WASHINGTON AREA HOUSING OUTLOOK

Transcription

1 DELTA ASSOCIATES WASHINGTON AREA HOUSING OUTLOOK SPONSORED BY Center for Real Estate Entrepreneurship C E MARKET INDICATORS Washington Metro Area At Mid-Year 214 Figure 1 Q2 AVG. SALES PRICE Q2 SALES (UNITS) Q2 AVG. DAYS ON MARKET CHANGE VS. Q1 214 CHANGE VS. Q2 213 $488, % 3.2% 18, % 6.6% SALES PACE* 2.5 Months.2 Months.8 Months THE WASHINGTON METRO AREA FOR-SALE HOUSING MARKET The Washington metro area housing market continues to lose the momentum it has gained over the past year. Although sales typically peak this time of the year, unit volume sold declined 6.6% year-overyear. Average price increased over the year, but the rate of increase has been decelerating. A gradual increase in the available inventory and the average days on market demonstrates that the regional housing market recovery is plateauing. Source: MRIS, Delta Associates; July 214. *Sales pace at June 214. Pace is ratio of total for-sale inventory to current month s sales. 2nd quarter prices: Up 3.2% at 2nd quarter 214 compared to 2nd quarter 213. Unit volume: Down 6.6% from last year at this time. Days on market: Up 3 days over the year to 41 days; still below the 1-year average of 62 days. Months of inventory: Up.8 months from the sales pace at 2nd quarter 213. The national economy is regaining traction and will continue to sustain the broader housing market in the period ahead. However, headwinds in the form of weak employment growth, sluggish household formation, and tighter lending standards will keep the region s housing market performance modest through the balance of 214. For current housing market indicators, see Figure 1. PACE OF PRICE GROWTH SLOWING The average price of a Washington-area home sold in the 2nd quarter of 214 was $488, % higher than last year. Thirty consecutive months of year-over-year price gains point to a sustained housing market. This mid-year regional price growth, however, is the smallest yearly price increase since the beginning of 212. The moderated pace 1

2 HOME PRICES BY SUB-AREA* Washington Metro Area At Mid-Year 214 Figure 2 SUB-AREA* CHANGE VS. Q1 214 CHANGE VS. Q2 213 Core $63, % 6.% Units 3, % 1.3% Inner $476, % 1.5% Units 9, % 1.% Outer $393, % 2.1% Units 4, % 3.9% Source: MRIS, Delta Associates; July 214. *Core: DC, Arlington, Alexandria. Inner: Fairfax, Montgomery, Prince George s, Fairfax City, Falls Church. Outer: Loudoun, Prince William, Frederick. HOME SALES AVERAGE PRICE CHANGE Washington Metro by Sub-Area* Figure MONTH TRAILING AVERAGE PRICE CHANGE 4% 3% 2% 1% % -1% -2% -3% -4% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Core Inner Outer Source: MRIS, Delta Associates; July 214. *Core: DC, Arlington, Alexandria. Inner: Fairfax, Montgomery, Prince George s, Fairfax City, Falls Church. Outer: Loudoun, Prince William, Frederick. of price increases in the first half of 214 is due in part to the increase in inventory, especially at the onset of the spring selling season. Expected increases in mortgage rates triggered by strong national job figures and the culmination of the Federal bond-buying program by late 214 will likely keep regional price growth at a decelerated pace. The Core Jurisdictions of the District, Alexandria, and Arlington counties experienced the greatest price increase in the area. The average sales price of a Core area home in the 2nd quarter of 214 was $63,961 6.% higher than the average price in the 2nd quarter of 213. See Figures 2 and 3. The District: the average sales price in the 2nd quarter of 214 was up 9.7% from a year ago. Arlington: the average price in the 2nd quarter was up 2.2% compared with one year earlier. Alexandria: the average price in the 2nd quarter was.9% lower than a year earlier. In the Washington area s Inner Ring of Fairfax, Montgomery, and Prince George s counties (including Falls Church and Fairfax cities) prices were 1.5% higher than a year ago; the average price at 2nd quarter 214 was $476,422. Prince George s: home prices are 1.3% higher than in the 2nd quarter of 214. Fairfax County: home prices are up 2.5% compared with one year ago. Montgomery County: prices decreased.3% from a year ago. The Outer Suburbs of Prince William, Loudoun and Frederick counties also experienced average sales price increases this year compared to last year. The average price in this area was $393,972 in the 2nd quarter of 214, 2.1% higher than in the 2nd quarter of 213. Prince William County: the average sales price in the 2nd quarter of 214 was 4.8% higher than the average a year ago. Loudoun County: average prices are 2.4% higher than a year earlier. Frederick County (MD): average home prices went up.2% from one year ago. Median prices in the District, Arlington, and the City of Alexandria increased to 114%, 15%, and 13% respectively, of the peak bubble price. Fairfax County is at 99% of its peak price while price performance 2

