DELTA ASSOCIATES WASHINGTON AREA HOUSING OUTLOOK MID-YEAR 213 MARKET INDICATORS Washington Metro Area At 2 nd Quarter 213 Figure 1 Q2 AVG. SALES PRICE CHANGE VS. Q1 213 *Sales pace at June 213. Pace is ratio of total for-sale inventory to current month s sales. CHANGE VS. Q2 212 $473,265 13.3% 8.7% Q2 SALES (UNITS) 31,215 64.% 13.4% Q2 AVG. DAYS ON MARKET 38 22 21 SALES PACE* 1.7 Months.2 Months.6 Months HOME PRICES BY SUB-AREA* Washington Metro Area At 2 nd Quarter 213 Figure 2 SUB-AREA* CHANGE VS. Q1 213 CHANGE VS. Q2 212 Core $595,69 9.7% 5.6% Units 3,895 6.4% 13.2% Inner $469,39 16.9% 9.7% Units 1,66 68.6% 12.5% Outer $385,78 9.9% 11.4% Units 4,574 58.8% 15.9% *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* 24 213 Figure 3 12- MONTH TRAILING AVERAGE PRICE CHANGE 4% 3% 2% 1% % -1% -2% -3% -4% Core Inner Outer 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 24 25 26 27 *Core: DC, Arlington, Alexandria. Inner: Fairfax, Montgomery, Prince George s, Fairfax City, Falls Church. Outer: Loudoun, Prince William, Frederick. 28 29 21 211 212 213 THE WASHINGTON METRO AREA FOR-SALE HOUSING MARKET The for-sale housing market at mid-year 213 in the Washington metro area reflected strong fundamentals, with very low inventory and days on market, and prices and volume up over the past year. 2nd quarter prices: Up 8.7% from last year at this time. Unit volume: Up 13.4% in the 2nd quarter of 213 compared to the 2nd quarter of 212. Days on market: Average is down 21 days over the year to just 38 days and is well below the 1-year average of 63 days. Months of inventory: Steady sales volume has decreased inventory over the past year. Months of inventory, at 1.7 months, is down from 2.3 months one year ago. This is the lowest it has been since the boom days of 25. Washington will likely see continued steady growth in housing market performance during the balance of 213. However, the recent spike in mortgage rates and potential mortgage interest deduction reform may become hurdles and affect its performance negatively. For current housing market indicators, see Figure 1. PRICE INCREASES CONTINUE The average price of a Washington-area home sold in the 2nd quarter of 213 was $473,265 8.7% higher than in the 2nd quarter of 212. Recently rising mortgage rates may dampen demand among some potential homebuyers, but we expect the high household incomes in this region to counter the negative effect to some extent. Though the year-over-year new listings went up, it is still going to take some time for inventories to build. A gradual increase in the total number of listings will likely decelerate price growth over the next year. Prices remain highest in the Core Jurisdictions of the District, Arlington and Alexandria. The average sales price of a Core home in the 2nd quarter of 213 is $595,69 5.6% higher than the average price in the 2nd quarter of 212. See Figures 2 and 3.
The District: the average price in the 2nd quarter of 213 was 7.8% higher than one year earlier. Alexandria: the average sales price in the 2nd quarter was 6.8% higher than one year ago. Arlington: the average price was 1.2% higher than a year ago. The area s Inner Ring of Fairfax, Montgomery and Prince George s counties (and Falls Church and Fairfax cities) experienced prices that were 9.7% higher than a year ago; the average price at 2nd quarter 213 was $469,39. Fairfax County: home prices are 9.% higher than the 2nd quarter of 212. Montgomery County: prices are 6.8% higher over the same period. Prince George s: home prices are 12.1% higher than a year ago. The Outer Suburbs of Loudoun, Prince William and Frederick counties also experienced higher sales price averages this year compared to last year. The average price in this area is $385,78 in the 2nd quarter of 213, 11.4% higher than in the 2nd quarter of 212. Prince William County: the average sales price in the 2nd quarter of 213 was 12.1% higher than the average a year earlier. Loudoun: average home prices went up 9.% from one year earlier. Frederick County (MD): Average prices are 14.2% higher than a year earlier. Median prices in the District and the City of Alexandria increased to 116% and 17%, respectively, of the peak bubble price from 11% and 16% last quarter. Price performance in Arlington and Fairfax is nearing the prices seen at the peak of the bubble. The median price in other jurisdictions remains at less than 9% of the peak reached during the last cycle. See Figure 4. MEDIAN HOME PRICES AS A PERCENT OF THEIR PRIOR PEAK Washington Metro Area Figure 4 District of Columbia Alexandria Arlington Fairfax Frederick Loudoun Montgomery Prince William Prince George's Note: Median home prices at June 213. 4% 5% 6% 7% 8% 9% 1% 11% PERCENT OF PEAK BUBBLE PRICE UNIT VOLUME ESCALATES Unit volume of sales in the 2nd quarter of 213 was up 13.4% over the comparable quarter in 212. The total unit volume was nearly 2, during the 2nd quarter of 213, which is the best second quarter performance since 26. The drivers during this peak selling season included a steadily improving job market (notwithstanding attrition within the Federal establishment), local affordability relative to incomes, low interest rates (which started to spike in June, possibly motivating some buyers) and an increase of new listings. MID-YEAR 213 2
