George Mason University’s Lisa A. Sturtevant writes an occasional column analyzing the region’s housing data.
Average home prices in metropolitan Washington were up by double-digit percentages in three out of the past four months, and some have begun to wonder if they are heading toward unsustainable levels.
How can prices in some neighborhoods be back to where they were at the peak of the housing market? How can there be bidding wars again where potential buyers have to be prepared to make an offer — often with an escalation clause — at the open house? How can it be so difficult for a first-time homebuyer to find a house in her price range that is not too far from her job?
Are these all signs that we’re headed for another bubble here in the Washington area, even as much of the rest of the country is just beginning to feel recovery in their housing markets?
The short answer is no. At least not the kind of bubble we experienced in 2002 through 2006. A critical difference between the current market and the overheated market of the middle of last decade is the nature of the mortgage market.
Stricter underwriting standards have limited the pool of potential homebuyers to those who are most qualified and most likely to be able to pay loans back. The demand this time is based more closely on market fundamentals. And the price growth we’ve experienced recently is “real.” Or “more real.”
Prices aren’t up everywhere across the region. In parts of the District, Arlington and Alexandria, average prices have returned to peak levels. For some neighborhoods and product types, demand is high and multiple offers are common.
However, prices in many neighborhoods remain far below what they were six or seven years ago. Prices have been pushed higher in neighborhoods closest to jobs and transportation and where supply is more limited.
Investors activated the early recovery in some parts of the Washington area market. In some neighborhoods, investors have comprised 30 to 40 percent of all transactions. Investors look for a place where they can get return on their investments. With robust rental demand and strong job growth, the Washington area has been an attractive place for investors. In some cases, these cash buyers have pushed more conventional buyers into different neighborhoods and price points.
Alongside investors are some very high wage workers in the Washington area. Nearly 40 percent of workers in the region earn $90,000 or more (in 2011 inflation adjusted dollars.) In 1990, that share was less than 10 percent (also in 2011 dollars.) Coupled with a high proportion of two-worker households, there is a sizable share of the population that can afford higher-priced homes. Households at the other end, however, are again becoming priced out.
Are the Washington region’s home prices sustainable? That remains to be seen, but there are at least two trends at work to suggest that while home prices will continue to rise over the next few years, the pace of price growth will be more moderate.
First, across the U.S., housing markets have bottomed out and job growth is on the rise and investors are being lured to other regions. Second, and perhaps more important, the structure of the Washington-area economy and the demographic make-up of its population is changing.
Recent analyses by the George Mason University Center for Regional Analysis have indicated over the next five years, the region’s job growth will be concentrated more heavily in the construction and health services sectors (relatively lower wage jobs), with job losses in the federal government sector and slower growth in the professional and business services sector (our two highest wage sectors.)
The region will have more one-worker households and the overall labor force will include a greater number of younger workers as baby boomers retire.
As a result of the economic and demographic changes in the region, the demand for rental housing and for smaller, more moderately priced owner housing will outpace the demand for larger, more expensive housing.
The local housing market will continue to improve, though it is unlikely we will see persistent double-digit price growth in the years ahead.
Lisa A. Sturtevant is an associate research professor in George Mason University’s School of Public Policy and deputy director of GMU’s Center for Regional Analysis.