half of each year for all condos sold in Arlington. Cells highlighted in green indicate improvement (for homeowners/sellers) in that category for 2018.

 

All Eight Zip Codes Appreciated

Demand indicators supported the price growth, with most zip codes seeing a faster pace of sale and buyers negotiate less off original asking prices. For those tracking new construction in Arlington, only 11 of the 98 sales in 22209 were in Key & Nash and it’s important to note that builders do not enter all of their sales into the MLS, so a large percentage of those sales are missing from the data. Note that 22205 is not included because of the lack of volume.

 

 

Older Properties Surged

Many older buildings in Northern VA are struggling to recover from their peak pricing from 2005-2007, which has left many owners in a difficult financial position. The strong appreciation seen in condos built before the 1970s will be a much-needed relief for many and proves that Arlingtonians and investors are seeing value in older, less expensive condos compared to their newer, amenity-rich neighbors built in the last 20 years. Check out the huge drop in average days on market for condos built in the 1950s or earlier!

 

 

Higher Demand at Every Price Point

Demand picked up the most for less expensive condos, but every price range saw at least two demand indicators increase in the first half of 2018.

 

 

If you own a condo in Arlington and would like to take advantage of the recent appreciation of your property, feel free to email me at Eli@EliResidential.com to schedule some time to talk about your options.

 

Question: We have been searching for a home for over 6 months and have expanded both our criteria and budget, but still not finding something we like. We have heard that the housing supply is low, is that true for Arlington?

Answer: The housing supply shortage in Arlington is a big problem and it’s not just Arlington that is feeling the pain, it’s most of Northern VA and the greater DC Metro (nationwide as well).

You’re not alone in your experience either, we have a handful of clients who have been looking for the better part of a year while also expanding their search area and budget, but unhappy with what’s available.

So, is the housing shortage mostly anecdotal and buyers are just too picky or to cheap? Nope… here are some charts that highlight the alarmingly low housing inventory in Arlington:

Eight Consecutive Quarters of Fewer Homes For Sale, Year over Year (YoY)

After seven straight quarters of YoY decreases in the number of homes for sale, Q1 2018 brought us the largest drop in YoY homes for sale with 21.1% fewer homes for sale than Q1 2017, which was already 7.2% lower than the number of homes for sale in Q1 2016. The chart below represents all homes for sale in Arlington.

 

Existing Housing Supply Would Only Last 1.5 Months

Months of supply measures how long the existing housing inventory would last given the last 6 months of demands (absorption). Most economists say that 4-6 months of supply represents a well balance housing market and Arlington has hovered around 1.5 months of supply for the last 6 months.

I broke out the chart below by housing type (detached, townhouse, and condo) to highlight the fact that the problem exists across all housing types, but town-homes have historically been the least supplied type of housing in Arlington.

 

Good Homes Are Selling Much Faster

This chart shows the YoY change in the number of homes sold within the first 10 days on market, which has increased the last six quarters in a row. There was an impressive 53.4% YoY increase from Q1 2016 to Q1 2017, followed by yet another double digit increase in homes sold within the first 10 days from Q1 2017 to Q1 2018.

 

The $1M+ Home Market Is Healthy

The only sub-market in Arlington with a healthy supply are homes listed for over $1M, with around four months of supply, while everything priced from $300k-$800k is under one month of supply.

However, the $1M+ sub-market is only “healthy” on paper, take a deeper look and you’ll see two major problems (cue comments that the problem with $1M+ homes is that they are $1M+). First, most of those homes are actually $1.5M-$2M and second, most of those homes are tear down/new construction with very similar size and design, leaving wealthy buyers who don’t like new construction with very few options.