FOR-SALE LISTINGS Washington Metro Area Existing Houses Figure 5 DAYS ON MARKET AVERAGE DECLINES OVER THE YEAR LISTINGS 4, 35, 3, 25, 2, 15, 1, 5, 1-Year Average = 23, Listings Dec 3 Dec 4 Dec 5 Dec 6 Dec 7 Dec 8 Dec 9 Dec 1 Dec 11 Dec 12 Jun 13 For the Washington region during the 2nd quarter of 213, homes sold in an average of 38 days, down significantly from 59 days one year ago and well below the 1-year average of 63 days. The average days on market for all of 212 was 62. Although yearover-year new listings increased, active listings actually declined in most jurisdictions, indicating that houses were sold at a faster pace than they were added to the market. See Figure 5. AVERAGE DAYS ON MARKET Washington Metro by Sub-Area* Existing Houses Figure 6 DAYS 15 125 1 75 5 25 Market Average at Q2 13: 38 Days Outer Inner Core Time on market is longest in the Outer Ring and shortest in the Core, though the differences among the three geographies are small. 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 26-29. Those gaps became less pronounced throughout the second half of 212 and into 213, indicating a healthier overall market. Inner Ring (Fairfax, Montgomery, and Prince George s): Time on market fell to 38 days, down from 61 days one year ago. Outer Suburbs: Time on market now averages 4 days, down from 56 days one year ago. Core: Time on market decreased to 35 days, from 53 days one year ago. See Figure 6. 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 26 27 25 28 24 29 23 21 211 212 213 *Core: DC, Arlington, Alexandria. Inner: Fairfax, Montgomery, Prince George s; Fairfax City and Falls Church. Outer: Loudoun, Prince William, Frederick. PRICE CHANGE AND INVENTORY Washington Metro Area 23 213 Figure 7 Of note, the average selling price in the 2nd quarter of 213 is 98.6% of list price. This ratio is lower than the 2nd quarter 25 peak of 1% but well above the recent trough of 89.9% in the 1st quarter of 29. The ratio has been high of late, as listings are limited and buyers are more willing to pay nearly full price. We expect that this ratio will begin to pull back modestly as more homes are made available for sale later this year. Still, some homes will sell for above asking price in high-demand locations. INVENTORY HITS A NEW CYCLICAL LOW 12- MONTH PRICE CHANGE 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% -25% 12-Month Price Change (left axis) 3 4 5 6 7 8 9 1 11 12 13 Months of Inventory (right axis) *Months of inventory at current sales pace for last month in each quarter. 15 12 9 6 3 MONTHS OF INVENTORY* Inventory declined during the 2nd quarter of 213 to the lowest level since the peak of the housing cycle during the 2nd quarter of 25. The Washington area has an average of 1.7 months of for-sale inventory at the end of the 2nd quarter of 213, down from 1.9 months of inventory three months ago and 2.3 months of inventory one year ago. 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 MID-YEAR 213 3
MONTHS OF FOR-SALE INVENTORY Washington Metro Area Figure 8 MONTHS OF INVENTORY AT SALES PACE* PRICE CHANGES REFLECTED IN PURCHASE- ONLY INDEXES 7 6 5 4 3 2 1 PRICE CHANGES Selected Large Metro Areas 1992 212 Figure 9 2% 175% 15% 125% 1% 75% 5% 25% Jun. 213: 1.7 Months Jun. 212: 2.3 Months Falls Ch Ffx City Ffx Cnty Arl Alex Pr Will District Mont Lou Pr Geo Fred (MD) Fauq *Pace is ratio of total for-sale inventory to current month s sales. 151% June 212 June 213 Source: FHFA, Delta Associates; July 213. Note: Price change at 4 th quarter of respective year; seasonally adjusted. 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 during 212 and early 213 is primarily due to a lower number of listings, though the number of sales has increased as well. Sales volume has risen in part due to investor activity. In every jurisdiction but Fauquier the ratio of inventory to sales is lower in the 2nd quarter of 213 compared to one year earlier. Fauquier County has the highest ratio in the region at 5. months of inventory at June 213 still fairly low by historical standards. Falls Church City has just.9 months of inventory at June 213, the lowest in the region. See Figure 8. WASHINGTON METRO S RECENT OUTPERFORMANCE SLOWS IN 213 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 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 