Single-Family Demand Shifting From City to Suburb

Question: Have you seen a shift in single-family home preferences away from DC/Arlington further out into Northern VA?

Answer: Last week, I wrote about a clear shift in Arlington’s (and DC’s) condo market as historically high volumes of inventory have come to market and demand has tapered off. I received some follow-up questions about how the single-family market compares so this week we’ll take a look at some of the trends in single-family detached (SFD) homes in DC, Arlington, Fairfax County, and Loudon County.

Across all markets, demand and competition for SFD homes is high, but there is a clear shift in preferences for SFD housing further away from the city that we’ve never seen before. Both Fairfax County and Loudon County have reached all-time highs in absorption and all-time low months of supply.

Suburban Absorption Rate Sky-Rockets

The absorption rate, a strong metric for demand, has almost always been higher in DC and Arlington than in Fairfax and Loudon Counties. An absorption rate of 1.0 equal one home under contract for every home listed for sale and great than 1.0 means homes are going off the market faster than they’re being put in the market.

The first chart shows a dramatic increase in the absorption rate in Fairfax and Loudon Counties since June, far outpacing the DC and Arlington markets. Loudon County, the furthest/least densely populated of the four markets was on fire in August, with an already high absorption rate increasing nearly 50% over July.

Check out the difference between the Arlington County and Loudon County 10-year Absorption Rate in the second and third charts below.

Listing Volume Up Seasonally

One of the trends that stood out in last week’s condo analysis is the historically high volume of listings that came to market in July and August, ranking among the highest of any month in the last 10+ years. While the volume of SFD listings is up in July and August compared to past summer months, volume is still well below peak spring listing volume.

The year-over-year change in SFD listing volume in Arlington for July and August is pretty extreme (see second chart below) simply because of how low volume was in 2019 due to the Amazon HQ2 announcement, but the numbers still fall well below a normal spring market.

Historically Low Months of Supply in Suburbs

Months of Supply, a great supply/demand metric, is something I watch closely to predict price movement. The lower the Months of Supply, the more upwards pressure there is on prices.

Months of Supply for SFD homes in Fairfax and Loudon Counties has blown through 10+ year historical lows (first and second charts) and shows no sign of slowing down (prices likely rising rapidly), while Months of Supply has tapered off and even increased slightly in Arlington (third chart), a sign that prices might be stabilizing. Months of Supply in Arlington is still way too low to create a buyer’s market where prices might start dropping.

I hope you’ve found this analysis interesting and/or helpful. If you’d like to discuss buying or selling strategies, don’t hesitate to reach out to me at Eli@EliResidential.com.

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.

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.

Impact of Coronavirus on the Real Estate Market

Question: How will the threat of Coronavirus impact the real estate market in 2020?

Answer: I wasn’t planning to write this, it seems a little click-baity (now my “Trump’s Impact on Real Estate” column has some competition!), but I got the question four different times in under 24 hours last week so here I am writing about it.

Too Early To Know

Nobody knows how Coronavirus is going to impact the real estate market over the next month or the next ten months because we don’t know what the real impact of the virus will be on public health and markets. According to President Trump, it could disappear one day “like a miracle” and according to others, we could face a devastating pandemic.

Yesterday’s stock market closed down nearly 8% and this morning, the Futures were up almost 4%. Uncertainty slows the real estate market down and the only certainty right now is how uncertain the markets and public are about COVID-19. It’s hard to see how this type of uncertainty doesn’t create a drag on real estate across the country, the question is how long it will last.

Beyond the uncertainty, you have the very real impact of a sharp decline in investment/retirement accounts that many people use for down payments. With many accounts down double digits over the last two weeks, some buyers may reconsider their decision to sell stocks right now.

On the other hand, interest rates are historically low, hitting all-time lows last week, and the real estate market across the greater DC Metro has been on fire since January so it’ll take a major shift in demand to slow things down as we head into peak buying season.

What I’ve Heard

So far, what I’m hearing from clients, colleagues, and other industry partners (lenders, title, etc) is that buyers are hoping the Coronavirus slows the market down so they can have a better opportunity to buy, but there seems to be very few people actually pulling out of the market or reducing offers because of it.

Currently, buyers still seem more motivated by historically low rates and lack of buying opportunities than they are concerned that the likely impact of the virus. It seems that long-term confidence in local real estate is still a stronger influence on people’s decisions.

I think this mindset could change quickly, having broad negative effects on the local real estate market, if markets continue to tank, systematic failures in the market appear (e.g. Mortgage-backed Securities in 07-08), or people begin experiencing more direct effects of the virus like work/school closures or people they know testing positive. This is an important change to watch for if you’re considering putting your home on the market in the coming weeks.

Don’t Overvalue Speculation

It’s important to distinguish between fact and speculation and not overvalue speculation. If you spend 30 minutes online today, you’ll be able to find an assortment of well-supported reasons why the markets is on the brink of another recession as well as well-supported reasons why everything will be just fine, with growth ahead.

Your decision should be rooted in things you can rely on like how long you can live happily in a home (nothing creates value like longer ownership periods) and what your best alternatives are to buying (renting, staying put) or selling (do you have a better utilization of your equity?).

Of course, you want to consider the national, regional, and local economy as well as neighborhood trends, development pipelines, and other factors that will influence appreciation/depreciation potential, but be careful not to overvalue speculation.

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.