The Shifting Condo Market

Question: I’ve seen a lot more condos come to market and also some staying on market longer than before, is that part of a larger trend in the condo market?

Answer: In July, I predicted there would be a surge in housing inventory that was held off the market this spring because of COVID. That has proven to be moderately correct for single-family housing and very accurate for condos. The market has had no trouble absorbing the extra single-family housing, albeit with less competition than before, but the condo market has not absorbed the extra inventory and has undergone a significant shift in the last two months.

In short, listing volume for Arlington condos reached historically high levels in July and August, absorption (demand) is down, and months of supply is the highest it’s been since the fall of 2017.

Historically High Listing Volume

July (253 listings) and August (229 listings) had the 5th and 13th highest months for listing volume in the last ten years. Prior to this year, the top fifteen months for condo listing volume fell in April or May (peak demand offsets higher listing activity), with the exception of June 2015. This is the first time that the number of condos listed in July or August has ever exceeded 200.

Pre-Amazon HQ2 Demand

Since Amazon announced plans for HQ2 in November 2018, condo demand was through the roof with 15 straight months of more condos going under contract than listed for sale (over 1.0 in the chart below), beginning January 2019. Absorption levels, a strong indicator of demand, are now more reflective of 2016-2017 which brought very little real appreciation in the condo market.

Monitor Months of Supply

The Months of Supply metric combines inventory levels and rate of absorption (supply and demand). It measures how long it would take to sell out of existing inventory given the current pace of sales. Most housing economists say that ~6 months of supply is needed for a well-balanced housing market, a number we’ve never come close to in Arlington.

Given that it takes ~6 months of supply for a balanced market, Arlington is still very much a seller’s market, but nowhere close to what it’s been over the last two years. In August, Months of Supply exceeded 2.25, higher than it’s been since October 2017 (2.32). Compare that to December 2018 – March 2020 with an average of .67 (just over two weeks of supply) and high of .88, and it becomes clear why many buyers and sellers are experiencing a different market now than they were as recently as June.

Condo Market Stronger Across Northern VA

The rest of Northern VA also experienced an increase in condo supply in July and August, but not nearly to the extent of Arlington. Absorption (demand) has also remained pretty close to the strong numbers seen since January 2019. As a result, Months of Supply for the entire Northern VA condo market has increased slightly over the last two months and fits normal seasonal patterns.

What About Washington DC?

It’s worth noting that while the overall Northern VA condo market is performing well, the Washington DC condo market looks more like Arlington. In July and August, Month of Supply (2.73 and 2.80, respectively) reached the highest levels since October 2012 and were the first and third highest monthly listing volume over the last ten years. July (863 condo listings) is the first time in over a decade that more than 800 listings came to market. Previously, the record was 762 set in September 2019. There were 757 condos listed for sale in August.

What’s Next?

It’s still too early to know if/how prices will be affected, but it almost certainly means longer days on market and fewer multiple offer scenarios. The effect on pricing will likely depend on whether this is a short-term shift that will correct itself come Q1 2021 or a more long-term change in urban buying patterns. My money is on this being short-term and the market returning closer to its two-year averages by February or March 2021.

In the meantime, I think we’re in for a frustrating few months for many condo owners due to the combination of surging listing volume (increased supply), an upcoming Presidential election (fear of an unknown future), and uncertainty around the timing of a widely available COVID vaccine (less demand for multi-family/urban living).

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

Impact of New Homes on Housing Prices

Question: How much of Arlington’s high housing prices are attributed to new homes?

Answer: So far this year, the average sold price of a single-family detached (SFD) home in Arlington is $1,146,000, but if you remove the sales of new homes, which are averaging $1,810,000 in 2020, the average price for a SFD home in Arlington drops 7.4% to $1,060,000. Since 2015, the average price of a new SFD home in Arlington has increased by 21.6%, while the average price of resale homes has increase 25.3%.

Important note: I removed one sale from the 2015-2020 sales data; a January 2020 sale of 409/411 Chain Bridge Rd for $45M, because it is such an extreme anomaly in Arlington real estate data that it skews everything else too high. This is important to understand because most likely in other assessments of Arlington real estate data you see, this data point will be included and it will make it seem like the average sale price in Arlington, especially 22207, has increased much more than it actually has.

