The Price Isn’t Right
For the last two years now, reports have said the same thing with such regularity that they’ve ceased to even make headlines: The housing market is in freefall, except around here. The end of May, however, saw the release of perhaps the most eye-popping finding yet. While home prices had reached a new low for the recession nationally on the closely-watched Case Shiller Index, the D.C. area posted a robust 4.3 percent growth rate since last year. It was as if the real estate crash were already ancient history.
The news spawned another round of pontification about why D.C. defies national trends with relative disregard for crushing economic forces like the foreclosure crisis, tight-as-a-drum credit, and underwater mortgages. It’s actually pretty straightforward: The federal government grew while the rest of the economy shrank, keeping the Washington area relatively flush with well-paying jobs—many of which come with cushy relocation packages that allow people to buy nicer homes than they might otherwise. Boomers are trading in their single-family suburban ramblers for chic condos with cafés on the ground floor. In D.C. proper, we still have a first-time homebuyer tax credit, which has helped to bolster sales even after the nationwide incentive expired. For rockstar urbanist Richard Florida, the D.C. area is just another vindication of his theory of the “creative class,” which dictates that cities do better when they attract people in the fields of science, technology, arts, and “professional fields.”
Generally speaking, that’s true. The D.C. area has added 17,000 jobs in the business and professional services sector and 7,000 in retail over the last year, versus just 3,000 in the federal government. As of April 2011, the region has an amazing 5.4 percent unemployment rate—about half the nationwide average (although D.C. tops it, at 9.6 percent). The District added nearly 30,000 people over the last 10 years, and they all need somewhere to live.
But beyond general trends, the Case Shiller Index doesn’t tell us all that much. Developed in the 1980s to help Wall Street hedge the housing market, the formula is a product of an earlier time—it only measures existing single family homes, omitting condos, co-ops, apartments, and new construction. It measures sale prices, not contracts or pending sales, meaning that it lags what’s actually going on by a few months. And like many metrics, it also only tracks the metropolitan statistical area, which encompasses 22 regions of wildly differing characters in D.C., Maryland, Virginia, and even West Virginia. All in all, it’s useful as a forecast for consumer and investor confidence, not as a reflection of what’s actually going on.
The more important story is the numbers underneath that smooth line: Who needs how much of what kind of housing where, and whether they’re getting it. Luckily, that story is also a hopeful one.
Before we get there, let’s remember how we got to where we are. The District’s real estate boom was bigger than that of many cities around the country: An expansion of government and the go-go economy of the mid-2000s coincided with a major revitalization of the center city, capturing many of those new residents both in high-rise condo buildings and dilapidated neighborhoods that just needed a little love.
The real estate crash took about a year longer to hit D.C. than the rest of the country; housing prices didn’t fall off a cliff until mid-2007. When they did, people didn’t stop moving here, but developers—suddenly unable to borrow money—stopped putting up buildings to house them. A few new condos, like the Floridian near U Street NW, were famous failures, either going into foreclosure or just selling at a snail’s pace.
Still, people kept coming to D.C. The condo market dried up. Only two buildings, the Harrison on Wisconsin Avenue NW and the Woodley Wardman on Connecticut Avenue NW, delivered in 2010. But while prices of single family homes rose—those sold in the first five months of this year were 8 percent more expensive than over the same period in 2010—condo prices dropped, dragged down by clunkers that had lingered on the market too long.
The supply of condos is usually characterized in terms of months of “inventory,” or how long it would take for the supply to disappear at a given rate of “absorption.” Six months of inventory is considered equilibrium. The District has been below that since mid-2009, and now has a little more than four months’ worth of supply. Translation: If you’re condo hunting in D.C., especially in the popular neighborhoods closer to downtown, don’t break your lease yet.
And that’s probably not changing any time soon. According to Lynn Hackney, president of condo brokerage Urban Pace, only 413 condos are under construction or will be delivered this year, and about 20 percent of those have sold. Meanwhile, lenders are still very skittish about underwriting these projects, no matter how many househunters are obsessively refreshing Trulia or Redfin.
If money’s not moving into condos, though, it’s just responding to an overall shift in how people are starting to live: With fewer square feet, renting instead of owning, using improved public spaces instead of holing up in their living rooms. The apartment vacancy rate for the whole metro area ended at 3.4 percent last year—almost half the national average, and still higher than hot neighborhoods in D.C.—and rents shot up 8 percent. Now, it’s easier to get financing for apartment projects, and many buildings will be ready for new occupants by 2012 and 2013.
