Bubble in Washington, DC?

[Andy Gross]

I've been monitoring prices in Washington, DC, and I am seeing some really rapid appreciation in the last 2 years. A friend of mine has been getting outbid at every turn. Is this flight capital from other countries, or are prices just making up for losses from the 2007-2011 downturn? Last year saw something like a 5% increase in sales prices, and volume has gone up dramatically.

Is this market getting overheated?

[Kyle Scholnick]

Yes, due for a crash in 2016 in my opinion

[Steve Dye]

Lots of overseas cash in NY and probably elsewhere in the US as well.

http://therealdeal.com/issues_articles/the-year-of...

This quote is crazy "Chinese buyers have accounted for roughly 25 percent of all buyers for homes $3 million and up in Nassau County between January 2013 and mid-February, she said."

With low rates and lots of cash looking for better then savings ROI valuations are starting to look pretty high in lots of places.

[Jesse T.]

I think overall the increases in the Washington area real estate are justified or at least sustainable based on fundamentals.  An overall crash in real estate could hurt prices in the DC area, but I don't really see most of the behavior of the bubble.  I think a big thing that has people thinking bubble is a lot of prices have returned to those levels.

That said a lot of the activity seems to be in areas that are most susceptible to bubbles - large higher end apartments, luxury condos and luxury developments/in-fill.  

[Lee Marsteller]

I have been in this market for a long long time and I still believe it is undervalued for a major international city. Check the values in any other major international hub such as NY, SF, London, Paris, on and on......The all are way more expensive for both land and per sf of building. 

That being said, we never chase the market rise and play the appreciation in any deal.  If it doesn't work today, we won't buy it unless it is specifically a buy and hold investment for future redevelopment. 

[Sam Van Horebeek]

I agree with Steve - there is a lot of overseas cash available - at least, we see a lot of Chinese cash going to the US.

We have been working with several Chinese buyers for Washington DC.  I believe that there is more to come - even when the market continues to appreciate. Washington DC is still cheap in comparison with Hong Kong, Shanghai and Beijing.

[Russell Brazil]

I think while we may still be seeing an overall price increase in the DC area, that does not tell the whole story of the market. Yes median and average prices are rising, but a lot of that is because the low end of the market is up, along with the high end of the market. You will see that in gentrifying neighborhoods, as prices approach the FHA and conventional loan limits that there is a plateauing of prices. Let's take upper Petworth for example. As redone rowhouses started passing the $600k mark, price growth in that price range slowed. But the nonredone properties in the $400's continued to rise. So the median price rises, but the market for those homes in the $600's stagnated.

So now that that price point stagnated, redone homes in Brightwood just to the north have gone up.

So from an outsiders perspective like @Andy Gross watching from Hawaii, you may see just prices rising, but doesnt tell the whole story of the DC market.  The loan limits create a ceiling in many neighborhoods where the jumbo loan people would not live.

There is also the factor that with all the money in the DC market, they compared to competitors like San Francisco, Boston, NYC...that DC has never traded at the valuations of those cities despite the DC area being center to 10 of the top 20 richest counties in America by median income.  

[Matt N.]

Originally posted by @Russell Brazil:

I think while we may still be seeing an overall price increase in the DC area, that does not tell the whole story of the market. Yes median and average prices are rising, but a lot of that is because the low end of the market is up, along with the high end of the market. You will see that in gentrifying neighborhoods, as prices approach the FHA and conventional loan limits that there is a plateauing of prices. Let's take upper Petworth for example. As redone rowhouses started passing the $600k mark, price growth in that price range slowed. But the nonredone properties in the $400's continued to rise. So the median price rises, but the market for those homes in the $600's stagnated.

So now that that price point stagnated, redone homes in Brightwood just to the north have gone up.

So from an outsiders perspective like @Andy Gross watching from Hawaii, you may see just prices rising, but doesnt tell the whole story of the DC market.  The loan limits create a ceiling in many neighborhoods where the jumbo loan people would not live.

There is also the factor that with all the money in the DC market, they compared to competitors like San Francisco, Boston, NYC...that DC has never traded at the valuations of those cities despite the DC area being center to 10 of the top 20 richest counties in America by median income.  

 Nice analysis. So which neighborhoods are following Brightwood in gentrification and government development? 

[Piper Mullins]

Hi all,

On a similar note, I'm a new real estate investor living in DC, and I'm considering buying a home with rental income potential. However, the market seems so hot right now that I'm wondering if it's a good idea. Most 3 bed/2 bath houses are going for over $500K, only some have basements to rent out. I want to stay in DC, so would be paying increasing rent anyway. What are your thoughts on buying a property as primary residence and rent to tenants or Air BnB? Do you have maximum price or other criteria for your deal analyses?

Thanks!
Piper

[Stefan Tsvetkov]

@Andy Gross I find DC quite interesting, as it was super overvalued at 2007 peak (54% vs historical price/income relationship), yet the subsequent price correction there was only 12%. 

As of the 1st quarter of 2020, DC is overvalued by 17% 'only', as it experienced strong income growth post its previous overvaluation. Can PM me if any questions.

That said DC is among the most overvalued U.S. markets right now at its above valuations.