New Home Prices vs Resale Prices

The charts below compare the annual change in the average price of a new SFD home and a resale SFD home. The first chart shows all Arlington SFD sales and the second chart is just for the 22207 zip code which accounts for 54% of all new SFD home sales since 2015.

I was a little surprised by how uncorrelated average prices were between new and resale homes some years, I would have expected a strong linkage.

One data point that stands out is the huge jump in new home prices from 2017 to 2018, which seems to be tied to a significant drop in the number of transactions (lower supply) in 2018. It highlights just how sensitive the new home market is to supply swings and I wonder if that forecasts less growth in the future as more homes built in the last 5-8 years come up for resale, competing with similar new homes. I also wonder if a pause in buying by builders in the first half of this year may lead to a material shortage of new homes in 2021 and drive prices up for new homes selling next year.

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

New Construction Tips and Learning Opportunity

Question: What recommendations do you have for somebody just beginning to consider building a home?

Answer: If you’re considering building a home and looking for a great educational opportunity, I’d like to invite you to a walk-through with the builder of a home that’s currently under construction (3196 N Pollard St). The builder, James McMullin, is a 3rd generation Arlington home builder. At the end of July, he’s offering two educational walk-throughs for small groups during the framing stage of construction to provide a peek behind the walls.

If you’re interested in attending, please email me at Eli@EliResidential.com (I promise you won’t get spammed with marketing!).

I sat down with James McMullin to outline the key phases of building a new home from acquisition through post-completion, along with some helpful tips at each stage.

Lot Acquisition
  • You can do this yourself or through a builder. A key competitive advantage for builders is a pipeline of quality lots.
  • If you acquire your own lot and find yourself in competition, it’s important to understand what type of offer terms you’re up against. Builders frequently offer existing homeowners months of free rent-back.
  • If you acquire a lot, make sure you establish a relationship with a builder before making an offer so they can provide necessary feedback on the feasibility of building the home you want either before making an offer or after (Study/Feasibility Study)
  • There are special loan programs available if you plan on acquiring your own lot. Troy Toureau (ttoureau@mcleanmortgage.com) of Mclean Mortgage is an excellent resource for construction loans
  • Cost: Lots in Arlington are currently selling from $500,000 for less desirable lots/locations to well over $1,000,000
Planning/Design
  • Designing the floor plan and elevations (exterior design) can be fun for some, but it’s easy for people to let this process drag on for months if they’re indecisive or unprepared
  • Having a great architect who understands your vision and current home design trends is critical
  • Full custom vs semi-custom: A fully custom home is designed from scratch to suit your tastes and will take much longer and cost much more in design fees. A semi-custom home uses a pre-designed floor plan and elevation template and you make small adjustments to suit your taste.
  • Cost: Semi-custom homes often range from zero design cost to a few thousand dollars, while fully custom homes usually cost tens of thousands in design fees.
Permitting
  • In Arlington, you will submit plans for County review/approval including demolition, building (architectural), and civil (engineering) before any work can begin
  • It usually takes four months for permits to be approved by the County, assuming everything is submitted correctly
  • Cost: Permit fees vary based on a number of factors but will generally be $25,000 + for new construction.
Demolition/Construction
  • Common pitfalls:  If you are selecting fixtures and finishes, meeting timelines is often a challenge. Most people struggle to make finish decisions and the ordering process often takes longer than expected (months) with buffer needed to shipping issues or incorrect shipments. Having an experienced interior designer on-board can be helpful.
  • Demolition and construction often take 4-8 months and can be delayed due to weather, material shipping/availability issues, and an assortment of other factors
  • Cost: The cost of demolition and site prep, including utilities, generally costs about $100,000. Construction costs, including materials and finishes, generally ranges from $400,000-$700,000+ in this area
Completion/Post-Move
  • Throughout construction the County will conduct inspections of the home, but you cannot move in until the County has issued a Certificate of Occupancy (final permit approval)
  • You may also consider hiring a 3rd party inspector with home building experience to inspect the property through each stage of construction including the foundation, pre-drywall, and the finished home
  • It’s common for there to be a (long) list of punch-out items for the builder to complete after the County has issued a Certificate of Occupancy (paint touch-ups, a chipped cabinet, missing light fixture, etc). Most builder contracts require you to close on the new home within a certain number of days of the Certificate of Occupancy and allow the builder access to the home after closing to complete the punch-out list.
  • Minor issues, especially cosmetic ones like settlement cracks in the drywall, are common after closing and will require maintenance for the first 6-18 months. Many builders offer post-settlement touch-ups/maintenance as a courtesy.