San Francisco and Los Angeles that have large private sectors (compared to Washington s) are seeing more robust price growth. In the Washington metro area, the Federal Housing Finance Agency (FHFA, formerly OFHEO) reported that Washington experienced price growth of 151% from the 4th quarter of 1992 through the 4th quarter of 212, second after Denver among large metros. See Figure 9. PRICE CHANGES 2-City Composite January 213 April 213 Figure 1 HOME PRICE INDEX GROWTH 8% 7% 6% 5% 4% 3% 2% 1% % -1% 1.9% Case-Shiller has reported that Washington home prices increased 7.3% from April 212 to April 213, the most recent data available. The Washington region underperformed the 2- city composite increase of 12.1% over the same period. Among the 2 cities in this composite, Washington s rank rose from 16th in greatest price growth as of January 213 to 13th as of April 213. This corresponds to a 1.9% growth rate from January 213 to April 213. Of note, this methodology is different from FHFA in that it tracks same-store prices, or comparable unit sales. See Figure 1. Source: Case-Shiller, Delta Associates; July 213. MID-YEAR 213 4
WASHINGTON AREA HOUSING OUTLOOK We believe the Washington area housing market is firmly established in the recovery cycle, which is supported by six quarters in a row of favorable pricing trends and robust performance during the first half of 213. The list price to sales price ratio rose to 98.6% during the 2nd quarter of 213, the highest level since the heady days of 25. Months of inventory hit a cyclical low of 1.7 months at the current rate of sales; six months worth of inventory is considered a balanced market. Both indicators in addition to robust year-over-year price increases suggest that the Washington area is a seller s market at this time. We expect the recovery to continue for the balance of the year, but with more new listings likely coming to the market and mortgage rates rising, year-over-year prices are likely to increase at a decelerating and more sustainable pace. We expect that a combination of the following will bring gains to the Washington for-sale housing market over the next year, but with annual price growth likely settling in the 5-6% range for 213: Steadily rising house prices that may incentivize more potential sellers to list their homes, thus bringing out more buyers but slowing price growth. High rents relative to house prices that may increase demand from investor-owners, though this is changing; by 214, renting may be a more attractive option for potential first-time buyers, siphoning off some demand in the for-sale market. Job growth, driven by the private sector, that is likely to continue into 214-15 but at modest rates for an expansion cycle. We expect the recovery to continue for the balance of the year, but with more new listings likely coming to the market and mortgage rates rising, year-over-year prices are likely to increase at a decelerating and more sustainable pace. MID-YEAR 213 5
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% 23 24 25 26 27 28 29 21 211 212 213* 23 24 25 26 27 28 29 21 211 212 213* Source: S&P/Case-Shiller, Delta Associates; July 213. *12 months ending April 213. Note: Seasonally adjusted purchase-only index. *Annualized. Our Take: The Washington area saw a 7.3% increase in existing home prices for the 12 months ending April 213 (per Case-Shiller data), underperforming the 2-City Composite average of 12.1%. Washington remains one of the most consistent performers within this composite index. Our Take: Sales volume in the 2nd quarter was 19,392 homes, 13.4% higher than the same quarter in 212. Sales volume is on pace to exceed last year s unit volume. ANNUAL AVERAGE DAYS ON MARKET Washington Metro Area Existing Houses Figure 13 RESALE PRICE CHANGE Washington Metro Area Trailing 12 Months Figure 14 12 1 1-Year Average = 63 Days 15 16% 14% 12% 8 1% DAYS 6 4 33 38 8% 6% 4% 2 2% 23 24 25 26 27 28 29 21 211 212 Q2 213 % Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Our Take: The average time on the market at 2nd quarter 213 is 38 days, down from 59 days one year earlier, and below the 1-year average of 63 days. The average days on market during 212 was 62 days. Our Take: Prices showed healthy growth yearover-year during the 2nd quarter of 213. On a 12-month trailing basis, prices in June 213 were 9.6% higher than in June 212. MID-YEAR 213 6