[Chris Seveney]

@Stefan Tsvetkov

DC is more resistant to market turns because the majority of workers are government workers or contractors. During a recession the government typically increases its size to reduce unemployment. The other reason is density. Washington DC has low height restrictions and many neighboring communities have single family zoning

If you tell anyone in the area you are looking for a duplex in NOVA or MOCO they will look at you like you have six heads because they don’t exist.

[Russell Brazil]

Originally posted by @Stefan Tsvetkov:

@Andy Gross I find DC quite interesting, as it was super overvalued at 2007 peak (54% vs historical price/income relationship), yet the subsequent price correction there was only 12%. 

As of the 1st quarter of 2020, DC is overvalued by 17% 'only', as it experienced strong income growth post its previous overvaluation. Can PM me if any questions.

That said DC is among the most overvalued U.S. markets right now at its above valuations.

 DC housing trades at only 4x median incomes, a very reasonable price. For perspective, LA, San Francisco and NYC all trade closer to the 9-12x income range, Boston trades at 6x income. 

The DC area is home to 11 of the 25 richest counties in America. 35% of home sales are currently all cash sales in DC. 

[Stefan Tsvetkov]

Originally posted by @Stefan Tsvetkov:

@Andy Gross I find DC quite interesting, as it was super overvalued at 2007 peak (54% vs historical price/income relationship), yet the subsequent price correction there was only 12%. 

As of the 1st quarter of 2020, DC is overvalued by 17% 'only', as it experienced strong income growth post its previous overvaluation. Can PM me if any questions.

That said DC is among the most overvalued U.S. markets right now at its above valuations.

Besides strong income growth, DC housing shortage (population/housing ratios) increased by 8% since 2010-2019. The latter has driven valuation metrics to higher sustainable levels. It is an additional reason why DC is not super overvalued now, compared to where it was in 2007.

[Leo Watts]

@Russell Brazil

That’s an interesting stat about income vs housing prices. I think DC does seem reasonable compared to NYC or California, but not to many other markets. We’ve seen a big drop in rental prices but no subsequent drop in housing values.

[Russell Brazil]

Originally posted by @Leo Watts:

@Russell Brazil

That’s an interesting stat about income vs housing prices. I think DC does seem reasonable compared to NYC or California, but not to many other markets. We’ve seen a big drop in rental prices but no subsequent drop in housing values.

 Big drop in rental prices? My rents are still going up. My average rent increase on turnover in 2020 has been 4.5%. 

When we have limited sample size in a data set, which we are having now, the low sample set can skew the data to create information that is not reflective of reality.

Good example of this phenomenon for instance happened in Petworth 9-13 years ago. Data set was skewed by a lower number of renovated rowhouses selling while a higher number of condos and non renovating row houses were selling. With the data set skewed towards the cheaper end of the spectrum, median prices in the neighborhood were dropping, while in reality the price of any 1 particular property was strongly rising. 

With an extreme constraint on inventory, we will see again skewed data that doesnt quite tell the story of whats actually happening, and I imagine any data that shows a large drop in rents is likely due to a small sample size.

[Leo Watts]

@Russell Brazil

Anecdotally I’m seeing many apartments offering 1 to 2 months free rent, in established and desirable buildings, plus waiving in move in fees.

I found this article in The Washingtonian about DC rental price drops from last month.

“New data confirms what common sense probably already led you to suspect: Fewer people want to live in buildings with hundreds of other units—and which charge premiums for shared amenities like pools and gyms—during a public health crisis. Delta Associates, an authority on the local commercial real estate market, released the findings in its 2020 second quarter report, concluding: “The pandemic has impacted all major apartment market metrics.”

In short, all those glassy, luxury buildings that have risen around the city in recent years have become emptier and less expensive since Covid-19 hit. “Severe job loss coupled with the closure of multifamily buildings to the public resulted in a significant slowdown in leasing activity,” according to the report. “Tours of multifamily buildings went virtual, but this was not enough to sustain a more normal level of leasing activity.”

Within the District, rents in high-end buildings are down 3.5 percent compared to last year, in large part because those apartments are having to offer discounts to attract residents. Average rent for a luxury DC apartment is currently $2,561 a month, compared to $2,649 last June.

AD

Prices have been particularly affected around NoMa and H Street, where buildings are offering an average 6.3 percent discount off full-price rent, and around Capitol Riverfront and the Southwest Waterfront, where they’re knocking off 5.7 percent.

Vacancies in those neighborhoods are also the highest. NoMa and H Street apartments are experiencing an 8.2 percent vacancy rate, while developments in Navy Yard and Southwest are seeing 7.7 percent vacancy. The vacancy rates in those areas were less than 5 percent at the same time last year. District-wide, the average vacancy rate in luxury apartments is currently 6.8 percent, compared to 4.1 percent last year.”

[Joaquin Camarasa]

In regards to condos, I agree with @Leo Watts I have been out recently showing condos in DC and Arlington. When representing the buyers, I have spoken with several sellers, I have heard the same story over and over again, they are moving back to their hometowns since they can work remotely. They are noticing the pool of renters has decreased and there is a drop in rents that is triggering them to sell. Supply of condos is rising and demand is going down allowing the buyers to negotiate better terms and substantial price reduction. As I mentioned, I am noticing this with condos, sfh and townhomes are a whole different story.