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

Awesome Heatmap of Neighborhood Turnover

Question: Which Arlington neighborhoods have the highest number of homes listed for sale?

Answer: I’m excited to show-off the first project to come out of a new data-visualization partnership so that I can make the data analysis I do a bit easier to digest (and prettier).

The chart below shows the Arlington neighborhoods with the most and least turnover of single-family detached homes, using the last 20 years of home sales.

Top Five Neighborhoods

The neighborhoods with the most turnover over the last 20 years are:

  1. Bluemont (1,406)
  2. East Falls Church (1,157)
  3. Yorktown (863)
  4. Donaldson Run (853)
  5. Rock Spring (848)

The nice thing about great data visualization is that it does most of the talking, so there aren’t nearly as many words for you to read as my usual column. Cheers to great data visualization and fewer words!

Have a great July 4th everybody!

COVID-19 Market Impact Update

Question: What impact is Coronavirus having on the real estate market?

Answer: COVID-19 has had a similar impact on new listings in Arlington as it has across Northern VA and the DC Metro with each market dealing with a ~30-35% year-over-year drop in April and May. However, demand in Arlington has tapered off from 2019 highs, while demand in Northern VA and the DC Metro is steadily increasing, despite everything we’ve gone through with Coronavirus.

The tapering of Arlington demand, which is still very strong relative to historical numbers, is bringing the Arlington market more in-line with supply/demand readings of the Northern VA and DC Metro markets. The below chart shows Months of Supply (a good supply/demand ratio) for each market. Months of Supply calculates how long it would take for the existing housing inventory to sell out, if no additional inventory was supplied.

Prices Up Regionally

Year-over-year prices for May sales and year-to-date sales are up significantly across the region. Across all of the counties/regions listed below, Arlington’s year-over-year growth is the lowest, which is almost certainly due to the significant appreciation in Arlington last year, after the Amazon announcement.

Keep in mind that sales data lags actual market activity because it usually takes 30-45 days for a property to close, so May sales are more reflective of March and April activity than what we’re currently seeing. This is particularly interesting because March and April were the peak of Coronavirus concerns/lockdowns. Barring any major shifts in the DC-area economy, I expect year-over-year prices to show even more growth as we get further into the year and sales reflect an even stronger buyer market.

Arlington New Listings Down

We’re used to seeing new listing supply peak from March-June, after November-February lows, with April and May almost always exceeding March’s supply. Unfortunately for many home buyers, new inventory tumbled in April and continued dropping further in May.

The May 2020 drop in new inventory represents a 32.1% decline compared to May 2019, which is particularly concerning when you consider that new inventory in May 2019 was already down 21.3% from May 2018, giving us a 47% decline in new inventory from May 2018 to May 2020.

The decline in new inventory was distributed pretty evenly across property type (single-family vs condo) and price point.

Arlington Demand Down

Absorption is a good indicator of demand, providing the rate of homes going under contract relative to total supply. Demand, and therefore absorption rate, are usually highest from February/March through May/June and have been sky-high since spring 2019, with an absorption rate of 1.0 or more in eight months since March 2019.

While the absorption rate in April and May 2020 remained high relative to pre-Amazon years, there was a year-over-year decline of 37.6% and 25.5%, respectively, indicating a tapering of Arlington demand compared to last year. However, with so few listings coming to market, there’s still high levels of competition for desirable properties that are reasonably priced.

This doesn’t mean that the bottom is dropping out in Arlington. Part of the difference in year-over-year data is due to how sharply Arlington demand rose in 2019 (post-Amazon announcement), but we’re also seeing a lot of buyers being priced out of Arlington and pushing their searches further into Northern VA.

Northern VA New Listings Down, Demand Up

Northern VA has experienced a similar drop in new listings (33.8% and 33.4% YoY decline in April and May, respectively), but is actually seeing an increase in year-over-year demand with a 32.2% increase in absorption rate in May 2020 compared to May 2019 and absorption rates exceeding 1.0 in three of the last four months.

