Question: How much has the market changed in the last six months?
Answer: Sometimes I write columns for myself as the audience, this is one of them…I hope some of you find it as interesting as I do!
Four months ago, you couldn’t watch/read the news without hearing about the collapsing real estate market but by late January, it was obvious that low supply would prevent that from happening. Demand even prevailed through February rate spikes because 2023 was the first year that new listing volume in February was lower than January.
Market Whiplash from Q4 ’22 to Q1 ‘23
It’s normal for the market to slow in Q4 and pick back up in Q1, but the change in market conditions from Q4 2022 to Q1 2023 was the most significant on record.
To get a sense of just how much of a shift we experienced between Q4 and Q1, I compared the key performance metrics of Net Sold (sold price less seller credits) to Original Asking Price percentage and the percentage of homes going under contract within ten days. I also compared all property types, condos, and detached/townhouse/duplex. Here are the highlights:
Buyers lost about 6.3% of negotiation leverage on non-condos since Q4. I think that percentage accurately represents how much the market value of most non-condo properties has changed in just a few months.
The performance data for non-condos is surprisingly similar for Q1 ’23 and in Q1 ’22, despite 2022 being the hottest market we’ve ever experienced.
Market pace in Q4 was really slow, with less than 1/3 of non-condos going under contract within ten days. In Q1 that number has jumped to almost 71%.
The condo market in Q1 ’23 is notably more competitive than it was in Q1 ’22, despite last year’s favorable market conditions (low rates). It took buyers a while to put the pandemic-led resistance to condos behind them, but it’s now clear that condo demand has returned.
Looking ahead, it doesn’t seem like there’s any supply relief in sight, with new listing activity trending at 10-20+ year lows so even moderate demand will create upwards pressure on prices and a fast-paced market. However, you can expect demand to ease up as summer approaches and you can always count softer demand in Q4.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How close are the County’s tax assessments to actual market values?
Answer: Earlier this month, Arlington announced that the next round of annual tax reassessments would increase the total residential assessment by 4.5% (this is overall, changes to individual home/land values will vary significantly). This change is meant to align with the increase in market values of Arlington homes, but assessed values remain well below actual market values for most homes. In fact, 81% of homes sold in 2022 sold for more than their most recent tax assessment value.
Homes in Arlington that sold in 2021 sold for an average of 8.7% (median 8.4%) above their most recent tax assessment.
Homeowners in the 22205 zip code benefit the most by underassessments, for a second year in a row, with an average difference between 2022 sold prices and their assessments of 14.8%, or over $194,000. Owners of single-family homes and townhouses (12.9% average difference) benefit more from underassessments than condo owners (4.1% average difference).
If County assessments were representative of actual market values, the average Arlington homeowner would pay over $900 more per year in property taxes, so don’t forget to send the Department of Real Estate Assessments a thank you card!
The following chart details the difference between how much a home in Arlington sold for in 2022 compared to its most recent County-assessed value:
If you believe that the County’s assessment of your home’s value is too high, you have the right to appeal the assessed value; the deadline is March 1.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: What were some of the most expensive homes sold this year in the DMV?
Answer: Happy holidays and new year everybody!
It’s always fun to look back at the most expensive homes sold in our nook of the world, so without further ado, let’s take a look at the most expensive homes sold this year in DC, Maryland, and Virginia. Note: this includes what is entered into the MLS, it’s certainly possible (likely) that expensive homes have traded hands privately outside of the MLS.
The most expensive home sold this year in all three DMV states is a beautiful 550-acre estate, with a private 18-hole golf course, in Upperville VA that sold for $23.5M! Despite the hefty price tag, it falls well short of the record sales from 2018, 2020, and 2021 that all cleared $40M.
Arlington’s average and median prices are sky-high, but the area generally likes ultra high-end properties we see elsewhere in the region. Arlington’s most expensive sale this year is a new build in Country Club Hills clocking in at 7,450 SqFt, seven bedrooms, seven full bathrooms, and two half baths. The property sits on an unusually large (for Arlington) .39-acre lot.
