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!

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.

Tips To Start Your Home Search

Question: We are looking forward to buying our first home in 2020. Do you have any recommendations on how we should start the home buying process?

Answer: Google “home buyer tips” or “what to know before buying a home” and you’ll find plenty of advice on the topic, so I’ll include some suggestions I don’t see on most of those lists and also put my own spin on others that you have heard before.

Weighted Criteria

It’s easy to come up with 3-5 things that are most important to you, but challenge yourself early to come up with 12-15 things that are important to you. Then give yourself 100 points and allocate points to each based on how important they are to you and you’ll end up with a weighted criteria list to help you focus your search and objectively compare properties.

If you want to take it to the next level, bring your weighted criteria list with you on showings and score each house out of the total points allocated to it.

Length of Ownership

This is one of the most important conversations to have with yourself/your partner. You should focus on the following:

  1. Likely length of ownership
  2. Difference in criteria for a 3-5 year house vs a 10-12+ year house
  3. Difference in budget requirements for a 3-5 year house vs a 10-12+ year house

Appreciation is not guaranteed and difficult to predict, but the value of longer ownership periods is undisputed. One way longer ownership adds value is the potential for eliminating one or more real estate transactions, and the associated costs (fees, taxes, moving expenses, new furniture, etc) and stress that comes with moving, over the course of your lifetime.

If you have an opportunity to significantly increase your length of ownership by stretching your budget, it’s often justifiable. On the other hand, if your budget or future plans restrict you to housing that’s likely to be suitable for just 3-4 years (and buying now still makes sense), it’s generally better to stay under budget.

Influencers (not the Instagram ones)

Family, friends, colleagues…they’re all happy to offer opinions and contribute to your home buying process, but the input can be overwhelming and unproductive if you don’t set boundaries. Try to determine up-front who you want involved in the process and how you’d like them to be involved.

Think about how you’ve made other major decisions in life – what college to attend, what kind of car to buy, where to get married, whether to change jobs – and if you’re the type of person who likes input from your friends and family, you’ll likely do the same when buying a house. Plan ahead with those influencers so their input is productive.

Does Your House Exist?

Before jumping too far into the search process, spend a little bit of time searching For Sale and Sold homes on your favorite real estate search website/app to see if the homes selling in the area you want and within 10% of your upper budget are at least close to what you’re looking for. If not, spend some time adjusting price, location, and non-critical criteria to figure out what high-level compromises you’ll need to make and then compare those compromises to your current living situation and/or continuing to rent.

Know Your Market

We’re in a strong seller’s market right now with low supply, high demand, and increasing prices. Each sub-market behaves a bit differently and comes with its own unique set of challenges and opportunities, so take time early on to understand the sub-market(s) you’ll be involved in and what you’re likely to experience. This is something your agent should be able to assist with.

Pre-Approval & Budget

There is a lot of value in working with a lender early on in the search process. For starters, you’ll have somebody who can provide real rates and advice based on your specific financial situation/needs. A lender can only do this if they’ve reviewed your financial documents and credit. The more you put in, the more you get out.

You’ll need to have a lender pre-approval to submit an offer (seller has to know you qualify for the purchase you’re offering to make) so if you have to do it anyway, why not doing it early on so you get the most value out of your lender? It also means that you’ll be prepared to make an offer if you find the right home before you expect to be ready.

Given how competitive the Arlington/Northern VA/DMV real estate market is, the quality of your pre-approval can make a big difference when you make an offer. You should strongly consider partnering with a local lender with a great reputation to give yourself an advantage (or not put you at a disadvantage) when making an offer. Pre-approval letters from big banks and online lenders don’t go over as well in our market. If you’re looking for a recommendation, consider Jake Ryon of First Home Mortgage (JRyon@firsthome.com).

Find an Agent

The least surprising suggestion on this list! Agents come in many different forms and finding somebody who suits your personality and goals is important. Ask friends, colleagues, and family for referrals and meet with multiple people until you find the right fit.