3 MEDIAN HOME PRICES AS A PERCENT OF THEIR PRIOR PEAK Washington Metro Area Figure 4 District of Columbia Arlington Alexandria Fairfax Frederick Loudoun Montgomery Prince William Prince George's Source: MRIS, Delta Associates; July 214. Note: Median home prices at June % 5% 6% 7% 8% 9% 1% 11% 12% PERCENT OF PEAK BUBBLE PRICE in other jurisdictions remains at 9% or less of the peak prices reached during the last expansion cycle. See Figure 4. UNIT VOLUME SOLD DECLINES Sales volume in the 2nd quarter of 214 is down over the year by 6.6%. This is in contrast to the 2nd quarter of 213 when the number of homes sold spiked 13.4% over the year. The tougher mortgage qualification standards that began early this year continues to create a drag on sales. Homeowners who took advantage of record-low interest rates of the past two years may also have committed to fixed-rate lock-ins and thus postponed repurchases, further subduing the number of sales. FOR-SALE LISTINGS Washington Metro Area Existing Houses Figure 5 Unit volume, however, has been sustained fairly well in light of modest regional employment growth. While the Federal government has trimmed its workforce, the private sector continues to create enough new jobs to offset the local economic impact of Federal austerity measures. 45, 4, 35, 3, 1-Year Average = 24,226 Listings DAYS ON MARKET AVERAGE UP SLIGHTLY, STILL BELOW LONG-TERM AVERAGE LISTINGS 25, 2, 15, 1, 5, Jun '2 Jun '3 Jun '4 Jun '5 Jun '6 Jun '7 Jun '8 Jun '9 Jun '1 Jun '11 Jun '12 Jun Jun '14 Source: MRIS, Delta Associates; July 214. Washington metro area homes sold in an average of 41 days, up 3 days from one year ago but below the 1-year average of 62 days. As inventory continues to rebound, homebuyers are now deciding among a greater array of listings and may partly explain the longer time to closing. The slowdown on purchases by investors and regular homebuyers snagging cheap, bank-owned properties also could have restrained buying. See Figure 5. AVERAGE DAYS ON MARKET Washington Metro by Sub-Area* Existing Houses Figure 6 DAYS Market Average at Q2 14: 41 Days Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Core Outer Inner Source: MRIS, Delta Associates; July 214. *Core: DC, Arlington, Alexandria. Inner: Fairfax, Montgomery, Prince George s, Fairfax City, Falls Church. Outer: Loudoun, Prince William, Frederick. 214 Time on market is shortest in the Inner Ring and longest in the Core Jurisdictions. Differences between the geographic areas of the market had widened a bit near the end of 211 and in early 212 as uncertainty over the Federal budget began to affect the market, although the gaps were not as divergent as in the period from Those gaps became less pronounced throughout the second half of 212 and during 213, indicating a healthy overall market. Core: Time on market was 45 days during the 2nd quarter of 214, compared to 35 days one year ago. Inner Ring: Time on market averaged 38 days in the 2nd quarter of 214, the same as one year earlier. Outer Suburbs: Time on market was 43 days during the 2nd quarter of 214, up from 4 days last year. See Figure 6. 3