 

Tips For Buyers

Here are some tips for buyers searching for hard-to-find homes in a tough market:

  • There are few, if any, great deals in an under-supplied market. In this market, good value is finding a home that meets most of your criteria, that you’ll be happy in, that you can afford.
  • If you want to negotiate, your best bet is to find something that has been on market for at least 2-3 weeks otherwise you’ll accumulate more rejected offers than homes currently on the market
  • Put in the time early in your search to understand the market so you can recognize the right home when it comes on market
  • Base your offer on what the home is worth to you, not just the asking price
  • Understand how Escalation Clauses work and use them to your advantage
  • Find out if there are offer deadlines (usually the Monday or Tuesday following the first day on market)
  • Understand the cost-benefit of contingencies (inspection, financing, appraisal are the standard contingencies) and how you can maximize the strength of your offer with limited risk exposure
  • Consider doing a pre-inspection — a home inspection before you make your offer
  • Have a strong financing approval letter from a reputable lender

A lot of readers have reservations about the value real estate agents provide in buying or selling homes, but without coming off as too much of a salesman for my industry, difficult markets like this are where having a strong agent makes a big difference. Not just somebody to open doors for you and draft a contract, but somebody who understands your needs that you trust to advise you on making the right offer, at the right time.

If you have an agent you trust, rely on them. If you’re looking for somebody, I’m available every day of the week to talk or meet, just send me an email at Eli@EliResidential.com and I’ll be happy to help.

Question: What is the role of Business Improvement Districts in Arlington?

Answer: The Business Improvement Districts (BID) of RosslynBallston and Crystal Citydeserve much of the credit for turning these neighborhoods from convenient places to work to lively, family-friendly places to live.

Funded primarily by businesses located in the neighborhoods they represent, BIDs are an important bridge between residents, businesses and local government. Homeowners located in or near any of these BIDs can thank their leadership teams for increasing the value of their homes.

 

As a long-time Rosslyn resident, I have watched as Mary-Claire Burick and her team at the Rosslyn BID have transformed Rosslyn over the last five years.

I reached out to her for an interview to answer some questions about the role of BIDs in the community and how residents can take advantage of their influence on local government and business investment. Thank you Mary-Claire!

What is the role of a BID, and what role does the Rosslyn BID play in the community?

Business Improvement Districts are nimble organizations that wear a lot of different hats. In Rosslyn, we work on urban planning, transportation and business and community engagement, just to name a few.

But I think one of the most important roles that we play is that of a convener who brings together the perspectives of various stakeholders in our neighborhood –including residents, businesses and county officials — to advance initiatives that will help our community continue to thrive.

We are in constant conversation with folks on the street, in our restaurants and in our business community to better understand not only what they love about Rosslyn but also what they want to see improved.

How does the Rosslyn BID engage with residents and visitors? 

As I mentioned, community engagement is one of our top priorities.

Probably our most visible presence on a daily basis is our Rosslyn Ambassadors Program. Our team is out on the street five days a week helping residents and visitors with directions and working to ensure our sidewalk and public areas are safe and clean. Be sure to say hello when you see them around the neighborhood in their purple shirts.

Our events are another important way that we connect and engage with area residents. In 2017, around 40,000 people attended more than 160 events that we hosted ranging from our popular Rosslyn Jazz Fest and Rosslyn Cinema series to lunchtime fitness sessions and pop-up concerts. Each one of these events represents a touch point for our team to engage with residents and employees in our region, and for interaction between these groups.

It’s that sense of community that these events help build that makes them so impactful.

What have been some of the BID’s most successful events?

Last year’s Rosslyn Jazz Fest was an incredible experience.

That event alone brought nearly 10,000 people to Gateway Park on one day, which was a record for us. The Rosslyn Cinema has long been a neighborhood favorite. Last summer, more than 20,000 people came out to catch their favorite movie. And it may surprise you, but Rosslyn is the largest pit stop for Bike to Work Day in all of D.C., Maryland and Virginia.

In 2018, we will continue to host these popular events, but are also introducing new activities and expanding others.

One example is the Rosslyn Farmers’ Market, which occurs weekly during the summer in Central Place Plaza. We’ve worked with FRESHFARM to introduce a new FRESHFARM Share program, similar to a community supported agriculture (CSA) program, to help bring more healthy food to Rosslyn residents and businesses.

