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A welcome cooling to the hot D.C.-area housing market

Buyers will find more options, less competition and more opportunities for negotiating with sellers, and sellers will still find eager buyers

Houses in the North College Park, Md., neighborhood. As the leaves turn and the weather cools so has the D.C. area housing market. (Evy Mages for The Washington Post)

After more than two years of hot housing market conditions in the D.C. region, there is a noticeable cooling trend. As we head into fall, home sales have slowed, and the pace of price growth has come down substantially. Instead of price wars and homes being bought sight-unseen, buyers now have more choices — and a little more leverage. So what will the Washington-area housing market look like this fall?

Higher mortgage rates increase cost of buying a home

Since the beginning of the year, mortgage rates have shot up by more than two percentage points. Higher rates are causing some prospective buyers to pause their home search, and rate increases have priced other buyers out of the market altogether.

Last August, the median price of a home sold in the D.C. region was $485,000. A year later, the median price was up by 5.7 percent to $512,750, but because of rising mortgage rates, the typical monthly payment rose by more than 40 percent. A family now has to earn nearly $115,000 to qualify for a mortgage on the median-priced home in the region. A year ago, the qualifying income for a typical mortgage was around $82,000.

Higher mortgage rates have had a bigger impact on buyers with more modest incomes, who are also disproportionately affected by persistently high inflation. In the Washington area, the higher-priced segment of the housing market has been relatively resilient, with homes priced at $1 million or above accounting for a larger share of home sales in 2022 than they did last year. Some of that increase is due to general price growth in the market, but the higher-priced segment of the market also has not been as sensitive to mortgage rate increases.

Home sales have slowed, but buyers are still looking

Through the first eight months of 2022, the number of home sales in the Washington area is down 17.3 percent compared with a year ago. Home sales activity has been down year-over-year for several months, which reflects cooler buyer demand. The year-over-year decline in sales is also due to the historically busy 2021 housing market.

And while buyers are not making an offer, they are still looking, at least from afar. Data on showings — the number of homes real estate agents are opening up to allow prospective buyers to view — indicate that buyer traffic was down in July compared with last year. However, the numbers of agent and public views of properties throughout the region were up 9.3 percent and 7 percent, respectively, in August 2022 compared with August 2021.

Buyers are back in close-in communities

When the pandemic began in the spring of 2020, there was a lot of uncertainty and frankly, fear, about living close to other people, commuting on public transportation, and otherwise doing the things that people do in more urban areas. As people were working from home and students were learning remotely, the pandemic fueled a surge in home buyer interest in homes at the fringes of the region. For example, home sales surged by about 20 percent in Spotsylvania and Stafford counties in 2020. And in Frederick County, Md., the number of home sales rose by 24 percent. At the same time, sales were basically flat in Arlington County and the District of Columbia.

In 2022, there has been a gradual return of buyers to the District and closer-in suburban markets. The share of home sales in the region’s exurban jurisdictions accounted for more than 33 percent of regional sales activity in 2020, but that share has fallen back to 32 percent this year. The share of sales in the District of Columbia, Arlington and Alexandria increased, accounting for 15.1 percent of sales in 2022, up from 13.6 percent in 2020.

What’s ahead for prospective buyers and sellers

Buyers will find that the changing housing market conditions offer some leverage they haven’t had in years. As home sales have cooled, the inventory available for sale across the Washington area has been expanding, providing buyers more choices.

Buyers will face less competition and will have more time to make decisions. They are able to ask for — and get — a home inspection, a home appraisal, and even a home sale contingency, concessions that were unheard of a year ago.

As mortgage rates fluctuate, it may be tempting for some buyers to try to “time” rates. Instead of timing rates, buyers looking for a mortgage should be shopping around because there is a lot of variability in rates and terms across different lenders.

For sellers, the cooling market does not mean they will not be able to find a buyer. However, would-be sellers do need to adjust their price expectations. There is evidence that sellers are already making adjustments, as more than 40 percent of all properties on the market at the end of August in the Washington area have dropped in price.

The frenetic pace of the housing market over the past two years was not sustainable. Cooler conditions in the Washington-area housing market should be a relief for prospective home buyers who will find more options, less competition, and more opportunities for negotiating with sellers. Sellers who price their properties to reflect the market will still find eager buyers. And everyone in the residential real estate industry can take a breath as the market settles into its new normal.

Lisa Sturtevant is the chief economist at Bright MLS, the area’s multiple listing service.