4 Of note, the average selling price in the 2nd quarter of 214 is 98.9% of list price. This ratio is the highest it has been since the 3rd quarter of 25 and well above the recent trough of 89.9% in the 1st quarter of 29. It is notable that the ratio edged up to 99.3% for the Core Jurisdictions during this quarter. This ratio has been high of late as listings though steadily recovering remain below the long-term market average and buyers are more willing to pay nearly full price. Additions to the available inventory may create a larger bid/ask spread in the year ahead. INVENTORY EDGES UP AS LISTINGS INCREASE PRICE CHANGE AND INVENTORY Washington Metro Area Figure MONTH PRICE CHANGE 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% -25% 12-Month Price Change (left axis) Source: MRIS, Delta Associates; July 214. *Months of inventory at current sales pace for last month in each quarter. MONTHS OF FOR-SALE INVENTORY Washington Metro Area Figure 8 MONTHS OF INVENTORY AT SALES PACE* Jun. 214: 2.5 Months Jun. 213: 1.7 Months Months of Inventory (right axis) June 213 June MONTHS OF INVENTORY* The number of homes on the market increased during 2nd quarter 214. The Washington area has an average of 2.5 months of for-sale inventory this quarter, markedly increasing from the 1.7 months of inventory a year ago. The improvement in inventory this quarter is mostly due to a 39% increase in the number of active listings from the 2nd quarter of 213. Steady price gains that have helped some homeowners out of negative equity as well as reduction in regional economic uncertainty have likely encouraged more Washington area residents to put their homes on the market. This increase in listings likely will decelerate the rate of price growth but could bring more potential buyers into the housing market in the year ahead. See Figure 7. In recent years, the Washington area s average prices tend to rise when the ratio of inventory to sales is below six months. This ratio is calculated by dividing the number of listings by the number of sales at a given point in time. If the number of sales increases and the number of listings decreases or remains the same, the ratio may be low, as at the peak of the housing market in 25. The relatively low ratio we have seen in the past two years is primarily due to a lower number of listings, rather than robust sales volume. Fauquier County in Virginia had the highest ratio in the region at approximately 4.5 months of inventory in June 214. Falls Church City has the lowest available inventory relative to sales this quarter, at 1.5 months, up from.9 months last year at this time. See Figure 8. PEER CITIES OUTPERFORM THE WASHINGTON REGION Falls Ch District Ffx City Alex Arl Ffx Cnty Mont Pr Geo Pr Will Lou Fred (MD) Fauq Source: MRIS, Delta Associates; July 214. *Sales pace at June 214. Pace is ratio of total for-sale inventory to current month s sales. By most measures, the Washington metro area housing market has consistently performed better than other metro areas housing markets. This is seen most clearly when examining long-term 4

