2022 was one wild ride of a year for residential real estate in the DMV
As we previously covered in our mid-year report, the first two quarters of the year were supercharged by feverish demand, rock bottom inventory levels and the growing realization that the cheap money party was coming to an end. The Fed- like parents who return home early from vacation to find a raging party of drunken teenagers underway in their home- did not waste too much time in turning off the music and throwing all the revelers out of their house. Starting in March, The Fed slowly began a tightening cycle that they accelerated significantly with four 75 basis point raises to the Fed Funds Rate starting in June. The result was the fastest period of monetary tightening in Fed history. Interest rates, which had already doubled from 3% in January to 6% in June, continued to climb after a brief summer respite to top out above 7% in November. The speed and sheer magnitude of the rate hikes had a chilling effect on the real estate market at the end of Q2 and beginning of Q3. The disconnect between Buyers - who were struggling to keep up with rising borrowing costs and rising home prices- and Sellers - who far too often failed to grasp the changing reality of the market- continued to grow throughout Q3 as inventory levels rose (albeit not significantly) and buyer demand softened. For the Buyers that were able to stay in the market- often by taking advantage of lower, jumbo portfolio loan rates or adjustable rate mortgage products- opportunities that had not existed in the marketplace for years, namely to negotiate a contract with contingencies, seller price concessions and seller subsidies to "buy down" rising interest rates, began to emerge. As Q3 went on we saw Sellers slowly adjust to the changing market dynamics and start to list their homes at more realistic list prices or elect to hold off on listing their homes entirely.
While one may read the above and assume that prices cratered in Q3 and Q4, that is not what happened. While there was certainly significant demand destruction as interest rates rose, the simple fact that the market started the year with such an imbalance of supply and demand in the favor of Sellers meant that it could absorb the loss of a significant number of buyers and still have enough demand to sustain a high floor on prices. Moreover, while existing listings stayed on the market for longer, the amount of new listings coming on in the Fall Market fell dramatically- down more than 20% - versus last year. While supply levels are twice as high as they were in February of this year, that still only represents 1.5 months worth of inventory in our region whereas a balanced market is one that is considered to have around 6 months of available supply. All in all, prices (particularly for single family homes) are currently closer to where they were in early 2022, which is still significantly above pre-pandemic levels, and not anywhere near correction territory for most home types.
The DC Market will show its resilience in 2023
All real estate is local and while there will be parts of the country that see prices fall significantly, we do not foresee that being the case in the greater DC Region. Lisa Sturtevant, the chief economist for our regional multiple listing service predicts a 1% rise in prices in 2023- a far cry from the 26% appreciation in the Case-Shiller Washington DC Area Home Price Index since April of 2020 but hardly the doomsday scenario like the 32% fall in the index from peak to trough during The Great Recession. There are several reasons for this but the simplest explanation is that demand and supply destruction have happened in equal measure in our market as interest rates have risen this past year. The overall market is also underpinned by considerably more solid fundamentals (i.e. higher lending standards, significantly higher home equity among owners, a strong labor market, better demographic trends) than during the Great Recession. Lastly, while we have certainly seen unsustainable rates of appreciation over the past two years, it was not driven by investors, i-Buyers and PE firms as it was elsewhere in the country (particularly in the West and Southeast). At around 8% investor participation, DC is far below the national average of 18% and leaps and bounds below the frothiest investor markets which saw as high as 30% of all sales in the last few years being transacted by investors and speculators. Less investor activity in our market means a far lower likelihood of the huge drops in demand combined with large increases in supply that lead to significant price declines in more volatile housing markets.
What is the bottom line for real estate in the DMV in 2023
2023 should start off as a far quieter and more balanced market than we have seen over the last few years. Transaction volume will likely fall back to at or below pre-pandemic levels but don't expect prices to fall significantly given the ongoing lack of supply out there. Overall, Buyers should expect to have more leverage in negotiations but homes that are priced right and show well will continue to sell fairly quickly and likely still with multiple offers (just not double digit offer counts). Listings should continue their trend of being priced closer to market value which will be a welcome sight for most market participants who grew to dread the grossly underpriced listings designed to drive bidding wars (and stress levels) for desperate Buyers the past two years. Most industry analysts do expect interest rates to moderate from current levels as inflation continues to abate and the larger economy is hit with recessionary headwinds. If interest rates do fall by a significant amount due to a national economic slowdown, we could very well see droves of local Buyers who have been sitting out the market coming off the sidelines as well as an uptick of out of town Buyers fleeing to the relative safety and security of the DC Area real estate market and economy. The winner in that type of scenario would be the Buyers who buy now even when rates are still high but prices are flat and refinance later when rates are lower and prices and competition starts to climb again.