I’d also like to point out that these events have a wider purpose and impact. They help bring thousands of visitors to Rosslyn who could one day be residents or tenants. And there’s an economic impact–restaurants and retail in Rosslyn usually see a boost in sales and exposure.

Some of the other local BIDs are Crystal City, Ballston and Georgetown. What are some of the most significant benefits of a community having a BID? Does a BID make sense for every community? 

From my perspective, there are a lot of benefits that a community can realize from having a BID. But simply having a BID alone isn’t enough. It’s important for all of the stakeholders to have a clear vision for what they want to accomplish, and to ensure a BID has the resources and buy-in to help realize that vision.

A BID with a distinct mission can be a leading driver of change for a community, serving as a liaison between government, businesses and residents. Residents, in particular, have a real opportunity to utilize BIDs to help create a viable, economically sustainable community that reflects their vision of the neighborhood.

How have new restaurants and retail spaces helped change Rosslyn? Are there any openings you are particularly excited about?

Restaurants and retail have been a critical part of Rosslyn’s transformation from a commercial area to a more vibrant, urban, mixed-use area. Between 2015 and 2017, 17 new restaurants opened in Rosslyn, adding to the more than 65 restaurants, cafés and markets within a ten-minute walk of the Rosslyn Metro. We’ve also seen more restaurants and bars staying open later, like Barley Mac, Quinn’s on the Corner and Continental.

This year, we’re looking forward to the continued evolution of Central Place, which is bringing multiple new restaurant offerings to the heart of Rosslyn. I think folks are going to be really excited to hear what they have in the pipeline.

We are also excited for the Central Place Observation Deck, opening this summer. This 12,000 square-foot-space will offer an unparalleled view of the Mall and the U.S. Capitol. Offering snacks and light fare, the Observation Deck will be the perfect place to bring out-of-town friends, a date or a colleague for an after work drink.

How can residents get involved with their local BID? 

Residents should utilize their local BIDs to advocate for what they would like to see in their community. Remember, a BID is there to serve the needs of a neighborhood’s residents as well as its businesses and visitors.

Residents can also get involved with their local BID by attending events, participating in community meetings and providing feedback on BID activities. Depending on an individual’s local BID, there may be opportunities to volunteer or be a community ambassador.

Question: Can you follow-up on last week’s column about condo/townhouse rentals with an analysis on the single-family home rental market in Arlington?

Answer: Thank you to ARLnow commenter Southy4Life for requesting that I follow-up last week’s analysis of the condo/townhouse rental market with a similar analysis of the single-family home (SFH) rental market.

The good news for those looking closely at the rental stats in Arlington is that the majority of SFH rentals are represented in the MLS data presented below, as opposed to a large percentage of condo/apartment rentals not represented in my data last week because most are handled outside of the MLS (commercial rentals, direct landlord-to-tenant).

Five Year Trends

Just like the condo rental market, there has been very little appreciation in rental rates in Arlington’s SFH home rates, until 2017, which saw a noticeable jump led by 22207, 22205 and 22203.

This doesn’t correlate to what we saw in the sales market from 2016 to 2017 so admittedly I don’t know why these three zip codes saw substantial rental growth, while the rest of the Arlington market remained relatively unchanged.

Below is a summary of the average cost of renting a SFH in each Arlington zip code over the last five years. 22206 and 22209 were removed for lack of SFH rental data points.

 

Bedroom Breakdown

Below is a table of all 3-5 bedroom SFH rentals in Arlington since 2016, broken out by bedroom count and zip code, with rentals in 22206 and 22209 removed for lack of data points.

