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Last week we discovered that the "flat" market reported in Denver by The New York Times was actually producing price gains.

This week it's the turn of the Washington, D.C. metro area. "D.C. Area Housing Market Cools Off", said a headline at the very top of the Washington Post's July 25th front page. As with the Denver story, this one too requires some investigation. The Post makes two essential claims to support its headline. First, MLS inventory in the past three years has increased from 23,000 to 35,300 current listings. Second, the average number of days on the market "has crept up" in several local jurisdictions.

The fact that inventory is increasing is not, in isolation, evidence of anything other than the existence of more inventory. Inventory is simply supply. More supply may indicate nothing more than a response to increased demand. The real issue is the relationship between supply and demand. If there is excess supply and a shortage of demand then one would expect to see falling prices. However, in the first quarter of 2005, the National Association of Realtors reports that median existing home prices in the Washington metro area increased to $369,000 from $300,700 a year earlier -- a 22.7 percent gain.

Increased inventory by itself is not evidence of cooling off, reason enough for the Post's sub-head: "Inventory Up 50 percent; Region Still Strong." But what about those average days on the market? The Post conveniently provided a front-page chart on the 26th showing that between 2004 and 2005 the average number of days on the market (DOM) increased in the Virginia areas of Prince William County (+3 days), Loudoun County (+1) and in Fairfax/Arlington/Alexandria (+1). In Maryland, homes in Montgomery County were on the market an additional two days. The Post's front page chart also shows something else: In the District of Columbia, where the Post is actually headquartered, the typical time on the market has fallen two days while in nearby Prince George's County, Maryland homes are moving 10 days faster than a year ago.

What we have here is evidence of nothing. As the Post points out "home sales tend to slow in the summer" and while some area homes are on the market longer, current DOM measures are "still short turnaround times by historic standards." What could also be pointed out is this: If you add together the marketing times for the jurisdictions reported by the Post, then a typical area home is on the market five days less than a year ago. In effect, the Post's own figures show that while inventory is up, so is demand -- otherwise one would expect that homes area-wide would be sitting unsold for longer periods of time. The Post also reported on July 26th -- one day after its front-page, top left cooling-off story -- that "sales of existing U.S. homes broke yet another record in June." Alas, you might have missed this story as it was buried at the very bottom of page D-3 (See: "U.S. Home Sales Reach New Highs In June")

Despite the moment's good news let's be very clear: While the Post's current case for cooling off is weak and conflicted, and while current sale results nationwide look strong, the market will cool. It will cool in the capital region and it will cool in other metro areas as well. This must happen. The types of increases seen in Washington and other metro regions cannot continue. It's simply ridiculous to believe that 22 percent annual gains can be sustained. Given that wages, inflation, jobs and population do not increase at such rates, it follows that home price increases must slow or reverse at some point. In the best case, as in Denver, price increases will moderate to something within the realm of reason, say price changes at, near, or around the rate of inflation.

The problem is not so much that home prices rise and fall -- that's the way the world works -- but that many buyers have effectively bought into the myth of perpetually rising real estate values. This has been done by financing with adjustable-rate mortgages, no-tell (stated income) financing and option loans. For a lot of people, too many, a terrible cost will begin to emerge as the housing market gets back to historic norms and artificially-low mortgage "start rates" come to an end.

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