The worst thing you can do is choose your agent based on whoever responds to an online showing request faster. A good agent can provide a ton of value being involved in your buying process 3-6+ months before you’re ready to buy. Be wary of anybody who wants you to “wait until you’re ready” before working with you.

If you’re considering buying (or selling) in the DMV in 2020 and would like to meet, feel free to email me at Eli@EliResidential.com!

Thankful For You, ARLnow Community

I published my first Ask Eli column on November 10 2015, just over four years ago. 200+ columns later, I’m incredibly thankful for the ARLnow community for the opportunity to share my perspective on local real estate and explore interesting market trends with you each week. Your feedback over the years, both privately and in public comments (yes, I appreciate every one of them) challenges and motivates me because I know my neighbors are actually reading.

I also want to thank Scott and his amazing team at ARLnow for building this platform and providing Arlington residents, workers, and businesses with highly valuable, hyper local news. The operation they run far outsizes the people operating it, which speaks to their hard work and talents. If you want to express your gratitude for their dedication to free local news, their email address is arlingtonnews@gmail.com.

From my family to yours, have a great Thanksgiving!

The Missing Ultra High-End in Arlington

Question: I recently saw a home listed in Arlington for almost $30M. Are there neighborhoods in Arlington with ultra-expensive homes like this?

Answer: We hear a lot about the “missing middle” in Arlington housing, but there’s another market that Arlington struggles to support that nobody is talking about…the super-rich. Sure we have plenty of homes that sell for $1M-$2.5M (457 sold in 2019) but in 2019 there were only seven sales over $2.5M and just one over $3M (and that was a sub-dividable lot). So what gives with everybody calling Arlington “expensive” if we can’t support the super-rich? Where do they live? (I hope my sarcasm is coming across…)

405 Chain Bridge Rd Arlington VA 22207. Listed by Mark Lowham, TTR Sotheby’s.

Arlington’s Most Expensive Homes

The recently listed $28.5M home, by Mark Lowham of TTR Sotheby’s, on the Potomac River side of Chain Bridge Rd is an anomaly in Arlington. Outside of the prestigious Country Club Hills neighborhood and Turnberry Tower penthouse-level condos, sale prices in Arlington rarely eclipse the $3M mark and even in those communities the handful of $3M+ sales historically top out at $4M. And then you have a very small pocket of ultra-luxury homes at $5M+ along the Potomac, off Chain Bridge Rd, which fall within Arlington County, but actually have a Mclean mailing address and zip code (22101).

Note: There are dozens more homes in Arlington worth $3M-$5M that just haven’t been sold. Many are custom built in the last 10-15 years with the original owners still occupying them. There are also a handful of private sales that aren’t entered into the MLS because they were sold off-market.

Why Doesn’t Arlington Have Ultra-Expensive Homes?

So with so much wealth and close proximity to DC, why doesn’t Arlington have more ultra-expensive homes? The answer is lot size.

For anybody that has looked for a home with a little elbow room/privacy in Arlington, you’ve reached the unfortunate conclusion that it’s very difficult to find anything with more than ¾ acres (even ½ acre is highly coveted) and there are just a small handful of properties with more than 1.5 acres. Smaller lots make it difficult to build enough house to justify a $5M+ price tag.

Where To Spend $5M+?

So where do people with $5M+ to spend on a home live? In Northern VA, most of those homes are in Mclean or Great Falls, as well as further west in Loudon County’s horse/wine country. DC’s most popular ultra-expensive neighborhoods are Georgetown and Kalorama, with a spattering of other neighborhoods west of Rock Creek Park. In Maryland you’ll find the most expensive homes in Potomac along River Rd, as well as Chevy Chase and Bethesda.

Enjoy Some Photos

For those of you who are here just for the pictures, here you go! I’ve linked to $5M homes either for sale or sold in the last few years in the area:

Northern Virginia

Washington DC

Maryland (Montgomery County and Eastern Shore)

How Agents and Agent Teams Are Structured

Question: I’m in the process of searching for a real estate agent and having trouble understanding the different organizational structures. Can you explain how it works?