The most expensive sale in Alexandria is a townhouse built in 1800 in Old Town that sits on nearly ¼ acre with over 6,000 SqFt and seven bedrooms. Pictured above is the second priciest sale in Alexandria, a waterfront penthouse condo in Robinson Landing with nearly 2,800 SqFt for $4,509,000.
The most expensive sale in Fairfax County comes in at $11M for a 20,000 SqFt home recently built one block from Langley High School. Pictured above is the second most expensive sale in Fairfax County of a sprawling Great Falls residence on five acres, built in 2007, sold for $10.5M.
The most expensive sale in Maryland is a beautiful waterfront home in Annapolis with over 3.5 acres and nearly 12,000 SqFt, built in 2014 for $12,000,000.
I hope this makes for some fun conversation during the holidays about what type of ultra high-end home you would buy if you win the lottery! But I’ll be honest, the most expensive homes this year aren’t nearly as impressive as last year’s (link if you want it).
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How has Arlington’s condo market reacted to higher interest rates?
Answer: In last week’s column, I looked at performance metrics for detached homes in Arlington, shared my thoughts on local pricing behavior, and discussed news about the national vs local real estate market. This week we will look at the underlying performance metrics in Arlington’s robust condo market.
Underlying Arlington Market Performance Data for Condos
Here’s how I approached the data used in this week’s analysis:
Low-, mid-, and high-rise condos only
Resale data only, no new construction
All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market
Net Sold = Sold Price less Seller Credits
I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that kicked off a condo craze. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of the COVID-driven shift in condo demand.
I either did not use or must caution your interpretation of this year’s August-November data because it is incomplete for purposes of this analysis. There are 13, 26, 39, and 42 condos actively for sale that were listed in August, September, October, and November, respectively, which will influence the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.
There are only 10 condos still for sale listed January-July that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented in this analysis.
Business as Usual for Condos
While the detached market was on fire in 2021 and early 2022, the condo market performed mostly along the lines of historical metrics, except for one month, February 2022, when average sold prices climbed slightly above the original asking price. As a result, high interest rates have led to a more modest reversal in pricing behavior over the last six months, compared to the detached market.
The only time in the last 15 years that we’ve seen a real acceleration in condo prices was during 2019 (and pre-COVID 2020) as a result of Amazon’s HQ2 announcement.
Pace of the Condo Market Slightly Below Normal
We had a few months during the peak of the 2022 market where the pace of sales came close to the craziness we experienced in 2019, after Amazon announced HQ2, but average days on market has returned to its normal seasonal trends. As more data rolls in for closings in August-December, I expect the average days on market for the last 3-4 months of 2022 to exceed historical averages, but not by much.
One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market.
As opposed to average days on market, these charts indicate that high interest rates have slowed the pace of the condo market beyond the usual seasonal slowdown, with a notably slow October where just 38% of condos listed sold within 30 days. Expect to see these metrics fall even further as more condos listed after July contract and close.
Looking Forward
Condo pricing tends to be pretty stable and movements up or down are relatively small, with the exception of major events like Amazon HQ2 (rapid appreciation) and COVID (rapid, temporary depreciation), so expect a return to stable and predictable pricing in our condo market where we’re used to seeing 0-2% appreciation year-over-year.
The effect of high interest rates will likely be felt most in the slow pace of the market. The pace will almost certainly increase in Q1 2023, which means we can expect about 1/3 of condos to sell within the first 10 days and about 2/3 to sell within the first 30 days during the spring selling season.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How have you seen the Arlington housing market react to higher interest rates?
Answer: I hope everybody had a fantastic Thanksgiving. The results of last week’s Dark Meat vs White Meat poll were impressive. With 559 votes in as of this morning, only three votes separated white meat as the preferred part of the turkey over dark meat! We may have found the only vote closer than a Georgia Senate Race!
National vs Local Market Expectations
With daily news about the nationwide (and global) housing collapse resulting from parabolic price appreciation followed by parabolic interest rates, I want to use this week’s column to check-in on what we’re seeing locally and remind everybody that what you read in the news is generally going to be the most attention-grabbing data points and that our market is likely to experience a much more modest correction than many other markets nationwide, as we saw during the Great Recession.