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

How to Write a Strong Offer

Question: The last time I bought a house, the market was much more favorable for buyers. I’ve heard so much about competing offers and the need to submit a strong offer, but what exactly does that mean?

Answer: Other than price, there are about a dozen terms included in your offer that will determine its strength — the value/appeal it has to the seller. Of course, every home owner wants to get the most money possible, but they also care about when the sale is executed, the likelihood of getting to settlement, renegotiation periods, risk and more.

Sometimes a seller takes a lower offer price in exchange for better supporting terms. Understanding what type of offer is appropriate/necessary for a property and how certain terms change your (buyer or seller) risk exposure on the transaction is critical.

Let’s take a look at some of the terms included in most contracts that have the biggest impact on the actual or perceived strength of an offer.

Price/Escalation Addendum

This is an obvious one. Higher price = stronger offer. Escalation Addendums are common when there are multiple offers, but how and when to use them is a nuanced, yet critical, decision.

The Escalation Addendum allows you to beat any competing offer by a specified amount, up to the highest amount (ceiling) you’re willing to pay for a property. Used correctly, it prevents you from leaving money on the table, while not paying too far above what the rest of the market is willing to offer.

Contingencies

The three most common contingencies are for the home inspection, appraisal, and loan. Each provide the buyer with a set of protections that allow them to renegotiate and/or terminate the contract, without losing the deposit. Removing a contingency or shortening the contingency timeline increases the strength of an offer.

  • Home Inspection:  It used to be standard for Arlington buyers to include a negotiation period in the home inspection contingency, allowing them to negotiate for repairs or credits based on the results of the inspection or terminate the contract. Now it is much more common for buyers to forego the negotiation period and simply retain the right to void (aka a pass/fail inspection), which is much more attractive for a seller. Even more attractive is when buyers perform a pre-inspection on the property (inspect before submitting an offer) and remove the home inspection contingency altogether.
  • Appraisal: If you’re using a mortgage to purchase a home, your lender will almost always require a property appraisal. The appraisal contingency allows you to renegotiate or terminate the contract in the event the home appraises for less than the purchase price. It is common for buyers to remove the appraisal contingency or agree to cover up to a certain amount on a low appraisal to increase the strength of an offer.
  • Financing: The financing contingency allows you to terminate the contract without losing your deposit if your loan isn’t approved. Many buyers who have undergone a thorough pre-approval process have enough confidence in their ability to secure the mortgage that they remove this protection, thus conveying a strong financial position to the homeowner.

Speed of Sale

Most sellers want to close (executed sale) as quickly as possible so cash-buyers have the biggest advantage here because they can usually close in a week or less. For the more than 80% of Arlington home buyers relying on a mortgage, many choose to work with smaller, local lender who can sometimes close in as little as 2-3 weeks. Offering a quick-close to a seller can give your offer a significant boost.

Financing

If you’re relying on a mortgage, sellers are usually more drawn to higher down payments. That’s not to say that a 3-5% down  payment (or 0% on a VA loan) can’t win in a competitive scenario, but you are at a disadvantage and will often get passed over when all other terms/pricing are relatively equal.

A thorough pre-approval process by a quality/reputable lender can provide the seller with confidence that if they accept your offer, there is very little risk of the deal falling apart due to financial issues. Sometimes sellers take less money work with a buyer they have more confidence in.

Earnest Money Deposit (EMD)

This is money held in escrow (usually by the Title Company) as security for the seller that you’ll perform under the obligations of the contract. It gets applied against what you owe at closing for down payment + closing costs, but is at-risk if you default on the contract (terminate outside the legal means/contingencies).

Traditionally, a reasonable deposit ranged from 1-3% of the purchase price, but some buyers are electing to make substantially larger deposits in an effort to establish financial strength. Instances of buyers offering deposits of 10% or more are becoming more common.

Rent-Back

Oftentimes if the homeowner is still living in the house during the sale, their preference is to close as quickly as possible and then have some time to move out after the sale is complete – this is called a rent-back. It used to be common for the seller to cover the buyer’s daily carrying cost (mortgage + taxes + insurance + HOA fee) for the length of the rent-back, but in this hyper-competitive market, a strong offer often includes a free rent-back for the seller.