Key Findings:

  • The most expensive home rented was a 7BR/7+BA home on Arlington Ridge Rd for $12,000/mon and the least expensive home rented was a 2BR/1BA home in Columbia Forest for $1,595/mon
  • It costs about 20% more to go from three bedrooms to four, 25% more to jump from four bedrooms to five
  • If you’re renting a SFH in Arlington, expect to take 5-6 weeks to find your tenant and be prepared to discount your rate by 2-3% from what you’re asking
  • For families looking to rent a home in some of Arlington’s top-rated schools, the 22205 zip code is a great value
  • 75% of SFH offered for rent allowed pets, but only 28 had fully fenced yards
  • On average SFH for rent were built in 1950 and the average lot size was just over 10,000sqft (1/4 acre)
  • Only 49 SFH homes offered for rent were built in the last ten years

 

Our team is happy to assist you with rentals, whether you’re a renter or landlord, so feel free to reach out if you need assistance with either! We are happy to put together more specific, personalized data tables for your as well.

Question: Do you think the recent changes to the rankings of Arlington schools on GreatSchools.org will have an impact on home values?

Answer: Sometime in the last few months, GreatSchools.org quietly changed their school ranking criteria, which resulted in a drop in every high school and middle school in Arlington by 1-2 points (10 point scale).

The two biggest K-12 public school ranking websites in the US are Niche.com and GreatSchools.org with about 6M and 4M monthly visits, respectively (SchoolDigger is a distant third with about 500k).

In my experience, buyers in the DC Metro rely more heavily on GreatSchools because Niche lacks differentiation between schools (everybody is a winner). The change in Arlington County Public Schools rankings on GreatSchools is worth noting and I suspect that it will have a negative impact on the housing market.

GreatSchools’ Explanation

In the About section of GreatSchools, they explain the changes in their grading criteria with the following: “In the past, the overall GreatSchools Rating in most states was based on test scores.

In some states*, the GreatSchools Rating was also based on student progress (or “growth”) and college readiness data (SAT/ACT participation and/or performance and/or graduation rates).

Our school profiles now include important information in addition to test scores — factors that make a big difference in how children experience school, such as how much a school helps students improve academically, how well a school supports students from different socioeconomic, racial and ethnic groups, and whether or not some groups of students are disproportionately affected by the school’s discipline and attendance policies.

Many of these important themes now have their own rating, and these themed ratings are incorporated into the school’s overall GreatSchools Summary Rating.”

Old vs New Rankings

Below is a table showing the before and after scores for all Arlington County middle and high schools, as well as a limited set of Fairfax County/Falls Church middle and high schools (the ones I had documented scores for before the change).

All “old” scores are as of Fall 2017. Note that my request to GreatSchools for the “old” scores for all Northern VA/DC Metro schools was denied.

 

Why It Does/Doesn’t Matter

I’d be lying if I told you I knew what the impact will be to Arlington home prices and demand, but I think a negative impact will be felt to some degree.

Schools are at the top of many buyers’ criteria list and most of those buyers, whether they’re local or relocating into the area, set a minimum score for the school boundaries they’ll purchase a home in and rely on GreatSchools for their data.

Below are some points I came up with for why it may or may not have an impact on the housing market:

  • It Doesn’t: It appears the majority of public schools in Northern VA were reduced by 1-2 points on GreatSchools, so buyers are still as likely to choose Arlington as they have always been. The alternatives have not improved.
  • It Does: While the reduction of most school scores in Northern VA may not change where or what people buy, the lower scores may decrease overall demand in Northern VA housing and result in less motivated buyers.
  • It Does: I don’ know if Montgomery County and Northwest DC public schools saw similar changes, but if they did not, we may lose buyers to those jurisdictions because their relative value has increased.
  • It Doesn’t: Arlington County Public Schools are still ranked the #1 school system in the state.
  • It Doesn’t: It doesn’t appear that Niche.com has introduced any changes and Yorktown and Washington-Lee are ranked an A+ and Wakefield is ranked an A on that site.
  • It Does: Could the fact that Arlington’s highest ranking high school is now a 5 impact the decisions of employers considering a move to the DC Metro?