My Take on Local Pricing Behavior
I shared some detailed thoughts and observations last month in a column addressing price drops in Arlington and the TL;DR version is that 1) yes prices have dropped relative to their peak this spring, 2) there’s not nearly enough data available locally to say with any statistical confidence how much that drop has been, and 3) my observation was/is that market-wide in Arlington we’ve lost most/all of the appreciation we saw in the first 4-5 months of 2022 ,but 2021 prices are still mostly holding up. Keep in mind that in a volatile, low inventory market (current state) pricing is more randomized and case-by-case than it usually is, so you’ll see plenty of individual examples that buck the aggregated trends/assumptions.
Underlying Arlington Market Performance Data for Detached Homes
This week, I thought I’d share some charts of underlying market performance metrics to help illustrate what our market is experiencing. Here’s how I approached the data this week:
Detached (single-family) homes only. I’ll probably look at condos next week.
Resale data only aka no new construction because performance metrics used in this column for new construction aren’t usually representative of the market
I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that sent data in unusual directions. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of COVID frenzy buying with normal seasonal behavior (2020 was totally out of whack on seasonality).
All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market instead of the month they closed (closed data is a lagging performance indicator)
Net Sold = Sold Price less Seller Credits
**An important caveat to this data is that I either did not use or must caution your interpretation of this year’s September, October, and November data because it is incomplete for purposes of this analysis. There are 15, 22, and 19 homes actively for sale that were listed in September, October, and November, respectively, which will have a significant influence on the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.
Note there are 2 homes for sale listed in each month May-July and 7 for sale from August that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented for those months
Net Sold Price to Original Ask down 9.3% in 6 Months
The average net sold to original ask dropped from a March peak of 105.9% to 96.6% in August. I suspect that once September-November listings close and we can start filling in those fields, we’ll see that number fall further but maybe not significantly because asking prices have started to react to weaker market conditions and many sellers are coming off their expectations for spring 2022 prices.
Of note, this performance metric is coming more in-line with 2017 metrics. I’ll be interested to see if performance metrics stabilize around 2017 numbers, pre-Amazon HQ2, or if they worsen. My guess is that they’ll worsen slightly compared to 2017 through the end of the year and come more into balance in 2023 (pending interest rate movements).
Average Days on Market 4.8x Higher in August than February ‘22
Unsurprisingly, the average days on market has skyrocketed relative to earlier this year from 9 days in February to 43 days in August. August ’22 is still lower than August ’17, but the August average will increase once the 7 properties still for sale from August contract/close.
Homes Selling Within 10/30 Days Go from Record High to Low
One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market. As opposed to average days on market, these charts indicate that our market pace is slower than 2017, on a seasonal basis.
We’ve gone from 82% of homes listed in March selling within 10 days to just 27% in October. Similarly, at least 90% of homes listed February-April sold within 30 days compared to 45% and 44% selling within 30 days in August and October, respectively. That is a massive change in market pace within 4 months!
Looking Ahead
I expect the performance metrics of August-October to worsen as more of those listings contract/close and November-December to come in below 2017 numbers. It’ll be a bit difficult to truly understand the aggregate effect on pricing because Arlington is a relatively small housing market, but I’ll do my best to come up with some accurate measures once we’re far enough into 2023 and enough 2022 listings have sold. Ultimately, the tale of local home values will be told in how long it takes interest rates to settle back down into the expected 4.5-5.5% range (don’t hold out for sub-4% rates again).
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: Is it possible to take over a seller’s existing loan if they have a low interest rate?
Answer: Thank you to our Veterans and Active-Duty military for your service.
In keeping up with the theme of last week’s column, addressing popular mortgage product/strategies, and in honor of Veterans Day, this week I’ll cover assumable VA loans.
An assumable loan is a loan that can be transferred from a seller to a buyer, allowing the buyer to maintain the interest rate of the seller’s existing loan rather than accept a market-rate interest rate. This can be valuable in a high-interest rate environment like we’re in now when most homeowners have an interest rate well below current market rates.