“In our market, there’s a lot of folks betting that a lot of the folks who could buy will rent, lots of large dollars chasing Class A multifamily,” says local broker and developer Bo Menkiti, referring to high-end apartment buildings. “And I think that’s driven by an assumption that homeownership isn’t an option.”
In previous decades, those squeezed by high housing prices would light out for the suburbs, where they’d likely find safer neighborhoods and better schools, too. But as the quality of life indicators improve in the inner city and high gas prices make commutes more expensive and annoying, the cost calculus is shifting. All great things, from D.C’s perspective. The question, in a place where apartment buildings can only grow so tall, is how to find the people who want to stay here a decent place to live.
The Logan Circles, Capitol Hills, andWest Ends of the world are only one side of the story, though. For every superhot submarket, there’s a D.C. neighborhood where prices are nowhere near boomtime levels. Take ZIP code 20019, which covers Deanwood, Kenilworth, and Minnesota-Benning. The average home price there was only $131,000 over the last year, compared to Georgetown’s ZIP code, 20007, where the average home went for $1.1 million.
Even in the wake of the worst part of the foreclosure crisis, prices aren’t rising much. According to Aaron Hargrove of Realty Executives, investors picked up hundreds of foreclosed properties, renovated them, and dumped them back on the market, where they’re selling for lower prices than they might have fetched last year. Meanwhile, tighter lending requirements are keeping some first-time buyers at bay. The sales rep for the Glenncrest subdivision off East Capitol Street says that units were selling quickly until mortgage insurance rates rose; now they’ve slowed to a crawl.
So why aren’t all those people angling for condos willing to take advantage of lower housing prices east of the river, like they did in previously marginal Northwest neighborhoods?
There are a few clear differences between the neighborhoods that capture the people who move here for jobs in the booming Washington economy, and the ones that don’t. Areas with historic housing stock, like LeDroit Park and Shaw, are the first ones to go. They also must have access to transit, and preferably be within walking distance to a commercial strip like H Street NE. White yuppies, of course, aren’t the only ones turning down neighborhoods east of the river: Native Washingtonians who sell their now-valuable properties in gentrifying areas usually trade their D.C. addresses in for more land in Prince George’s County, unwilling to pay hundreds of thousands of dollars for a house they remember costing what you might now pay for a car.
In a market where private developers get the most bang for their buck out of luxury products, nonprofit housing developers also play a critical role. For them, high housing prices cut both ways: On the one hand, more transactions on expensive homes and condos generate tax revenue for the city’s Housing Production Trust Fund, which is loaned out to produce and preserve affordable housing. On the other hand, higher home values make land more difficult to acquire in the first place. At the moment, with Trust Fund money at a trickle, the non-profits haven’t been able to produce much.
“Nowadays, our market is relatively slow, because prices haven’t come down, and because the mortgage guidelines of lenders are much more difficult to comply with,” says George Rothman, president and CEO of Manna, Inc.
Still, most of the housing created through that channel is for a pretty specific type of person: The ones who have income low enough and credit good enough to both meet the eligibility requirements and qualify for a loan. What’s missing in this equation is housing for everybody else: The grad student who can’t afford to pay $1,500 for a studio; the minimum-wage worker who has a two-hour commute; the renter who wants to settle down but can’t get a mortgage on a half-million dollar house; the young couple that just wants to be near all their friends. It just takes a few neighborhood amenities for D.C.’s stores of already-affordable housing in marginal neighborhoods to become viable options for a wider group of would-be residents, creating the kind of mixed-income neighborhoods that make the city strongest.
“There are two ideas of how to improve lives,” says Roderick Harrison, a demography researcher at Howard University. “Either improve the place, or the circumstances of families. We’ve largely taken the latter strategy: ‘Let me improve your job and let me improve your income.’ If we do that, the likelihood is that you’re going to take that and move. Which will increase the socioeconomic diversity of other places, at least.”
What one number doesn’t show is D.C.’s all-important play to make sure job growth translates into new residents, while allowing older residents to stay if they want to. Otherwise, the District’s new motto may well be the old line: “Nobody goes there anymore, it’s too crowded.”