5 PRICE CHANGES Selected Large Metro Areas 1994 First Quarter 214 Figure 9 PRICE CHANGES REFLECTED IN PURCHASE- ONLY INDEXES HOME PRICE INDEX GROWTH 2% 175% 15% 125% 1% 75% 5% 25% PRICE CHANGES 2-City Composite April 213 April 214 Figure 1 21% 18% 15% 12% 9% 6% 3% % 181% Source: FHFA, Delta Associates; July 214. Note: Price change at 1 st quarter of respective year; seasonally adjusted. 7.% performance. Recently, however, price growth in many major U.S. metros has surpassed the Washington market s rate of growth. In particular, metros such as Las Vegas, San Francisco, and San Diego are seeing more robust price growth. In the Washington metro area, the Federal Housing Finance Agency (FHFA) reported that Washington experienced price growth of 181% from the first quarter of 1994 through the first quarter of 214, second after San Diego among large metros. See Figure 9. Case-Shiller has reported that Washington home prices increased 7.% from April 213 to April 214, the most recent data available. The Washington region underperformed the 2-city composite increase of 1.8% over the same period. Among the 2 cities in this composite, Washington ranked 17th in greatest price growth as of April 214 from 15th in January. Washington s housing market began to recover earlier in the cycle and its performance is still being exceeded by other metropolitan areas performances. See Figure 1. Of note, Case-Shiller s methodology is different from FHFA s in that Case-Shiller tracks same-store prices, or comparable unit sales. WASHINGTON AREA HOUSING OUTLOOK Source: S&P/Case-Shiller, Delta Associates; July 214. Note: Seasonally adjusted purchase-only index. The Washington area housing market recovery remains on a healthy track but is running at a much slower pace during the first half of 214. The unit volume sold slipped 6.6% over the year as of 2nd quarter 214 while home prices increased only modestly at 3.2% over the year. The days-on-market average was 41 days during the 2nd quarter of 214, up three days from a year earlier but still well below the 62 day long-term average. Thanks to a 39% increase in active listings from the 2nd quarter of 213, the available inventory is up to 2.5 months in the 2nd quarter of 214. Although increases in inventory could further slow price gains, increasing certainty in the regional economy should continue to support metro area for-sale housing demand during the 2nd half of 214. Washington s housing market outlook might be affected by other constraints. Sluggish household formation might continue to limit housing demand in the region. As the economy strengthens and as the Federal Reserve s quantitative easing ends later this year, the 3-year fixed mortgage rates will likely fluctuate upwards, further increasing the cost of buying. These changes, combined with projected increases in inventory, will likely keep local price growth in the modest range of 3% to 5% per annum in the intermediate term. 5

6 On balance, we expect that a combination of the following will bring gains to the Washington-area for-sale housing market during the second half of 214: Mortgage interest rates that remain relatively low by historical standards, notwithstanding a potential increase. Sustainable increases in house prices that may incentivize more potential sellers to list their homes, thus bringing more buyers into the market and increasing sales volume (while slowing price growth). Job growth, driven by the private sector, that is likely to be stay modest but gain traction. Regional job growth popped in June after being weak earlier in 214. Modest income growth and robust household formation that will propel new homebuyers into the marketplace. Of note, a decline in this region s apartment rents will likely slow the rate of price increases for Washington-area single-family houses in the year ahead. Still, the housing market is likely to see price growth for all of 214. As the economy strengthens and as the Federal Reserve s quantitative easing ends later this year, 3-year fixed mortgage rates will likely fluctuate upwards, further increasing the cost of buying. 6

7 THE BIG PICTURE PERCENT CHANGE IN HOUSE PRICES Washington Metro Area vs. 2-City Composite Figure 11 RESALE VOLUME Washington Metro Area All Housing Types Figure 12 25% 12, % CHANGE 2% 15% 1% 5% % -5% -1% -15% Washington Metro Area U.S. 2 MSA Composite HOUSING UNITS SOLD 1, 8, 6, 4, 2, -2% * * Source: S&P/Case-Shiller, Delta Associates; July 214. *12 months ending April 214. Note: Seasonally adjusted purchase-only index. Source: MRIS, Delta Associates; July 214. *Annualized. Our Take: The Washington area saw a 7.% increase in existing home prices for the 12 months ending April 214 (per Case-Shiller data), underperforming the 2-City Composite average of 1.8%. Washington outperformed its peer cities earlier in the cycle but now trails most major metros. Our Take: Sales volume in 2nd quarter 214 was 18,113 homes, down 6.6% from the same quarter in 213. This is the first time since early 212 that unit volume sold declined for two consecutive quarters. ANNUAL AVERAGE DAYS ON MARKET Washington Metro Area Existing Houses Figure 13 RESALE PRICE CHANGE Washington Metro Area Trailing 12 Months Figure % 1 1-Year Average = 62 Days 87 8% 8 6% DAYS 6 4% % * % Jun Jul Aug Sep Oct Nov Dec Jan '14 Feb '14 Mar '14 Apr '14 May '14 Jun '14 Source: MRIS, Delta Associates; July 214. *At Mid-Year 214. Source: MRIS, Delta Associates; July 214. Our Take: The average time on the market at 2nd quarter 214 is 41 days, up from 38 days one year earlier but below the 1-year average of 62 days. Our Take: Price growth this quarter showed signs of cooling compared to the elevated price gains last year. On a 12-month trailing basis, prices in June 214 were only 2.2% higher than in June