To help me provide the best information about assumable VA loans, I reached out to Skip Clasper of Sandy Spring Bank (sclasper@sandyspringbank.com), who I highly recommend for a range of loan products including VA loans, construction/rehab loans, and jumbo loans.
Only Some Loans Are Assumable
VA loans (available to Veterans, service members and surviving spouses), FHA loans, and USDA loans are the only traditional loan products that are assumable. They make up a relatively small percentage of existing home loans in Arlington (likely single-digit percentage of total loans). I’m not aware of any conventional loans that can be assumed.
Key Details about Assuming a VA Loan
There are some important details and caveats to assuming a VA loan that both buyers and sellers need to understand prior to transferring a loan:
Buyers do NOT have to be a Veteran or otherwise qualify for a VA loan to assume a VA Loan
Sellers can NOT obtain a new VA loan until the previously assumed loan is paid off (or refinanced out of) unless the new buyer is a Veteran and uses their eligibility on the assumed loan
It is less expensive (closing costs) to assume a loan than to originate a new loan. The VA Funding fee is only 0.5% for assumable VA loans.
You need a down payment that covers the gap between the assumable loan balance and the purchase price. For example, if the seller’s loan balance is $200,000 and the purchase price is $500,000, the buyer is assuming $200,000 is debt and will have to cover the remaining $300,000 via down payment or alternative debt such as a second trust.
Buyers need to qualify for the loan using normal income, debt, and credit guidelines
As you can probably determine from the above details, there are only a limited number of scenarios where assuming a VA loan makes sense for both parties. The biggest hurdle to VA loan assumption is that the VA loan eligibility stays with the loan so if the buyer does not have their own VA loan eligibility, the seller must be sure they are okay giving up this very valuable benefit until the new buyer pays it off or refinances.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: The seller of a home I’m interested in is offering a 2-1 Buydown incentive. Should I accept that or negotiate for something else?
Answer: Higher mortgage rates have re-opened conversations about creative ways to help buyers reduce their rates and monthly payments to incentivize demand: assumptions, seller-financing, buy-downs, adjustable mortgages, and more. Over the coming months, I’ll start covering some of these options to share pros and cons of each.
This week, we will look at the 2-1 Buydown, which has captured a lot of attention lately and is being marketed as a way for seller’s to draw buyer interest by helping them reduce their monthly payments during the first two years of their loan.
POLL: How would you prefer to allocate a $10,000 benefit from the seller of a home you are buying?
Answer 1: $10,000 off interest payments spread over two years (2-1 Buydown)
Answer 2: $10,000 in points to permanently lower your interest rate (“lose” benefit if you sell or refi)
Answer 3: $10,000 off closing costs (up-front cash savings)
Answer 4: $10,000 reduction to the purchase price
What is a 2-1 Buydown?
A 2-1 Buydown is a seller-paid benefit to the borrower/buyer that reduces their mortgage rate by 2% in the first year and 1% in the second year. In the simplest terms, it allows the seller to pre-pay some of the buyer’s interest payments for the first two years of the loan to reduce their monthly payments.
It generally equates to a savings on total interest payments equal to ~2.35% of the loan amount, over the two-year period. The seller pays that amount to the bank at closing, which shows up as an additional cost to the seller on their settlement statement. The 2-1 Buydown is something sellers may offer up-front or that buyers can negotiate for.
Ultimately, the question (which is reflected in the above poll) is whether or not the dollars allocated by the seller to a 2-1 Buydown are best used there versus towards buyer closing costs (reduces buyers out-of-pocket), lowering the purchase price (reduces interest/payments over the life of the loan and loan payoff amount), or points (a permanent reduction in interest rate rather than pre-paying some interest for two years).
It’s important to note that the 2-1 Buydown doesn’t change the qualification requirements (e.g. Debt to Income ratio limits) for the borrower (buyer). They must qualify for the loan at the full mortgage rate, not the discounted rate.
There is also a less commonly used 3-2-1 product that lasts three years and reduces the rate by 3%, 2%, and 1% in years 1-3 of the loan.
