Good information for DC home buyers

Nice piece by Rob Rozansky, the principal of The Rozansky Group of Long & Foster and Washington Post blogger, about the upside and downside of buying in DC right now.  Think: Interest Rates, New Development, and Fragility.

Here is the article below:

What to watch in the Washington-area housing market this year
By Brad Rozansky March 31
Residential construction in the Arts District in Hyattsville is one of the issues to watch in the Washington-area housing market this year. (Benjamin C. Tankersley/FOR THE WASHINGTON POST)
Brad Rozansky is principal of The Rozansky Group of Long & Foster Real Estate in Bethesda.

The real estate market this year is off to a good start — sales, prices and inventory are up. But if last year was an indication, any one of several factors could disrupt the market’s upward trajectory.

A possible government shutdown and/or the Fed’s impending hike in interest rates could significantly impact whether house hunters maintain the confidence and financial ability to become buyers.

Here are some factors to watch if you’re considering buying or selling a house this year:

• Interest rates: In defiance of forecasts that interest rates were going to rise steadily in 2014, they actually went on a steady decline, ending near 3.75 percent. As 2015 started, rates have been ebbing and flowing, balancing out near the 3.8 percent level.

Where will they go from here? Many industry experts are debating whether the Fed will raise interest rates in June or September; some, though, are forecasting an end-of-the-year hike. Fed officials, including Chair Janet Yellen, have not signaled their intentions.

With the when issue unclear, the next question is how significant will the hike be?

A significant rise of 1.5 percent looks like this in dollars and cents:

On a $500,000 loan, a 4 percent interest rate puts the principal and interest payment at $2,385 a month. To qualify, a buyer needs an annual income of $86,000.

At 5.5 percent, the principal and interest payment is $2,840 a month or almost $500 more. Should rates rise to 5.5 percent, the buyer needs an income of $103,000, or a hefty raise of $17,000.

One thing that is certain: Interest rates have risen and fallen throughout modern American history. When they do rise, two things happen. First, people who have been on the fence about a home purchase quickly get off it. Secondly, as mortgages become more expensive, home absorption rates slow. Motivated sellers then reduce prices — and a cycle starts to change from a seller-favored market to a buyer-favored one.

Although the borrowers must meet strict qualifications, there are conventional loan products today requiring only 5 percent down. In 2015-2016, if rates rise significantly, adjustable rate mortgages (ARMs) will probably resurface as the mortgage product of choice.

But any time there is a significant interest rate hike, some buyers are taken out of the game: Many of them simply won’t qualify anymore.   And even for those who can still qualify, rising rates alter the equation of the rent vs. buy scale, driving otherwise ready, willing and able buyers to sign a lease instead of a purchase contract.

 Construction: Everywhere you turn in the metropolitan area, construction cranes seem to be part of the landscape.  From the development along the Southwest Waterfront, to the Arts District Hyattsville, to Pike & Rose in Rockville, there is an incredible building boom underway where walkability is replacing car-centric living.

What’s difficult to predict is the price buyers will be willing to pay for that lifestyle.  With several new luxury condominium projects nearing completion in downtown Bethesda, demand is high, with most of them reporting brisk pre-sales.  The Darcy is selling fast, with more than half of the building sold at pricing upwards of $1,000 per square foot. That’s great for the developer, but with hundreds of units under construction in Bethesda, could the supply exceed demand?  Only time will tell.

And what does all the new construction mean to the resale homes around it?   Currently, existing condominiums in downtown Bethesda are experiencing a pricing uptick. The Lionsgate, completed in 2008 and just blocks from the Darcy, had seen values falling from 2010-2013, but is experiencing a spike in prices on the units listed for sale this year, averaging between $800 to $900 per square foot.

The building is older, but with easy access to Metro, a doorman and other luxury amenities, the condominium construction boom around every block seems to be helping sell the existing inventory as well.

 Fragility: While other parts of the United States were struggling throughout the recent housing crisis, the D.C. area was relatively stable because of our strong federal government-backed economy.  That dependency showed its weak side in 2013 and 2014 with government shut downs.  As closings of the Grand Canyon, Yosemite and the Smithsonian grabbed national attention, the D.C. area real estate market quietly took a hit.

The fact is, the fragility of our economy extends far beyond the marble buildings housing government employees: Thousands of contractors, subcontractors and all the ancillary businesses that cater to the government — the entire metro area — felt the punch.  When the government shut down, a huge pool of home buyers were suddenly out of work; the home loans they had in progress faltered.  When a buyer’s loan faltered and/or stopped, home sales followed suit.  Fortunately, the area recovered quickly.

But will history repeat itself in 2015?

We dodged a bullet with the Homeland Security funding scare in February, but given what has happened in the past, it’s safe to predict that future government shutdowns will inevitably bring some pain to the local real estate market.

For the sake of home sellers and buyers in the D.C. area, let’s hope Congress finds middle ground in 2015.

Luke Buchanan delivers in-depth, local knowledge regarding NW Washington neighborhoods. Luke is proficient in relative-valuation and formerly worked as a strategist for an advertising firm in Santa Monica. If you wish to learn more about your home's worth, please call or email to schedule a free real estate consultation today. You may also visit Luke Buchanan's blog or Facebook, to find additional information that may further guide your real estate decisions. Hobbies include: golf, grilling, image editing, photography, running, skiing, tennis, travel and yoga

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