8 NATIONAL AND REGIONAL TRENDS IN HOUSEHOLD FORMATION Household formation has slowed down in recent years. Harvard s Joint Center for Housing Studies reported that the nationwide pace of household growth stayed in the meager range of 6, to 8, per year from 27 to 213, far below the average annual pace of 1.3 million in recent decades. Weak household growth rates among younger adults explain much of this slowdown, as there were 1.1 million fewer heads of households in this age group in 213 than ten years earlier. Sluggish household growth is worrisome since it could translate to depressed housing demand, especially for starter homes. Many have pointed to this trend as one of the underlying causes of the recent slump in new housing starts and permits, particularly for single-family units. This national trend in household formation is unfolding in the Washington area and may affect the regional housing market rebound. Headship rates the ratio of households to adults in the metro area shrank from 51.1% in 25 to 46.9% in 212, based on the one-year estimate of the American Community Survey (ACS). The same ACS estimates for the Washington region also indicate that the percentage of householders under 25 years old decreased 3.2 percentage points while those ages 25 to 44 declined 1.4 percentage points from 25 to 212. See Figure 15. HEADSHIP RATES Washington Metro Area Figure 15 PERCENT OF ADULTS 18 YEARS AND OVER WHO HEAD A HOUSEHOLD 52% 51% 5% 49% 48% 47% 46% 45% 44% Source: ACS 1-year estimates, Delta Associates; July 214. Long-term demographic trends affect household growth and headship rates, but economic fluctuations, such as stagnant income growth and rising debt, can partly explain the recent setbacks. In the Washington region, tough job competition and Federal spending cuts have imposed some downward pressure on income growth. Based on data by the Bureau of Economic Analysis, the metro area s overall real income per capita dropped 4.1% from 28 to 212. The region has also regained mostly lower wage jobs since the beginning of the recovery. Since higher personal income correlates strongly with greater likelihood of heading an independent household, weakened income growth in Washington could slow the pace of regional housing demand. The rising share of younger adults with student loan debt is another recent constraint on household formation. An increase in monthly student loan payments for this age group could affect these potential first-time homebuyers ability to pay and save for housing. With lending standards remaining tight, higher potential for default among 8

9 student loan debtors could prevent this group from building good credit and qualifying for mortgages. Although there is currently no conclusive survey for the metro area, the increasing share of graduates with student loan debt may influence housing choices of younger Washington residents since it is a region known for attracting and retaining a high number of college graduates. PAYROLL JOB GROWTH Large Metro Areas 12 Months Ending June 214 Figure Despite these concerns, household formation in Washington should hold up in the long run. According to ESRI, households are expected to grow at an annual rate of 1.4% from 213 to 218 in the metro area. This projection is likely since the metro area will continue to attract net domestic and foreign in-migration due to its investment in public infrastructure and its diversifying economy. Also, the region still has the highest median household income among major metro areas, with 1.9% of Washington millennials earning over $1, according to Nielsen. Furthermore, renewed certainty regarding the regional economy and the partial repeal of sequestration measures should give a boost to the labor market, releasing the pent-up demand to form households and to enter the for-sale housing market. WASHINGTON AREA ECONOMIC OUTLOOK We expect job growth in the metro area to remain tempered for an expansion cycle in the range of 3, to 5, jobs per annum. 6 This is sufficient to support a healthy residential real estate industry, 4 2 LA Basin 26.8 NY DFW SF Bay Hou S FL Atl Den Bos Phx Chi Was but below the levels experienced in most recent expansion cycles. See Figures Source: BLS, Delta Associates; July 214. UNEMPLOYMENT RATES Large Metro Areas May 213 vs. May 214 Figure 17 UNEMPLOYMENT RATE 12% 1% 8% 6% 4% 2% % May-13 May-14 Bos Was Hou DFW SF Bay Den Phx NY S. Fla Chi Atl LA Basin Source: BLS, Delta Associates; July 214. National Rate 7.5% 6.3% Note: National rates are seasonally adjusted. We expect the Washington metro area economy to gain momentum entering the latter half of the year after a weak start. Harsh winter weather slowed the economy in the first half of the year, but we expect it to gain traction as we approach 215. During 215 and 216 we expect healthy growth, though at a slower rate than seen in recent expansion cycles. As the Federal government will continue to face austerity measures during this period albeit reduced from 213 levels we expect the source of growth to continue its shift to the private sector. More specifically, we predict approximately two-thirds of job growth during the next five years will come from the Professional/Business Services and Construction sectors. Overall, employment growth will be healthy but average wages lower on an inflation-adjusted basis than what this region has experienced in the past. International business activities will benefit Washington and support payroll job growth in the National Capital Region. 9