Example of a 2-1 Buydown
Here’s an example from Brad Pace at US Bank of a 2-1 Buydown, compared to using the same dollars to reduce the purchase price:
Standard Deal w/o Any Negotiated Discount:
Purchase Price: $1,500,000
Loan Amount: $1,200,000 (20% down)
Interest Rate (7yr ARM): 5.75%
Principle & Interest (P&I) Payment: $7,002
Deal w/ 2-1 Buydown:
First Year P&I Savings: $17,345.85 ($5,557 P&I payment)
Second Year P&I Savings: $8,917.27 ($6,259 P&I payment)
Buyer Savings in First Two Years (also the cost to seller): $26,263.12
Deal w/ Cost of 2-1 Buydown Applied to Price:
Purchase Price: $1,500,000 – $26,263 = $1,473,737
Loan Amount: $1,178,989 (20% down)
P&I: $6,880
Buyer pays $23,328 more in first two years compared to the 2-1 Buydown and will take ~16 years for the lower ($122/mon P&I) payment on the price reduction to breakeven with the cost savings of the 2-1 Buydown. However, buyers also benefit from a lower loan balance which means more equity and more proceeds when they sell.
Pros and Cons of the 2-1 Buydown
While the 2-1 Buydown may be considered a helpful marketing tool for sellers to draw interest in their home, buyers ultimately need to decide whether they feel it’s the right allocation of dollars being offered by the seller compared to alternatives like closing costs, price reduction, or points.
For me, I think it’s worth considering if you’ve already negotiated for the seller to pay 100% of closing costs and there’s still enough negotiation room to cover the cost of a 2-1 Buydown and the savings in the first two years is more valuable to you then longer-term payment reduction and loan balance reduction you get by lowering the purchase price.
Pros of a 2-1 Buydown:
Will reduce your payments significantly more during the first two years than an equivalent reduction in the purchase price
If the buyer refinances their loan or sells before the two years of the 2-1 Buydown is complete, the bank will credit any remaining balance on the 2-1 Buydown against the payoff of the loan. This makes it different (and potentially more valuable) than buying down a rate permanently with points because you lose that benefit upon refi or resale.
Gives buyer more time to adjust to their full mortgage payment if they expect a raise or additional source of income within 2-3 years from their purchase
Gives buyer extra cashflow in first two years to help with moving expenses including buying furniture
Cons of a 2-1 Buydown:
If the 2-1 Buydown is in lieu of seller paying buyer closing costs, buyer may benefit more by having those funds used to reduce their closing costs which results in an up-front cash savings instead of receiving that same dollar amount spread over two years (money now vs over time)
Many banks do not carry a 2-1 Buydown option so the “natural” interest rate on a 2-1 Buydown can be higher and some banks only offer it on their 30yr fixed rate loans, not ARMs or Jumbo loans
Over the long run, a reduction in purchase price (loan amount) might save you more money than the up-front savings of a 2-1 Buydown. Discuss this trade-off with your loan advisor.
Let me know what you think about the 2-1 Buydown in the poll and/or comments section!
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: I’ve read a lot of bad news about the real estate market, how is that playing out in Arlington?
Answer: Bad news sells…keep that in mind as you get your daily/weekly dose of headlines that the housing market is collapsing under the weight of high interest rates and overinflated prices. With that said, I’m not about to deliver a rosy picture of the Arlington real estate market, but it’s important to keep in mind that most of what you’ll see in the news will be cherry-picked statistics and stories around the country/region that are likely more extreme than what our market will experience overall.
Arlington remains one of the most stable, reliable real estate markets in the country. We are absolutely feeling the effects of a dramatic tide shift in demand, but just as our market didn’t see meteoric price increases like other markets from Loudoun County to Tampa to Boise during Summer 2020 to Spring 2022, we most likely won’t experience as extreme of a pullback while interest rates remain high.
Usually, you’d scroll down and see a lot of charts and data from me in an article like this, but I don’t think we have enough of the right data yet to tell an accurate story of property values in Arlington. So this week is more of a stream of conscious of my thoughts on property values, with a few data points sprinkled in. I welcome any and all theories, agreements, and disagreements in the comments section!
Have Prices Gone Down?
