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DC Metro Area Real Estate Cools

New information shows that the real estate market in the Washington, DC metro area* has taken a turn from the strong spring market, primarily due to the doubling of mortgage rates. The August multiple listing service report (see below) shows that by every measure the real estate market has cooled, except that home prices are higher on average than August 2021!

New listings, showings and sales all are down around 25% compared to a year ago, while days-on-market and the number of months of housing supply are up (yet still quite low based on history). Bright MLS (the local real estate multiple listing service) reports a proprietary "T3 Home Demand Index" as a benchmark of the real estate market. The current index of 101 is down 8% from July, and 17% from August of 2021. The HDI "analyzes property data gathered from real estate agents, home sellers, and homebuyers involved in the viewing, showing, buying, and selling of homes," and uses a scale range of high, moderate, steady, slow and limited. The current score of 101 is in the "steady" or middle-range category.

How are prices up from last August when all other measures point to a cooling market? Prices surged in the spring until April, then as interest rates kept rising, the excess demand began to dissipate over the summer and prices flattened. In fact, the HDI peaked in April, and has been on the decline month over month since then. Here is a graphic showing the effects of rising interest rates on buyers' purchasing power. A $1 million house in August is 41% more expensive than a $1 million house in the spring, looking at the difference in monthly payments based on an 80% mortgage. Yet, the HDI varies depending on housing type and price range. The HDI for houses over $950K is at 182 in August, which is the highest range on the scale, though it did drop 20% from just the prior month. This reflects the continued extreme backlog of demand for houses in DC, though that demand now is fading. By contrast, houses valued below $400K are rated 70 on the HDI, which is the lowest category called "limited" demand. This contrast in part reflects the interest rate sensitivity of buyers in different price categories and locations.

Where do we go from here? DC has the federal government as its unique economic driver, which helps the area weather downturns better than other parts of the country. The Federal Reserve has signaled its intention to continue to raise interest rates to "do whatever it takes" to curb inflation, even if it potentially drives the country into recession. If these 6.5% mortgages go to 8%, 9% or even higher, we will eventually see prices falling, as real income growth taking into account inflation are not keeping up with the increased cost of buying a home. Plus, now that the bubble of the backlog of demand is deflating, especially with Covid panic ending, we can expect the demand to ease further. Yet, we are in a situation where we cannot expect significant supply either, as homeowners are loving their 2.5% mortgages and not willing to give them up to move on a whim. In addition, now that more and more people are tied to their office space again, that whim is not an option anyway.

Chris Jones


* The Washington DC metro area, for the purposes of this analysis, includes: Washington DC; Alexandria City, VA; Arlington, VA; Fairfax, VA; Falls Church City, VA; Frederick, MD; Loudoun, VA; Montgomery, MD and Prince Georges, MD.

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