10 PAYROLL JOB GROWTH Washington Metro Area Figure Year Projected Average = 42,/Year We estimate that an annual average of 42, payroll jobs will be added to the Washington metro area economy during the five-year period from 214 to 218. Private sector firms will be the cornerstone of employment growth in the period ahead. See Figure 18. THOUSANDS OF NEW PAYROLL JOBS Year Annual Average = 42,3/Year Source: BLS, Delta Associates; July 214. We estimate that an annual average of 42, payroll jobs will be added to the Washington metro area economy during the five-year period from 214 to

11 DELTA ASSOCIATES Delta Associates is a firm of experienced professionals offering consulting, valuation, and data services to the commercial real estate industry for over 3 years. The firm s practice is organized in four related areas: Valuation of partial interests in commercial real estate assets. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties. Subscription data for select metro regions for office, industrial, retail, condominium, and apartment markets. For more information on Delta Associates, please visit DeltaAssociates.com. Delta s Washington Area Housing Outlook team includes: Gregory H. Leisch, CRE, Chief Executive David Weisel, CRE, President, Consulting Division Alexander (Sandy) Paul, CRE, Executive Vice President Rachelle Sarmiento, Associate Michele Frazzetta, Graphic Designer 214. All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Center for Regional Analysis, Delta Associates, ESRI, Federal Housing Finance Agency, Harvard s Joint Center for Housing Studies, Metropolitan Regional Information Systems, NATIONAL ASSOCIATION of REALTORS, Nielsen, S&P/Case-Shiller, U.S. Census. Although the information contained herein is based on sources which Delta Associates (DA) believes to be reliable, DA makes no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice. 5 Montgomery Street, Suite 6 Alexandria, VA Info@DeltaAssociates.com 11

12 GEORGE MASON UNIVERSITY CENTER FOR REAL ESTATE ENTREPRENEURSHIP The Center for Real Estate Entrepreneurship at George Mason University strives to advance real estate research and education in real estate development and finance. Working in partnership with leading real estate developers, professionals, and organizations in the Washington, D.C. area, the center develops relevant content for the business and academic communities. The center acts as a bridge between the Master of Science in Real Estate Development academic program and the real estate industry. It provides MS in Real Estate Development students with a forum for professional development and offers them unique opportunities to connect with the real estate development community. For more information about The Center for Real Estate Entrepreneurship please contact Robert Wulff, CREE Director and MS in Real Estate Development Director, at rwulff@gmu.edu. Or, visit us on the web at som.gmu.edu/realestate. The Center for Real Estate Entrepreneurship is within George Mason s School of Management. Ranked by U.S. News & World Report in the top 15 percent of all AACSB accredited business schools, the School of Management is one of only 1 percent of business schools worldwide that is accredited in both business and accounting by the Association to Advance Collegiate Schools of Business (AACSB) International. Locations Fairfax Arlington Herndon Main Campus School of Management 44 University Drive, MS 1B1 Enterprise Hall Fairfax, VA