Answer: Most real estate agents operate as independent contractors within their brokerage (office), thus have autonomy to operate their business/service model as they choose. With over 12,000 Realtors in the Northern Virginia Association of Realtors alone, the organizational structures and business models vary widely to suit an agent’s style of business and/or target clientele.

I think it’s almost as important for home buyers and sellers to learn about their prospective agent’s operating model as it is to make sure they know your market. An agent’s operating model will impact your experience and you need to make sure it aligns with your expectations.

I’ll break down some of the organizational structures that are most common today so you have an idea of what to look for.

Brokerage

At the top of the organizational structure is the brokerage, which is best described as the office your agent works for. The brokerage is the legal entity involved in the transaction and when you sign a Buyer Representation or Listing Agreement, it’s actually with the brokerage, with your agent as the assigned representative of the brokerage.

Currently in the DC Metro, most brokerages are made up of multiple agents, often dozens to hundreds, and function like a shared office. An agent cannot operate independently outside of a brokerage, but an individual agent can have their own broker’s license and operate an independent brokerage.

Most agents operate as independent contractors within their brokerage, but there are some models, Redfin being the most popular, where agents are employees.

Agent Models

In most cases agents operate individually or within a team, structured in a some common ways:

  1. Individual Agent, No Support: Many agents work independently without any sort of support staff. The advantage for clients is that you always know who you’ll be working with and who is handling every detail of your transaction. The main disadvantage is that there is a single point of failure if that person is unavailable.
  2. Individual Agent With Administrative Support: Some independent agents hire one or more people to support administrative tasks like scheduling and marketing. Some brokerages also offer this type of administrative support to their agents. This should be an advantage over #1 because the agent has more time for high-value tasks, but it also requires the administrative support to be on top of things and strong communication between agent and admin.
  3. Team Partnership: Two or more experienced agents with strong individual businesses may partner to share some administrative support costs and build a stronger brand together. For the client, it has many of the same qualities as #2, but there’s usually an added benefit of knowing that there’s at least one other experienced agent available as back-up in case your agent in unavailable.
  4. Team Lead With Coordinators: An individual agent or partnership with a large book of business that uses specialized buyer and seller coordinators to support client activities. An advantage to clients is that the transaction is generally led/directed by an experienced agent and that there is no single point of failure, you’re working with a support team. A disadvantage is that some or many high-value pieces of the transaction are handled by coordinators, not the lead (experienced) agent.
  5. Team “CEO” With Junior Agents: An experienced agent who acts more as a CEO, overseeing the operations of a large team of agents, and personally handling very few transactions, if any. Clients should benefit from systems and processes the “CEO” agent used to become successful, imparted on the junior agents. A disadvantage is that these teams often have dozens or more agents and the experience of those agents varies widely and don’t necessarily reflect the talent of the “CEO” agent.
What Should You Ask?

It’s important for you to understand how your real estate agent operates and it shouldn’t be hard to find out by asking some simple questions.

  • Will I work with anybody else during the transaction?
  • Will anybody else work on my transaction?
  • What happens if I need something when you’re unavailable or out-of-town?

I hope this has been helpful for anybody starting out their search for an agent or just generally confused by how the industry is structured. As always, if you would like to meet with me about buying, selling, or renting in Arlington or the surrounding DC Metro communities, feel free to email me at Eli@EliResidential.com.

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.

Question: We are planning to buy a home in the DC area sometime in the next 12-24 months and want to make sure we take that time to prepare. What should we know before buying a house that we can get started with now?

Answer: Whether you’re a first-time buyer, experienced buyer relocating from out-of-state, or moving locally here’s a list of things I review and plan out with clients before getting into the full swing of house hunting:

Local Customs, Requirements, Timelines, and Contracts
The home-buying process varies greatly across and within states. I think the most important thing you can do as a buyer is take an hour at the beginning of your buying process to become educated on the process, timelines, and key contractual terms/obligations in the area(s) you plan to search. This is also a good way to meet and vet different real estate agents early on to get a feel for who is willing to spend time with you up-front on education and planning vs pushing immediately for a sale.