The short answer is “yes,” prices have come down from their 2022 peak. By how much? That is a very difficult question to answer and there’s no reliable way for us to know at this point. So let’s talk about how I think we should we talking about prices based on what we do and do not know at this stage:
What we do know:
The prices we saw in the first half of this year are out of reach, in most cases
In the last seven days, 52 properties in Arlington (12.5% of homes for sale) have cut their asking price, which is a pace consistent with previous seven-day windows. Odds are this pace increases as we get closer to, and into, the holidays.
Price reductions and sale prices are not being discounted anywhere close to enough to offset the difference in monthly payments between earlier this year and now
The market always slows in the summer and continues to taper off through the end of the year (with the exception of September/early October), we’re just experiencing a more dramatic version of seasonality because of the sharp interest rate increases that have paralleled the traditional seasonal slowdown and because of where we’re coming from – insane demand for nearly two years.
Supply coming to market is down, contract activity is down, and showing activity is down all about 20-30% year-over-year
What we don’t know:
What is the appropriate baseline to judge price change from? Is it the relatively short window of peak pricing from roughly February-May 2022? If you want headline news, sure, but if you want a more accurate/helpful perspective on market conditions, you probably want to use a wider data set that goes back to Q2/3 2021.
We don’t have anywhere near enough data points after the market inflection this summer to assess market price changes in Arlington (or even Northern VA or the DC Metro, in my opinion) and because sold price data lags so much behind shifts in market condition, we won’t truly know what the pricing effects were on Q3/Q4 markets until at least February 2023 because many homes struggling to sell now won’t show up in sold data until then.
There’s no precedent for how buyers as a whole will respond to such extreme interest rate increases (see chart below I saw last week on MortgageNewsDaily.com that highlights the historical significance of recent rate increases), so it makes pricing challenging for sellers (and buyers, for that matter). Days on market has increased 2-3x or more for most sub-markets and the number of showings are down by about 30-35% year-over-year so it can also be very difficult for sellers to infer whether their time on market is price induced or not. A lot of current pricing is based on seller motivation and their hope/fears of market conditions 3-6 months from now.
The Big Unknown (hint: interest rates)
The most significant “what we don’t know” is what will happen with interest rates in the coming months/year. And please save me the “interest rates are still low relative to the last 30 years” non-sense. The fact is that buyers, homeowners, and prices have adjusted for sub-5% rates over the last 15 years and a long-term reversion back to the 6-8%+ range will be painful.
Per MortgageNewsDaily.com, the average 30yr fixed rate is ~7-7.3%, depending on the data source (see chart below). What we don’t know is how long we’ll have unusually high interest rates and that is ultimately what will drive changes in property values in Arlington, regionally, and nationally (I know, stating the obvious here).
Barring a change in Fed policy (e.g. reducing expected Fed Rate increases or bringing liquidity to the mortgage market), it seems unlikely rates will drop much or at all in Q4. High rates compounded with the normal seasonal slowdown means that there will be plenty of discounted sales from motivated sellers who don’t want to hold out until 2023, but when we eventually aggregate all the sales data from Q3/4, I’m not sure it will amount to an eye-popping drop in prices across the entire Arlington market (maybe 5-10%, depending on your baseline data).
I think the problems (aka a double digit drop in home values over a longer 6-12 month period) will show up in Q1/2 2023 if interest rates are still 7% or more through Q1 2023. I think that is when we’d start to see property values in and around Arlington drop as a whole, by uncomfortable amounts (maybe below 2021 prices).
On the flip side, if rates come down by late Q4/early Q1 and we start seeing 6% or lower averages on the 30yr fixed, that would coincide with our normal ramp-up period into the spring and the market could very quickly turn around. I would bet that if we see the average 30yr fixed rate get to the mid 5% range or less in Q1, we will see a rapid return to competition as buyers who have been sidelined due to high rates in the 2nd half of 2022 return to the market and meet the normal churn of new buyers introduced to the market in the new year.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
I would love to hear more from you in comments or by email (Eli@EliResidential.com) about your opinions on the availability of good real estate content – national or local market information, investing, best practices/how-to, etc. Whether it’s content you’d like to see here in my column or content you wish you could access from other sources, I’d love to hear!
