One of the questions we constantly ask ourselves in the residential real estate business is: “Where are we in the cycle?” In that regard, increasingly these days, the consumer hears on news broadcasts that the home sales market has “bottomed out.” Well, what exactly does this mean and just where are we? And if the home sales market is coming back, does that mean rental demand has “peaked?”
The first thing everyone needs to keep in mind is that real estate markets are local. And while there are clear similarities between the condition of the market in say Washington, DC and Boston, there are just as striking differences between these markets and the ones in Las Vegas or Phoenix.
The second thing I try to remember is that economists tell us where we’ve been, but have a much harder time saying where we are, let alone figuring out where we’re going. I mean no disrespect when I note this, but I do think that from time to time we tend to forget it.
In any case, I will address my comments to the market I know best, the greater DC/Baltimore region. I believe we saw the bottom of the home sales market in our region a year ago or more. Multiple sources published studies of home price trends, nationally and in the DC/Baltimore region, and while they drew some of their own conclusions, they all point to positive trends in our area. Some examples:
- Real Estate Business Intelligence reported in May 2012 that the DC Metro Area median price increased 11.2% year over year, the highest annual gain in six years. This is also the third consecutive annual increase, providing evidence of a market bottom sometime in early 2011.
- The same study reported a 14% year-over-year decline in active listings and that limited supply is putting further upward pressure on prices.
- In May, George Mason University’s Center for Regional Analysis reported that foreclosures in the DC Area decreased 5% since March and were down 14% since the same time last year. Foreclosures made up only 7% of sales so far in 2012 compared to 17% in the same period in 2011.
- According to data from the US Census Bureau and HUD, national housing starts increased nearly 30% in April from a year earlier and 2.6% from March. Building permits also increased by 23.7% from last year.
- According to the National Association of Home Builders, home builder confidence is at a five-year high.
Moreover, assuming we have continued economic recovery, I think we will continue to see increased sales activity. There are several, probably unscientific reasons, behind my opinion. First, if I learned anything in school, I learned that most things are in constant search for a mean or middle point. The run up in prices from 1999 to 2005 in our region of more than 100% made no logical sense nor did the craziness that characterized the buying attitude during that period. However, the retrenchment that has occurred since 2008 has probably gone too far in the other direction. I think what we are seeing today is a movement back to a more “normal” market.
A “normal” market, in my opinion, is when people make the decision to rent or buy for lifestyle rather than purely economic reasons. As has been amply demonstrated by the recent past, it makes no sense to buy a home when your lifestyle is in any sort of flux. Flexibility is hindered when you encumber yourself with debt on an illiquid asset.
On the other hand, people do get married and have kids. And they get jobs they intend to keep for an extended period of time. Then, it makes sense to own a home, for all the stability that homeownership implies in America. I suspect that those households that have over the past few years moved into these more permanent relationships are now moving back into the home purchasing market, assuming of course that they can get mortgages.
However, I don’t know where it’s written that because the home buying market is beginning a resurgence, the rental market will necessarily go into decline. We went through a several year period during the depth of the recession when there was very little household formation. This isn’t natural or by any means normal. People were doubling up or living at home or prolonging their time in school. It is not a coincidence that during the years of the great recession, college attendance in America reached an all-time high.
As the economy recovers and Generation Y leaves college and gets jobs, they will increasingly form their own households. And they will rent. They will rent until they reach an age at which they are willing to trade off flexibility and mobility for stability. While what they may rent first is a home with three or four of their buddies or girlfriends, in a year or two they will tire of that and have the income to rent an apartment. And experience seems to show that they will rent increasingly nicer, and more expensive, apartments, until their lifestyle and wallet justify buying a home.
So, barring another major economic calamity, I suspect that the next few years will continue to be good for the apartment industry, with continuing demand, and will begin to be much better for homebuilding as well. Perhaps, as a result of the great recession, we have realized that the American Dream is not a home with debt we can’t afford bought as a speculation against hope for appreciation, but instead is the sanctuary provided by a place of our own that we can afford, regardless of whether we write our check to a bank or a landlord, that meets our lifestyle needs at the moment and that, most importantly, we can be proud to call “home.”