Low Housing Inventory in Northern Virginia; Challenging for Buyers, Advantage Sellers!

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Housing Inventory at Historic Lows – Why?
The Northern Virginia housing market is in the midst of one of the most competitive environments experienced by buyers.  “Why?” is a common question asked of real estate agents, but the question is usually met without a complete answer, so I thought it would be a great topic to address in this month’s issue of Tim’s R/Eview!  The common answer given by most agents is simply “fewer homes for sale combined with an ever-growing number of prospective buyers”.  That response doesn’t really explain the cause.  The cause is a multi-faceted supply and demand side problem.  Here’s what I share with my seller and buyer clients to help them best understand how we navigate this type of market to ensure we reach their desired outcomes at full value.

Cause #1 (Supply Side – Lagging Builders)
The main factor contributing to the low inventory in Northern Virginia has been cautious builders who were badly hurt in the Great Recession.  As depicted in the first chart below, builders are simply producing fewer new home starts and have not only lagged demand, but also historical averages.  The average number of new home starts in the U.S. is about 1.6 million units per year.  Starts plummeted from the 2006 high of 2.3 million to just 0.5 million in 2009 (~70% drop) and still have not recovered to even the historical average.  Since 2009, builders have been making a slow climb back from the lows, but with each year still clocking well below average it has created an accumulated undersupply in the market’s wake.  Even in today’s strong market, the current level of 1.35 million starts is still 16% below average.
US Housing Starts
Cause #2 (Supply Side – New Buying Competitors)
A much-overlooked aspect that has helped produce low inventory nationally, and to some degree in the Northern Virginia housing market, is the advent of buy-to-rent companies like publicly traded Invitation Homes (INVH) and American Homes 4 Rent (AMH).  The mission of these buy-to-rent companies is to buy residential homes for the sole purpose of holding the asset as rental property.  The buy-to-rent market has been historically filled by individual investors, but billions of institutional dollars have been raised by public and private companies alike organized as Real Estate Investment Trusts (REIT’s).  In fact, during the 2011-15 period this sector accounted for as much as 33% of the buying activity in several markets as these bourgeoning companies purchased many of the foreclosures, fixed them up and then introduced them back to market as rental properties.  INVH and AMH are only two examples of such companies and alone they have a combined market cap in excess of $20 billion.  These companies have made an impressive buying impact.  The first-time home buyer, entry level market has been most affected as these homes are the primary focus of buy-to-rent companies.
Cause #3 (Demand Side – Low Mortgage Rates)
Buyers in the Northern Virginia housing market have been coming off the rental sidelines to take advantage of historically low mortgage rates.  This is especially true in the last year or so as rates have increased 25% off multi-year lows prompting buyers into action in fear of escalating mortgage cost and declining purchasing power.  My R/Eview – April Issue (“Mortgage Rates Have Likely Bottomed”) discussed this interest rate topic in great detail.
Cause #4 (Demand Side – New Household Formations)
The U.S. adds nearly 1 million new households per year.  Most new households have resorted to rental housing with fewer homes available for sale and rising prices.  This group, whose numbers have been stacking up over the years, is unwinding and desperately trying to enter the home buying market.  As they do, more demand is introduced to the buy side market.  The Northern Virginia area is no stranger to this impact on low inventory as our region is very attractive for hew household formations.
Buyer Challenges to Continue – Leverage/Advantage to Sellers & Owners!
The next chart below (Inventory Forecast) clearly depicts the low supply in the Northern Virginia region.  This chart shows the home listings in Fairfax County for the past 9 years.  Fairfax County is our largest county in the Washington, DC metro region and its low inventory problem is indicative of every other county in our area.  The chart displays a clear downtrend in listings for the past 3 years (marked by lower highs and lower lows), which is projected to continue into 2019.  Northern Virginia home buyers – don’t despair.  To be sure, thousands of homes are still being bought and sold in our region each year.  Last year, 37,000 homes in excess of $20 billion were sold in just Northern Virginia alone (between our three Virginia Realtor® associations essentially covering Fairfax, Arlington, Prince William and Loudoun counties).
Executive R/Eview
Today’s experience of relatively low inventory in the Northern Virginia housing market is making the home buying process more challenging for buyers.  The leverage pendulum presently rests with sellers and should materially remain that way for the foreseeable future.  Lagging new home starts by builders, market participation by buy-to-rent companies, low mortgage rates and new family formations are the chief causes of low inventory.  The bottom line – housing stock in the Northern Virginia region historically averages 5 months’ supply.  Current stock is just 1.5 to 2 mos.  The factors that have caused our low inventory environment are examples of abnormal market behavior, ultimately producing abnormally low housing stock.  Economic theory will eventually prevail, market participants will move to normalize their behavior and housing stock will regress back to the mean.
In today’s market it’s even more vital for buyers and sellers to partner with the most experienced and knowledgeable real estate agents.  For my Northern Virginia home sellers, I provide a selling strategy that is perfectly aligned with today’s seller advantaged conditions.  My work extracts maximum transaction value for them. Conversely, when working with my Northern Virginia home buyers I have a harder working, business minded work plan to navigate this challenging market and ensure they reach their desired outcomes as equitably as possible.  Both of my strategies fit the specific needs of my clients in today’s market.  I’ll specifically address how I work with my sellers and buyers in next month’s R/Eview!

“Tough times don’t last. Tough people do.” – Gregory Peck

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