The use and structure of each of these terms is dictated by many factors including demand/competition, days on market, seller-preferences, and buyer priorities/risk tolerance. As a buyer, being prepared with the right offer strategy and understanding the risk-benefit tradeoffs for each term can be the difference between landing your dream home or going back to the drawing board.

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

All-Cash Home Purchases

Question: I just lost a competitive offer to an all-cash buyer. How common are cash buyers in Arlington? How much of a disadvantage am I at?

Answer: I have personally noticed an increase in cash buyers and expected to find a significant increase in the number of cash deals over the last 12-18 months, so I was a little surprised when I ran the numbers and learned that the percentage of homes purchased by all-cash buyers has only increased a few percent in the last couple of years. Since 2019, 17.5% of homes purchased in Arlington have been by all-cash buyers, compared to 14.3% in 2017.

Increased Cash Deals Attributed to Condo Sales

The number of cash purchases in Arlington jumped in 2018 and 2019, likely due to more cash investors getting involved after the Amazon HQ2 announcement in November 2018. This increase is attributed completely to condos (likely investors). The number of buyers paying cash for single-family or townhouse purchases has remained about the same since 2015.

The rate of all-cash purchases seems to be spread pretty evenly across all price-points and housing types. I assumed that the lower priced condos would have a much higher rate of all-cash deals, but it turns out that since 2019 only 20.5% of sub-$400k condo purchases were all-cash, which isn’t much higher than the overall Arlington market.

The chart below shows the percentage of homes sold in Arlington that were bought by all-cash buyers since 2015, also broken out by condo and single-family/townhouse purchases.

Cash vs Mortgage – What’s the Difference?

The idea of getting a cash offer sounds exciting, but what exactly does it mean? After all, a dollar from a lender is worth the same as a dollar from a savings account.

  • Contingencies: Cash buyers don’t need the contractual protection of a financing or appraisal contingency because they don’t need a lender to approve/review anything. This is appealing for sellers because it decreases the possibility of something going wrong that disrupts the sale.
  • Speed: Cash deals can close faster, often in one week or less, than financed deals which usually take at least 3-4 weeks due to the time it takes to process the loan.
  • Security: Cash deals are considered more secure because the purchase funds are already available
  • Cost: Cash deals have lower buyer closing costs because there are no lender fees or lender’s title insurance. Lenders also require a substantial about (usually 1-1.5% of purchase price) of money be pre-paid into an escrow account for future property tax payments and homeowner’s insurance.

Given how competitive the current housing market is, many buyers using a mortgage take steps to make their offers as cash-like as possible by removing the appraisal and financing contingencies and/or working with lenders who can close quickly. For buyers that have taken these steps, there’s very little difference to sellers between their offer and a cash offer.

If you are a seller considering a cash offer, make sure you verify the existence of the cash funds the same way you would verify a buyer’s mortgage qualification with a pre-approval letter. The most common method of verification is to request bank statements, but a letter from the buyer’s bank should also suffice.

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

Impact of Coronavirus on the Real Estate Market, Part 5

Question: What has been the impact of the Coronavirus/COVID-19 on the real estate market?

Answer: I hope this column finds everybody in good health. If you need to replenish your cooking oils and haven’t tried The Olive Oil Boom before, I highly recommend it. It’s a local shop in Courthouse that my wife and I love. My personal favorite is the Harissa olive oil.

If you have some local favorites that you’d like to help stay in business during tough times, please give them a shout-out in the comments section and note a personal favorite product/dish!

Financial Confidence Poll

Buyer confidence drives real estate demand, so I’d like to do a reader poll this week to measure the confidence of Arlingtonians. Thanks for participating!

Question: How long do you expect the effects of the Coronavirus pandemic to negatively impact your personal finances?

Arlington/Regional Market Update

Regionally and locally we’re seeing the pipeline of new inventory dry up and sellers lose confidence. The two charts below reflect market activity in Arlington over the past seven days (left) and seven days prior to that (right). While the total Coming Soon and New Active for each seven-day period is almost identical, the Coming Soon pipeline was cut in half. You’ll also note huge increases in the number of price reductions and properties pulled off market (Temp Off, Withdrawn, Canceled, and Expired).

