January 8, 2010

Ken Fears, Manager of Regional Economics

The housing market for the 22-county Washington metropolitan area (MD, DC, VA, and WVA.) is known for its stability due to the large proportion of its work force that is derived from the Federal government. However, even Washington experienced a sharp downturn during the subprime mess.

In Washington, 12.3% of mortgages were subprime loans, roughly the national average. But the foreclosure rate on subprime loans in the DC area stands at 20.1%, well above the national average of 18.0%. As home sales volume slipped in the outer suburbs during 2007 and 2008, prices began to moderate. When the wave of resets on ARM and interest-only mortgages arrived, a flood of foreclosures hit the market pressing prices lower in these areas. Meanwhile, the size and quality of homes selling in closer-in, more resilient neighborhoods declined, while the trend has been for a modest price concession even in areas of solid demand. The combination of these patterns pulled down the median home price for the area from $438,000 in the third quarter of 2007 to $333,000 four quarters later.

More recently, the DC market has found its legs and sales volume has increased by 27.8% over the four quarters ending in September of this year. Much of this demand is at the lower end of the market, under $500,000, while the higher end of the market has witnessed substantially longer days on market. The median home price, while still down, is down just 2.5% from a year earlier signaling that the market is close to, if not at, the bottom. Demand has tightened inventories at the lower end of the market and multiple bids have re-surfaced.

Not surprisingly, the decline of subprime has meant an increase in FHA usage among buyers in the DC area. Furthermore, the sharp price decline has enabled more people to utilize FHA. The current median home price is only 45% of the local conforming loan limit of $729,750, meaning that a substantial portion of the market can use government-backed financing. This is an important change as it means fewer problems from foreclosures and a healthier, more stable housing market in the future.

The price decline boosted affordability, which fell below the long-term average this year. However, the price stabilization has eroded some of these gains as higher summer prices pushed the debt service ratio, the principal and interest on a mortgage as a percent of household income, from 12% in the first quarter of 2009 to 14% in the third quarter.

Local economic conditions are the worst this area has seen in decades, but far better than the national average. The local unemployment rate is 6.2%, well below the national average of 10.2%, but well above the local rate of 3.2% from twelve months earlier. There remains a large reserve of potential buyers who were priced out of the market during the boom and are still having trouble finding the ideal home in this competitive market.

While employment is not an issue in the Washington metro area, affordability and supply at the lower end of the market are. Washington will continue to experience steady and stable demand, though focused on the lower end of the market, and renewed demand growth in the outer suburbs as prices on starter homes in the inner-suburbs are bid up.

Every housing market is unique. NAR Research recently released its Local Market Reports for the third quarter of 2009. These reports cover 150 markets and highlight the current pricing and sales patterns as well as future demand and supply conditions. The Washington report as well as reports for many other markets can be viewed on the Local Market Reports page.

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

 

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