Comeback Or Not Yet?


Signs May Point to Real Estate Recovery, But Conflicting Numbers Signal Caution

After years of tumbling home prices, foreclosures and surplus inventory, could an early recovery in the Washington area be on the way? Even for the savviest real estate expert, the landscape is difficult to make out.

Nowadays, as soon as one report comes out pointing to a real estate resurgence, another story emerges about an unexpected decline in home construction, for example, or a spike in foreclosures due not to subprime mortgages but to unemployment — further complicating the picture of an industry still in a state of flux and highly subject to local trends.

But at least judging by the numbers from early 2009 to late summer, the Washington region’s beleaguered housing market seems to be on the mend. In June, the inventory of unsold homes dropped well below the healthy standard of a six-month supply, according to a report from consulting firm Delta Associates and Metropolitan Regional Information Systems, a multiple listing service that provides housing data to realtors in the District, suburban Maryland and Northern Virginia. This July, for instance, Montgomery and Prince George’s counties in Maryland saw the biggest jump in home sales, increasing by 30 percent and 76 percent, respectively, from July of last year.

And although the area’s battered housing prices aren’t up to 2008 levels, the National Association of Realtors has noted sharp increases from the first to second quarter of 2009.

Some experts point to a new ,000 tax credit for first-time homebuyers, as well as record-low interest rates and declining home values as the biggest contributors to the recent upswing.

Unlike the anxious, spontaneous buyers of the competitive boom, many of whom ended up with homes they couldn’t afford, recent buyers have more leeway to bargain hunt for deals generated by foreclosures and short sales. As a result, the area’s housing excess has been steadily shrinking to the current supply, which will take an estimated five months to sell.

This activity is also helping to stabilize home prices in general. In mid-August, the National Association of Realtors reported an 11 percent increase in the Washington area’s second-quarter condo prices, which are currently at a median of 4,800. Likewise, the median price of a single-family home was up from 9,400 in the first quarter of 2009 to 9,200 in the second.

And fewer sellers are reducing their asking prices, according to Trulia, a national real estate marketing firm. In a recent analysis, the firm found a 17 percent decline in the number of local price reductions from June to August. Washington was one of the few cities to post a decrease — nationwide, 25 percent of current sellers have had to drop the list price of their homes at least once.

Although local sellers aren’t yet in a position to raise prices, some recent on-the-ground accounts suggest they’re offering less generous incentives and, in some cases, are beginning to see scaled-back versions of the housing boom bidding wars.

“Sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy,” said Lawrence Yun, chief economist for the National Association of Realtors.

But for every expert and report interpreting the numbers as a sign of continuing recovery, there’s another cautioning that too much optimism may be premature.

Fewer price reductions among today’s sellers aren’t so much a sign of tables turning in their favor, notes Trulia, but an indication that reality is finally sinking in with homeowners who may have previously ignored market conditions and simply over-priced their homes.

Other sellers may be giving up entirely, pulling their homes and condos from the housing market and putting them up for rent instead (also see “Landlord Leap: Homeowners Rent Properties to Wait Out Slumping Market” in the December 2008 issue of The Washington Diplomat). Mid-year reports from Delta Associates suggest such an explanation, with an increase in rental vacancy rates reported in August.

And of course, as the housing market picks up, so do mortgage interest rates. After dropping to a whopping 4.78 percent in early 2009, the average rate on a 30-year, fixed-rated mortgage was at 5.29 percent in August.

“There can be little doubt that the general trend for mortgage interest rates will be up,” Dean Baker, co-director of the Center for Economic and Policy Research, wrote in a recent weekly report.

Baker points to rising interest rates and a November expiration of the new homebuyers tax credit as reasons to expect a sales decline in coming months. Other experts say continuing job losses and fears of unemployment also threaten to upend recent gains.

If economists and housing experts do tend to agree on one thing, it’s that Washington may in fact hit bottom relatively soon. The point of contention — or, more accurately, deliberation — is how long it will take to get there.

In the nation’s capital, which was considered ground zero for the nation’s housing boom and ensuing bust, help could come in the form of overseas investments. That’s because when Americans are anxious about the real estate market, foreign investors see opportunities in U.S. apartments, homes and offices. Members of the Association of Foreign Investors in Real Estate (AFIRE) held an astonishing 1 billion of real estate in the United States in 2008. In a recent survey of AFIRE’s members, D.C. even beat out New York, London and Paris as foreign investors’ top city pick for investments.

“The perception that Washington, D.C., will be the first to recover has risen dramatically since the annual survey,” said James A. Fetgatter, chief executive of AFIRE. “Twice as many respondents named Washington as their city of choice over second-place New York.”

The association normally conducts its survey every 12 months, but this year it has so far conducted two: one in February that examined 2008 responses, and a second mid-year analysis that gauges effects of the shifting economy on investor sentiments. When interviewed again in June, 75 percent of respondents hadn’t yet made investments in 2009. Two-thirds, however, said they plan to invest in the market by year’s end, and 31 percent said they felt more optimistic about the U.S. market than they had at the start of the year.

Still, once again the news is a double-edged sword because realtors nationwide are working with fewer foreign clients these days: The number of agents working with foreigners recently dropped from 32 percent to 26 percent, according to the National Association of Realtors 2008 Profile of International Home Buying Activity. And of that total, just 13 percent of clients actually purchased homes.

“The decline in foreign home buying could reflect the general downturn in the U.S. housing markets,” the reports’ authors noted. “Foreign buyers — like U.S. buyers — may be waiting for home prices to continue to decline in order to purchase a property at a lower price. Some foreign buyers may be reticent to invest in a U.S. property until they are assured that their investment will ‘pay off.’”

About the Author

Heather Mueller is a contributing writer for The Washington Diplomat.