Demand is dropping, but homeowners are experiencing it in different ways. For example, the markets that were hyper-competitive prior to the COVID-19 crisis, such as the $600k-$900k single-family starter home market that was seeing double digit offers, are still getting strong offers, and in some cases, multiple offers. For those homes, even a 60-70% decline in demand means a few offers instead of 10+.

I inquired on five homes this weekend for two separate clients. Each was a move-in-ready detached single-family home in Arlington, Falls Church, or Alexandria priced from $695k-$875k. All five had at least one strong offer, four were expecting multiples, one had two pre-inspections scheduled and one got seven offers.

However, the number of price drops and listings being pulled from the market shows that many homeowners are experiencing something different. If your home was likely to get one strong offer before the Coronavirus lockdown, a significant drop in demand can easily mean no offers and a longer wait for the right buyer to materialize.

To gauge the odds of a successful sale (quick sale, at/near asking price), homeowners should be conscious of the profile of the buyer(s) most likely to purchase their home and try to understand how their motivation and financial security has been impacted by COVID-19. For example, dual-income families are likely feeling more financial security than single-income buyers. Buyers with kids are often more motivated because they likely have fewer alternatives than somebody buying a 1-2-bedroom condo who can more easily find a comparable rental apartment until the economy is back in order. Further, families with kids are generally buying with a longer ownership horizon and thus able to outlast whatever economic recession/depression is brought on by the virus.

Past Sever Days (Arlington)

Seven Days Prior (Arlington)

Are Prices Dropping?

Although some homes are still selling for their pre-COVID prices (which shouldn’t be happening, in my opinion, given the amount of uncertainty/risk in the market), I suspect that most homeowners are settling for a few percent less than what they would have pre-Coronavirus. You can also argue that they’re taking an even greater loss than what they would have gotten in the peak spring market (right now) had Coronavirus never been a factor.

I think that for most of the DC Metro, that’s the appropriate discount at this time, considering what we do and do not know about the future of the national/regional economy.

The price drop that most people are worried about or looking forward to, depending on which side of the transaction you’re on, is a double-digit drop like we saw during the Great Recession 12 years ago. There are myriad inputs that factor into real estate prices, but the simplest is supply and demand. If you’ve been paying attention to real estate in Arlington or the DC Metro, you know that we’ve suffered from a historically low supply of homes for sale, driven by both a lack of new inventory and high demand.

Econ101 tells us that in order for there to be a significant price drop, demand will have to recede substantially more than supply. There’s no doubt that an on-going economic shutdown will significantly reduce demand, but if changes to lending practices over the last decade and financial support from the government allow people to keep their homes, inventory will likely plunge as well. So long as inventory and demand are dropping by somewhat similar amounts, we may not see the type of dramatic price drops we saw in 2008.

To highlight just how bad the supply is around here, I pulled charts showing the months of supply in Arlington, Northern VA, and the DC Metro over the last 10 years. Note that most economists agree that a market is fairly balanced for buyers and sellers when there’s ~6 months of supply.

I also added a chart showing the corresponding change in median sold price for Arlington during that same 10 year period.

https://cpp1.getsmartcharts.com/chart/mls/1/getreport.php?rid=60&ftid=2&fid=1000&gty=120&ltid=4&lid=51013&gid=2&cc=0000dd&sid=0&mid=0&tt=2&mode=4
Months of Supply for Arlington County
https://cpp1.getsmartcharts.com/chart/mls/1/getreport.php?rid=6&ftid=2&fid=1000&gty=120&ltid=4&lid=51013&gid=2&cc=0000dd&sid=0&mid=0&tt=2&mode=4
Median Sale for Arlington County
https://cpp1.getsmartcharts.com/chart/mls/1/getreport.php?rid=60&ftid=2&fid=1000&gty=120&ltid=2&lid=1006&gid=2&cc=0000dd&sid=0&mid=0&tt=2&mode=4
Months of Supply for Northern Virginia
https://cpp1.getsmartcharts.com/chart/mls/1/getreport.php?rid=60&ftid=2&fid=1000&gty=120&ltid=2&lid=1034&gid=2&cc=0000dd&sid=0&mid=0&tt=2&mode=4
Months of Supply for The DC Metro

If you’d like to discuss buying or selling strategies in this market, don’t hesitate to reach out to me at Eli@EliResidential.com. Be smart, be careful, be strategic. And stay home!