I have no doubt that over the course of 2018 I will have local and out-of-town buyers tell me they do not want to purchase a home in Arlington because it has poorly rated (high) schools.

For me and my colleagues who know Arlington, we will point them towards resources that show how great the entire ACPS system is. However, if you recall from my column in July 2017, about half of the agents who closed a deal in Arlington only had one or two transactions here, meaning that agents who don’t know Arlington well are unlikely to have the appropriate background to give their clients better guidance about our schools.

What To Do?

GreatSchools.org wields a lot of power over home values across the country and the drop in our ratings is frustrating, but just like a bad Yelp review for a restaurant, we have to acknowledge the change and find ways to offset it by making it easy for buyers to find more favorable information.

I’d love to hear from readers in the comment section who purchased or are in the process of buying a home in Arlington, who placed a lot of weight in the GreatSchools rankings – how would these changes have impacted your decision when you bought or how are these changes impacting your current purchase strategy?

If you would like to discuss how the new GreatSchool rankings impact your upcoming plans to purchase or sell a home in Arlington, feel free to reach out to me at Eli@EliResidential.com to set-up some time to meet.

Question: As interest rates have increased over the last 6-12 months, how will the market react to higher rates and do you expect them to come back down in 2018?

Answer: The rates I’m seeing today are about 1-1.5% higher than what I’ve seen on average over the last few years and about .5% higher than where they’ve been over the last 6-12 months. Generally, most economists are projecting growth in the US and there are similar signs in Europe so if that holds true, expect interest rates to continue their upward trajectory.

Higher Mortgage Rates In 2018

According to Freddie Mac, the average Mortgage rate from the 1970s-2000 was about 7%, the average rate from 2000-2008 was 6% and we’ve been hovering around 3.5-4% since 2008. Freddie Mac currently predicts that rates will reach about 5% by the end of 2018.

  • Mortgage rates are at the mercy of the US and global economies so predicting their direction is no different than predicting how the stock market will do.
  • Contrary to popular belief, mortgage rates are not directly correlated to the Fed rate that you regularly hear about in the news. So when you hear that the Fed is planning to increase rates by .25%, that does not mean your mortgage rate will be .25% higher the following day. See chart below for historical trends of Fed rate vs mortgage rates:

 

  • We are currently experiencing high daily and weekly volatility in mortgage rates, which is frustrating for many. Some weeks see swings of .25% so you can either benefit or lose out from those swings based on when you lock your rate. Discuss this risk with your loan officer.
  • You may have missed the lowest rates over the last few years, but historically mortgage rates are still well below average as you can see from the chart below from Freddie Mac:

 

The Impact Of Higher Rates

For my clients, the ones who feel the rates increases the most are those who have been in the market for 6-12 months but have not purchased yet either due to lack of suitable inventory or urgency.

It’s tough to accept that rates were about 1% lower when they started looking and now they feel like they’ve lost. Those who are just now entering the market tend to be much better at brushing it off. It also impacts my clients who are not also selling a home because those who are selling will realize the benefits of the stronger market vs those who are just buying are at its mercy.

First time buyers are also more sensitive to rate fluctuations because most are already struggling to adjust to the hefty price tag of buying what they want in the DC Metro area.

Redfin recently asked 4,000 buyers who planned to purchase in the next 12 months how increasing rates would impact their purchase and found that only 6% would cancel their plans to buy while nearly 50% wouldn’t change anything or would increase their urgency to buy.

This might seem like a good result for homeowners, but losing 6% of buyers, having 21% reduce their budget, and 27% waiting for rates to drop is a bad sign. Especially if rates continue to go up and the 27% who were waiting for rates to drop decide to either stop their search or reduce their budget.