Question #1: Are you informed on the real estate market?
A1: Yes, I seek out information and data regularly A2: Somewhat, the news I follow includes enough to keep me informed A3: Not really, I occasionally hear/read the headlines A4: No, I don’t get any exposure to real estate news or information
Question #2: Are you happy with the real estate information/news you receive?
A1: Yes, I get exposure to the type and amount of real estate information I want A2: No, I get real estate information but it’s not what I want A3: No, it’s hard to find real estate information
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: I have recently seen two properties from Open Door listed for less than what they paid for it. Is that common for them or are these outliers?
Answer:
What is Algorithm-based Real Estate?
Algorithm-based buying and selling, also known as iBuying (2019 article here for more details), is when large companies/investors use algorithms (e.g. Zestimates) to assess a home’s value, purchase it (cash), and then resell it for a (hopeful) profit. These are arms-length transactions using corporate-level strategies rather than local ones.
The idea is that there are enough homeowners who value the ease and flexibility offered by iBuyers (cash, quick closings, no showings, etc) over getting a higher price that there’s billions in business for these companies (Open Door is currently valued over $3B). The acquisition and resale values of homes are determined by algorithms that these companies believe give them a clear picture of local markets across the country and competitive advantage at scale.
Zillow lost about $1B over 3.5 years using their pricing algorithms and shut down their iBuying business last year (article here for more details). After Zillow shuttered their iBuying business, it left Open Door as the biggest player in the industry. What makes them different than Zillow is that iBuying is their core business; for Zillow it was a supplemental revenue stream that risked hurting their core business.
I think the business in fundamentally flawed for many reasons, one of them being the massive disadvantages iBuyers are at during shifting market conditions. In strong markets, sellers can achieve the same or similar terms from everyday buyers and iBuyers are competing with everyday buyers on a house they haven’t seen, in a market they don’t know. In a weakening market (like we’re in now), properties they bought months earlier may be worth the same or less than they are when they’re being resold, so profits are smaller and losses much more common.
The greater DC Metro area is a relatively small, unattractive market for iBuying for multiple reasons, one being our diverse housing stock makes it difficult to value/project using algorithms; areas with large scale tract housing tend to much more popular with iBuyers (and corporate buy and hold investors) because it’s much easier to calculate market values.
How It’s Going…
As noted earlier, Zillow exited the iBuying business after ~$1B in losses over 3.5 years, leaving Open Door (market cap $3B+) as the main players in this category. I was curious how Open Door’s business is performing in Northern VA so I dug into their data from this year.
I looked at all of Open Door’s currently active (88), currently under contract (29), and sold (35) properties in 2022 and found 152 properties. I was able to find Open Door’s purchase price on 112 of those properties via public records.
Of the 112 homes I found Open Door’s purchase price on, the total acquisition price for these properties was $63,464,400, for an average of $566,646 per property, ranging from $207,100 to $1,031,800. If we assume their average purchase price held for the 40 properties I couldn’t find an acquisition price for, we can estimate their total acquisition price for all 152 properties in this data set (Northern VA sold in 2022 or currently under contract or listed for sale) to be $86,130,257.
Based on the analysis below, I think they may end up losing $5M-$6M+ on these investments.
Known Losses on Closed, Under Contract, and Listed Homes
First, let’s take a look at the gains/losses I can calculate (Known Gains/Losses) based on the known data which is:
How much Open Door paid for 112 properties
How much settled properties sold for (including closing cost credits to the buyer)
How much under contract and active properties are listed for
That Open Door pays 2% of the sale price to buyer agents (note: in 2021 over 96% of sellers offered at least 2.5% to buyer agents, see analysis here).
I do not know what their other direct costs are including closing costs (on purchase and resale), carrying costs (taxes, HOA fees, utilities), improvements/repairs, marketing, etc but I will address those later in this article.