Ask Eli: Impact of Coronavirus on the Real Estate Market, Part 4

Question: What has been the impact of the Coronavirus/COVID-19 on the real estate market?

Answer: I hope you and your families are healthy and finding some productive ways to remain safely at home. It’s been great to see so much carryout and delivery activity at local restaurants, I hope we can keep our favorite establishments in business.

I want to shout out the Sunday evening manager at the South Arlington Ledo Pizza for the way he was expressing constant, sincere appreciation to every employee hard at work and each customer who came in. It was refreshing to hear such positivity.

This week I’ll cover some real-time market updates and take a look at how past recessions have impacted real estate.

March 30 Stay At Home Order — Executive Order 55

Yesterday afternoon, Governor Northam announced EO 55, at Temporary Stay At Home Order due to COVID-19 to further discourage gatherings and personal contact.

There was an immediate concern across the real estate community that the new order effectively shut down all real estate operations, but soon after Northam’s announcement, the Northern Virginia Association of Realtors (NVAR) and the Virginia Association of Realtors (VAR) announced that under EO 55, real estate business may continue to operate using best practices for social distancing and other measures recommended by the CDC, as well as avoiding any gatherings of 10+ people. Here is a link to the official NVAR comments.

That means that as of this morning showings, inspections, appraisals, closings, lending and other activities critical to a real estate transaction are all still allowed in Virginia/Northern Virginia. Public Open Houses are strongly discouraged and many companies have suspended them.

Personally, I think showings are the most questionable activity because you can make a strong case in both directions. If somebody needs to find a home, it’s fair to say that they need to see the home in person before making an offer. On the flip side, somebody seeing five properties on a Saturday afternoon to prepare for a purchase 6 months from now should not be out on showings. There’s certainly a level of personal responsibility required here.

Arlington Market Update

It seems that much of the Arlington and Northern Virginia market has softened in the past week. This is based on further decreases in showing activity and the negotiations I’ve been directly involved in or aware of via colleagues. We won’t have actual price data available for another 3-4+ weeks when homes start closing that were placed under contract during the COVD-19 lockdown period.

New inventory continued to flow into the market, but was down from the previous week. A healthy 63 homes went under contract, showing that there are still buyers out there, but many of them are likely securing better terms than they would have a month ago, and facing much less competition.

Arlington market activity over the last week

Showing activity is unsurprisingly very low, with the average showings per listing dropping to 2.25 over the past week. With an average of about 15 showings before a ratified contract, expect average days on market to start increasing. However, the showings that are taking place tend to be to ready-buyers so it should take fewer showings than it used to for the right buyer to surface.

Average showings per listing in Arlington last week
Real Estate During a Recession

The economy is in bad shape and it could get a lot worse. It’s way too early to make any predictions about the real estate market 6-24 months from now until we know just how long Coronavirus will keep businesses closed and consumers at home.

What we can do is look at the real-time/near-term impact (what I’m trying to cover every week) and what’s happened in past recessions. The 2008 crisis crushed real estate across the country (Northern Virginia/D.C. Metro fared relatively well) and is fresh on everybody’s minds, but it’s important to note some key differences between the Great Recession and other down markets.

First, that was a mortgage-based crisis so the real estate industry was hit directly. Second, prices were up despite high supply because demand was artificially high due to absurdly irresponsible lending practices that allowed people to buy much more than they could afford via low/easy entry into loans.

Mortgages over the last decade are much more conservative than the mortgages that led to the Great Recession. There are strict debt-to-income and credit limits, and predatory products/practices like zero interest balloon loans are all but eliminated from the market.

So the recent price appreciation is driven by a more natural supply/demand curve. Low supply because we’ve run out of land to build on and strong demand from much more qualified borrowers.

In three of the last five recessions, housing prices actually increased, as illustrated by the chart below from Attom Data Solutions and in a similar study by First American of the last three recessions, showing the dramatically different impact the 2008 crisis had on housing prices compared to other recessions.

Conclusion

I want to be absolutely clear that I’m not suggesting everything is going to be fine or that the real estate market won’t take a significant hit. That type of messaging from real estate “professionals” irks me almost as much as the idea that a market can simultaneously be great for buyers and sellers… that’s not how markets work (can’t help myself from the Esurance meme)!

