Make Way for Moderation

John McClain

Senior fellow and deputy director, Center for Regional Analysis at George Mason University

There is no longer a question among local housing researchers about when the market is going to cool -- the cooling is here. Prices have ceased their yearly double-digit percentage increases, the number of sales has fallen, and the time it takes to sell a house has tripled. The questions now are how much the market will cool, whether prices will fall and when this market adjustment will be over.

Not all parts of the region and not all types of housing are cooling at the same rate. From August 2005 to August 2006, the average price of existing housing is down 5 percent in the District and 3.7 percent in Northern Virginia. In suburban Maryland, it is 3 percent higher. Around the region, average prices for single-family detached houses and townhouses are essentially flat. However, condominiums are down more than 8 percent from a year ago. And areas where houses are more moderately priced are still experiencing modest increases.

The average for annual housing price increases in the Washington region from 1980 to 2006 has been 7 percent per year, but there have been times when prices flattened or fell slightly. In the early to mid-1990s, prices dropped in a couple of years. It is possible that average price growth in the region, overall for all types, might be slightly negative for a few more months, but prices are not likely to continue to fall. At some point -- say, next spring, when demand usually rises -- prices will go up again, and in the future will likely return to the long-term average increase of 7 percent per year.

One reason for the run-up in prices the past few years -- in addition to low mortgage rates nationally -- is that housing supply has been constrained here by local government policies. There simply have not been enough units built for all the workers who have filled new jobs.

The market is expected to stabilize and return to normal because the underlying economic fundamentals are strong. The region has averaged 65,000 new jobs each year since 2002, and added 74,000 jobs from August 2005 to August 2006. Job growth means a continuing influx of new workers into the region. This means that though the region's housing market may be in an adjustment period, it will not last long. Factors that could cause this not to happen would be some kind of national or local change that would cause the region to lose jobs.

In terms of timing the purchase of a house relative to what the market is doing, it really depends on a potential buyer's individual situation. Trying to guess if prices will fall more before they stabilize involves a risk with houses much as it does with stocks: One might miss the bottom and buy as the market rises. However, buying a house is much different than buying stocks because it is not only an investment but also a home, a place to live. If you are buying a home, almost any time is a reasonable time to buy.

Especially if it is unlikely you will want to sell after a short period, risk is reduced because house prices are likely to return to the long-term growth rate of about 7 percent per year. At that rate, the value of a house doubles every 10 years.

However, if you may be transferred soon, or if you are buying a house on speculation and planning to flip it in a few months, purchasing during a period of market adjustment is riskier.

Clearly the price increases of the past years could not be sustained, and have made recruiting workers more difficult. The moderation in price increases, and perhaps even some declines, will help restore balance in the region's economy.