It's always a (somewhat unexpected) pleasure when facts begin to support one's theories. So the report in the Sunday, January 20th Washington Post on their front page no less, was a welcome arrival. The headline of the report: Region's Home Prices Continue to Fall; Some Pockets Thrive.
Now before I'm accused of schadenfreude, and taking joy in falling home prices, let's be clear that I own a home as well, the price of which has fallen more than I care to say. What was satisfying is that my theory about the greater volatility of home prices on the suburban edge appears to be reflected on the ground, at least in the Washington Metro region.
The Theory:
Even though regional development patterns have been the same in the past few years as the past few decades (since the late 1940's to be precise), and most housing has been built on the suburban edges, now some 50 plus miles from downtown, the market for this suburban edge housing is declining. This is due to a number of factors including:
- changing demographics (fewer households with school age kids),
- longer commute times due to growing traffic congestion,
- higher gas prices (and the growing realization that they will continue to rise for years to come),
- concern about the need to reduce driving and greenhouse gas emissions, and
- the growing desire to live in more urbanized settings among the Baby Boomers and their kids, the Echo Boomers, the two largest American demographics.
This theory, of course, is a regional planners dream. If it does occur it should take years, maybe decades to fully play out. Even then there is likely to be at least some continued growth on the edges as the US population continues to soar.
If the theory is correct, though, it will be important for developers, builders, public officials and especially homeowners (at least those who hope to be able to sell their homes for more than they bought them in the future) to understand the coming shift in market forces. Frankly, it may takes years for this shift to become clear.
But maybe that's wrong. Looking at the latest data, it's clear that home prices are falling faster the further out a home is, at least in the Washington Metro region.
Prices in the District of Columbia are down 2% over prices a year ago, and prices in Arlington and Alexandria, the two most urbanized counties right next the the District, are down 2.5% and 2.3% respectively. In Prince George's County, which borders the District to the east, they are down only 1.6% while the next county out to the Southeast, on the other side of Prince George's from the District, is down 3.6%.
To the West, prices in Montgomery County, which lies on the District's Northwestern boundary, are down 4% while in Fairfax, which is to the West of Arlington and a second tier county, are down 6.6%. Home prices in the counties on the third tier out from the District, Frederick and Loudoun, are down 6.5% and 7.8% respectively.
The county with the biggest drop in home prices is Prince William County, outside of Fairfax and Loudoun Counties and third tier county, with a drop of 12.8%. This presents almost a perfect picture of prices falling faster the further out the home is.
However, before becoming too smug about this, there is at least one other factor at play here, namely production. Prince William County is where the most new homes were built in the past few years, followed by Loudoun and Frederick. It is probable that a large part of the drop in home prices is due to overproduction in the outer counties, and more limited production in the closer in, more developed counties and the District.
That said, oversupply is a function of the relationship of supply and demand. If the primary reason for the drop in home prices in the region is oversupply, this suggests that demand is lower in Prince William County relative to supply than it is in the District. In fact, there are still instances in the District of homes being bid up over their offering prices. This suggests there is still demand for housing in the District, while there is little in Prince William County. And that the closer a submarket is to the center of the region, the the better balanced supply and demand are.
What does this portend for the future, once the current housing slump is over in a year or two? Will the outer edge markets once again be the hot ones, with the highest home price appreciation and construction? This is possible given the need in the US for some 1.5 million new homes a year on average.
But then again, maybe not. It is just possible that what we see here is the beginning of a real shift in the housing markets, accelerated by the current housing crisis.
What do you think?