It seems almost certain that negotiation leverage will favor buyers over the next 4-6 weeks. The critical question is whether or not buyers will have even more leverage months from now or whether markets will begin stabilizing, then return to the hyper-competitive market we had just a month ago.

The fact is that we have never experienced a complete economic shut-down like this, nor do we know how long it will last, and economic/real estate forecasting models aren’t tuned for this. It’s still too early to say with any level of certainty right now what the mid/long-term fallout will be for real estate or any other industry.

Be smart, be careful, be strategic. And stay home!

Early Real Estate Market Conditions Are…

Question: How is the market shaping up for 2020? Have things cooled down or picked up where they left off last year?

Answer: The early Arlington/Northern VA market conditions are…crazy. After a fast and furious 2019 for condos and detached/townhouse properties in Arlington, it looks like we’re in for another year of fast-paced sales and strong appreciation.

In some of the most in-demand markets (e.g. R-B Corridor condos and $800k-$1.2M detached) pre-inspections (buyers do an inspection before making an offer), zero contingencies, and escalations 3-10% over the asking price no longer guarantee an accepted offer because there are multiple buyers offering those terms.

From the activity I’ve seen on both the buyer and seller side of this market, it seems like sellers can safely increase their asking price by 3-5% over what 2019 sales support and soon enough appraisers will have the necessary data points to support these increases, thereby eliminating much of the current appraisal risk for financed purchases.

Activity Over The Last 30 Days

The market fired up within the first couple weeks of January, but you know I never like to make statements about the market without also backing it up with data. So here are some highlights on the type of activity we’ve had over the last ~30 days (excluding relisted homes, Coops, and age-restricted housing). The data is of 7AM Tuesday February 18:

  • 223 homes listed for sale
  • Of those 223 homes, 150 (67.3%) are sold or under contract
  • Of the 150 homes sold or under contract, only 16 (10.7%) were on the market for 10+ days and 97 (64.7%) were on the market for 6 days or less (indicative of multiple offers)
  • Of the 73 homes still for sale, 37 (50.7%) are still within their first week on the market (high probability of going under contract soon) and 16 (21.9%) are $1.7M+
  • Of the 25 that sold, only one sold for below the original asking price and it was in a condo building with a major pending lawsuit that makes it nearly impossible for a buyer to get a loan. 7 have sold for over ask.
New Supply Increasing, Total Supply Decreasing Less

There is a glimmer of hope for buyers amongst all the competition and price appreciation. Arlington had a YoY increase in new listings for December ’19 and January ‘20 for the first time since October ‘18 (Amazon HQ2 announced in November ‘18). While demand is still outpacing new supply, resulting in 45(!) consecutive months of YoY decreases in housing supply, the drop in YoY supply was below 20% for the first time since October ’18 (-8.8% drop). So what does that mean in plain English? It’s getting less bad.

Where Do We Go From Here?

Here are some of my thoughts about what the rest of the spring/2020 might look like:

  • Once more of the early sales close, asking prices should adjust upwards to reflect the current market so we won’t see the same volume of offers but I expect prices to maintain the recent increases and buyers will continue offering very attractive terms to sellers (little or no contingencies, quick closes, etc).
  • In many cases there are 5-10 losing offers for every sale so those buyers are still active and possibly even more motivated, hence why I don’t see the market slipping in a couple of months after an early surge
  • I think there’s a good chance that we continue to see YoY increases in the number of new listings as homeowners decide to take advantage of the price increases over the last 18 months to move up, downsize, or relocate to a less expensive market
  • Low interest rates, strong stock market/economic performance, and the long-term local growth potential from Amazon, Nestle, and others will keep demand high
  • I’m interested to see how the elections impact market conditions this year. Usually buyers freeze up and sellers hold back on listings in the months leading up to a national election. I wouldn’t be surprised to see demand dip this fall given how much negativity will surround this year’s campaigns. However, with so much momentum in the market and if supply also drops, I’m not confident that it will result in buyers paying less.

For those of you currently looking or planning to look outside of the Arlington/Alexandria markets hoping for an easier buying experience, I’m sorry to say that homes are moving quickly with multiple offers and favorable contingency terms (for sellers) all over Northern VA. Expect this level of activity/competition to last through May/June.

If you’d like to discuss the best buying or selling strategies in the current market, feel free to email me at Eli@EliResidential.com to schedule time to talk.