Here are some highlights on the Known Gains/Losses:
Known Gains on sold properties are just over $390,000
Known Losses on properties under contract or actively for sale are over -$1,458,000 if you assume the property sells for what it is currently listed at (unlikely, more on this later)
For the 40 properties I do not have the Open Door acquisition price for, I can confirm that they sold five properties for $479,413 less than they originally listed them for (including the 2% commission) and for the 35 homes currently for sale or under contract that I don’t have the Open Door acquisition price for, they’re listed for $1,727,003 less than the original asking prices
Of the 35 homes sold, they spent an average of 53 days on market and accepted a price on average 3.8% below the asking price. Only three sold over ask and another three sold for asking. These metrics fall well short of what sellers experienced earlier this year (the average home sold much faster and for at or above the list price).
The average property tax liability on these 152 homes is estimated to be roughly $71,000 per month
Projected Losses on Under Contract and Listed Homes
In the section above, I calculated “Known Losses” on properties currently under contract and currently listed for sale by using the most recent list price as the projected sale price, but the reality is that most, if not all, will sell for less.
Of the 35 properties sold in 2022, Open Door accepted an average of 3.8% below their most recent list price with only three selling for over ask and just three more selling for asking price. This was during one of the hottest real estate markets ever, when the large majority of homes were selling for at or above the asking price.
If we assume that all properties currently under contract or for sale will sell for an average of 3.8% below the current list price (that’s probably too optimistic for Open Door), the projected Known Losses on the remaining homes is nearly $3,252,000!
Furthermore, this only accounts for losses on the 82 homes under contract or for sale that I know the Open Door acquisition price of, there are an additional 35 homes that are under contract or for sale that I do not have the acquisition price on so those homes could easily account for another $1M-$1.5M in projected Known Losses.
Additional Unknown Costs
There are plenty of additional direct and indirect costs that we know exist, but would be difficult or impossible for me to calculate including direct costs like their closing costs (e.g. transfer taxes) on the acquisition and resale, months of carrying costs like property taxes, Condo/HOA fees, and utilities, and any improvements/repairs prior to resale (it doesn’t appear they do much). There are also plenty of indirect costs of the operation including salaries of staff working on the deals, marketing each property, and more.
It’s likely that Open Door is taking on roughly $1M-$1.5M in additional direct unknown costs for these 152 transactions.
What Can We Conclude?
I think that we can safely assume that Open Door will be taking $5M-$6M+ in direct losses from the 152 homes they currently have for sale, under contract, or sold in 2022 in Northern VA.
For a company currently valued over $3B, these losses are meaningless; and Open Door reported nearly $1.5B in gross profit over the past 12 months (but losses on Operating Income), so clearly they’re winning big in other markets, but what conclusions can we draw from Open Door’s experience?
In my opinion, the most concerning data from Open Door’s Northern VA activity is not the millions in losses it’ll take on currently for sale and under contract properties, but the poor performance of their closed sales from earlier this year in a historically strong market. When you account for the unknown additional direct costs on those sales, Open Door is likely coming in at roughly break even. Additionally, the days on market and sold price to ask price ratio data (two key measures of resale success) is much worse than the rest of the market.
We can reasonably conclude that they overpaid for their acquisitions because they generated little-to-no profit, despite a rapidly appreciating market and we can conclude that their resale process/strategy (pricing, prep, listing management, negotiations, etc) performs significantly worse than market average.
As I mentioned above, they clearly are not having these problems in all markets because they’ve generated significant gross profits from their transactions (although they’re taking losses in Operating Income). Many markets are much easier to operate in with an arms-length, hands-off approach. Our market is not. I’ll leave you with some thoughts:
Local markets behave very differently and present vastly different nuances that make a national approach to local real estate difficult to execute
The greater DC Metro area market is a difficult one for algorithms to figure out because of the diversity in housing stock and nuances of price shifts over small geographic areas
The greater DC Metro area market will be a difficult market for high volume corporate buyers to profit from without taking a localized approach, which is expensive and complex
Our market is overwhelmingly full of smart, educated, and savvy home sellers and buyers relative to other markets which means that we are more likely to exploit flaws in corporate-level buying/selling strategies that are not specifically tuned to our market or markets like ours
There are plenty of examples where algorithms and/or arms-length, uninvolved are successful, there’s excessive risk of that approach in our market and it is unlikely to be more profitable than time-tested, human expertise in the long-run or at scale
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