MORTGAGE RATES AND MORTGAGE INTEREST DEDUCTION (MID) IMPACT THE MARKET Mortgage rates have experienced significant change since June. The 3-year fixed-rate surged past 4% at the end of June and jumped to its highest point of the cycle thus far, 4.51% on July 11, significantly up from 3.56% a year earlier. Rates were down slightly thereafter but remained above the 4% mark. Meanwhile, fewer people are applying for mortgages. According to the Mortgage Bankers Association, as of June 26, the Market Composite Index, a measure of mortgage loan application volume, dropped 3% on a seasonally-adjusted basis from one week earlier to its lowest level since November 211. Steady, low mortgage interest rates have been one of the main drivers of housing market gains during the recovery. The sudden spike, therefore, has caused speculation about how materially the housing market may be negatively impacted. The increase in rates will put downward pressure on demand locally, but we expect the overall impact to be limited. Although the 3-year fixed rate rose almost a full point compared to the same time last year, it remains very low by historical standards. In addition, private sector job creation and a high median household income likely will help to sustain long-term housing price increases in this region. In 211, the U.S. mortgage interest deduction frequency among homeowners was 24.4%, which translates to an amount of $2,462. But the deduction frequency in each state varied widely, ranging from 14.4% to 35.5%. According to a report by the Pew Charitable Trust, 35.5% of homeowners in Maryland claimed the tax break in 211, the highest figure in the country. On average, they received a deduction of $4,193. The levels for Virginia and Washington, D.C were 31.9% and 24.4% respectively. The data emphasize that the Washington, D.C area is taking advantage of the MID more than any other large metro area in the country. Therefore, the ongoing debate over MID reform will likely impact this area s housing market materially. MID-YEAR 213 7
PAYROLL JOB GROWTH Large Metro Areas 12 Months Ending May 213 Figure 15 WASHINGTON AREA ECONOMIC OUTLOOK PAYROLL JOBS IN THOUSANDS 16 14 12 1 8 6 4 2 48.5 NY DFW Hou LA SF Bay Chi Was Atl Phx Bos Den S FL Basin We expect Washington metro area economic growth to progress slowly during the balance of 213 as Federal austerity measures hinder the local recovery. However, the labor market is gradually expanding, driven by hiring in the private sector. We do not anticipate stronger growth to occur until a compromise is reached on sequestration or the region fully adapts to its economic impact. Regardless, we expect the rate of expansion to be slower than seen in previous growth cycles. Source: BLS, Delta Associates; July 213. UNEMPLOYMENT RATES Large Metro Areas May 212 vs. May 213 Figure 16 UNEMPLOYMENT RATE 12% 1% 8% 6% 4% 2% % May 212 May 213 Was SF Bay Bos Phx DFW Den Hou S. Fla NY Atl LA Basin Source: BLS, Delta Associates; July 213. Chi National Average 8.2% 7.3% During the 213-17 period we expect the Federal government to reduce spending, though perhaps less than currently planned. However, we expect other sectors to pick up the slack to help stimulate the Washington metro economy through 217 specifically the Professional/Business Services and Health and Education sectors. In consultation with Dr. Stephen Fuller of George Mason University, we estimate that an average of 48,1 payroll jobs will be added to the Washington metro area economy annually during the fiveyear period from 213-17. Private sector firms will be the basis of employment growth in the period ahead. While job growth will be robust enough to support a healthy residential real estate market, the types of jobs being created are likely to include more lower-wage positions than in prior expansion cycles, lowering the ceiling of economic growth in this cycle. See Figures 15-17. PAYROLL JOB GROWTH Washington Metro Area 23 217 Figure 17 8 6 4 2-2 -4 2-Year Annual Average = 42,4/Year 5-Year Projected Average = 48,1/Year During the 213-17 period we expect the Federal government to reduce spending, though perhaps less than currently planned. -6 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 District Sub. MD No. Virginia Source: BLS, Dr. Stephen Fuller, Delta Associates; July 213. MID-YEAR 213 8
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: 1. Valuation of partial interests in commercial real estate assets. 2. 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. 3. Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties. 4. Subscription data for selected 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, President, Consulting Division Alexander (Sandy) Paul, CRE, Executive Vice President Marianne Du, Intern 213. All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. Sources: Bureau of Labor Statistics, Center for Regional Analysis, Delta Associates, Federal Housing Finance Agency, Metropolitan Regional Information Systems, NATIONAL ASSOCIATION of REALTORS, Pew Charitable Trust, 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. Headquarters 5 Montgomery Street, Suite 6 Alexandria, VA 22314 73-836-57 Info@DeltaAssociates.com MID-YEAR 213 9