Choose the Right Financing, Get Pre-Approved
Not all lenders offer the same loan products so it’s important to identify a lender who not only provides high quality service, but also has access to loan products that fit your profile (down payment, credit score, job industry, etc). Real estate agents, friends, and co-workers are all great sources of recommendations.

You’ll also want to get a pre-approval from at least one lender, one that actually reviews and verifies your financial documents, income, and employment instead of just running credit and reviewing an information sheet. This will decrease the chances of you being rejected from a loan, allow the lender to provide the most accurate recommendation, increase your leverage in contract negotiations, and reduce the amount of work required of you once you’re under contract.

Don’t Forget A Monthly Budget
I find that most people qualify for more than they actually want to spend, especially dual-income buyers, so budgeting is important. The biggest mistake most buyers make is budgeting strictly around the sale price, which is often driven by the amount you have for a down payment. It’s just as important to set a monthly budget for total housing expenses including mortgage, taxes, insurance and if applicable Association fees and/or mortgage insurance. Your lender can help you project monthly expenses at different price points based on different down payment amounts.

Do You Want Representation?
Determine if you want to have a real estate agent representing you in the transaction (breaking news…I highly recommend it) and, if so, what level of service you’re looking for. In most cases, the seller pays commission to their representing broker and the buyer’s broker, so representation often comes at little or no cost to buyers.

Push Yourself on Your Criteria
It’s very easy to come up with your top 3-5 criteria for a home and rare for most couples to disagree on the short list, but push yourself/yourselves to rank your top 10-12 criteria. This list can and will change as you search for homes, but it pushes you to think about more than bedroom count, schools, commute, and an open kitchen. This is especially valuable for couples. Just because you have the same taste in music, food, and TV shows that brought you together, doesn’t mean you’re on the same page about housing criteria.

Cash Needs + Savings
You need cash savings to pay for your down payment + closing costs of 2.5-3% of the sale price (in the DMV). Within a few days of your offer being accepted, you’ll have to transfer 1-5% (negotiable) of the sale price into an escrow account as deposit to secure the sale. You’ll spend about $1,000 out-of-pocket between contract and closing on inspections and the appraisal. Don’t forget how expensive moving is either, so keep enough savings for incidental moving expenses, new furniture, painting, etc. You should aim to haver 3-6 months of emergency savings tucked away after everything is paid for.

Other Key Providers
Most buyers are familiar with the role real estate agents and lenders play in the transaction, but don’t forget about the importance of working with a quality title attorney and home inspector. Your agent should be able to make a great recommendation.

How Long Will You Live There?
This is probably the most underrated conversation for buyers to have when they’re setting a budget and determining criteria. Your home-buying strategy should look very different if you’re planning to own for 3-5 years vs 10-12 years so give it serious thought and be realistic.

Deadlines and Lease Terms
Figure out if you have any strict deadlines for the move and iuf there are direct or indirect costs of buying before or after that deadline. It can be difficult in a low-inventory market to time a purchase, so make sure you’re aware of the pros and cons of purchasing before or after your deadline. If you’re renting, make sure you find out the cost of early termination or if month-to-month leasing is an option.

Reason for Your Purchase
I still haven’t met somebody who asks for a bad investment when they buy a house, everybody wants their home purchase to be a great investment, but you have to define what a great investment means to you. Does it mean your home appreciates in value well above the market over a certain period of time? If so, you’ll likely be in under-developed areas or in a house nobody else wants. Does a great investment mean you wake up every morning so happy with your home and neighborhood that the money is a secondary concern? I often remind clients that sometimes the best investment is buying a house that allows you to live there longer and eliminates one or more real estate transactions in your lifetime. In other words, the value you get out of being in a home for 10 years vs 3 years far surpasses a small increase in your budget.

I hope this list is helpful not just for local DC Metro readers, but for anybody getting started with their home search and wondering what you should know before buying a house. These are the conversations and steps I take with my clients every day to make sure they’re prepared, educated, and have the right strategy in place before we even step foot in a house together. I’m sure I left a few things off this list, but this should get you 95% of the way there. Feel free to give me a call or send me an email at Eli@EliResidential.com for the 5% I missed.