 

I think the biggest reason increasing rates will slow the market is the psychological effect of higher rates vs the actual impact to buyers’ budgets. For buyers struggling to internalize the “loss” they’ve taken now that rates are higher, consider the following:

  • On a $400,000 loan, a .25% increase in rate represents $60/month. Try to decide if a $50-$150 change in your monthly mortgage cost is worth giving up on a home purchase or compromising on what you want/need. Most buyers decide to spend less than what they’re approved for, so there is usually some cushion.
  • The reason rates are higher is because the economy/stock market have done so well lately so your investments and/or income are hopefully increasing at a rate on pace with or above what you’re giving up in increased mortgage rates.
  • In 2017 the S&P 500 returned about 20% to investors so maybe you earned enough in the market to allow for a higher down payment?

Hopefully the net effect of everything that factors into mortgage rates is still positive for you.

With so much volatility around mortgage rates, it’s even more important that your lender be able to advise instead of just being a pass-through for today’s rates.

My clients have found Jake Ryon of First Home Mortgage (jryon@firsthome.com) and Troy Toureau of McLean Mortgage (ttoureau@mcleanmortgage.com) to be valuable resources during their home purchases and I’d encourage anybody to reach out for advice.

Question: I’ve submitted two offers on home this year and both times lost to multiple offers. Is this normal or is the market more competitive this year?

Answer: 2018 has been a good year for sellers and a frustrating one for buyers already. Generally, I don’t start seeing multiple offer deals until late February/early March, when it starts to warm up and days get longer.

However, about 80% of the listing and purchase deals I’ve been on this year have ended up with multiple offers. I even had a listing that had been on market for three months receive three offers in one weekend. My colleagues who work in new construction and generally have the best pulse on market pace have also been surprised by the amount of activity this early.

Here are some numbers in Arlington from January to back up the anecdotal evidence of a hot market:

  • Supply Down, Demand Up: Monthly of supply measures how long it would take to sell all existing inventory at the current market pace (supply and demand) is down 21% YoY and at its lowest levels (1.31 months of supply) since March 2013 (1.22 months of supply)
  • More Homes Under Contract: Over 200 homes went under contract in January (215) for the first time since 2012 (219)
  • Homes Under Contract Faster: Of the 119 homes that were listed and went under contract in January 2018, 69% went under contract within one week. Over the last five years, 49% of homes listed and under contract in January went under contract within one week.
  • Average Number Of New Listings: The amount of new homes listed on market in January 2018 (234) is about average for what we’ve seen over the last decade

Advice For Buyers

Periods of low inventory and high demand can be frustrating for buyers, so here are a few tips for buyers to create leverage for themselves without simply paying more:

  • Quality Of Lender: Have a pre-approval letter from a strong local lender who has review all relevant documents, not just somebody who checks credit score and asks for basic financial information. A strong lender letter gives the seller confidence you will close on the home on time, without complications.
  • Contingencies: Consider giving up your right to request repairs and credits after the home inspection and using a Pass/Fail contingency instead. This shows that you’re not interested in nickel and diming a seller, but just want to make sure there are no major issues. You can also offer to cover up to a certain dollar amount in the event of a low appraisal, if you are offering to pay above the asking price.
  • Close Faster: Most homeowners want to close as quickly as possible. A good lender can have you ready to close in 20 days vs the more common 30-40 day close.
  • Don’t Play Games: We all want to negotiate a great deal, but oftentimes a great deal is actually having your offer accepted not saving a few thousand dollars. When a seller has multiple similar offers, they often put more weight in who they think is most likely to close with the least complications. In that scenario it pays off to make it clear how much you love/want the home instead of acting like you could take it or leave in an attempt to negotiate a lower price.
  • Days On Market: The number of days a property has been on market should dictate how you approach an offer. You won’t have much leverage in the first few weeks or after a major price reduction.

The spring market can be a great time for buyers who are prepared for competition because you’ll see a significant increase in inventory, so that illusive 2 bedroom + den or half acre yard with a deck is more likely to materialize.

If you’re not prepared to make a strong offer, the spring can be frustrating and defeating because you may watch your dream home(s) go to other buyers who have made smarter, but not necessarily higher offers.