NORTHERN VIRGINIA HOUSING 4Q18: Despite Good Fundamentals, the Market Continues to Soften

  • New Home Starts are down 11% from 2017 – even as closings are steady.
  • Loudoun County remains the most active market area in Northern Virginia, with 31% of all activity in the region. Demand in Loudoun remains strong but it is more expensive and supply constrained.
  • In Fairfax/Arlington, condo starts are down 58% as the market absorbs the wave of mid and high-rise activity that occurred in 2017.

According to Metrostudy’s 4Q18 survey of the Northern Virginia housing market, annual new home starts – attached and detached – numbered 8,420 during 2018, down 11% percent from 2017. While starts are off, closings are steady, which has helped keep new-home inventory levels healthy.  The months of supply of finished but empty new homes is the lowest year-end reading since 2005, so it is welcome news to see healthy new-home inventory levels in the face of relatively soft demand.

“Some of the decline in starts is due to weak condo activity, which is way down from 2017,” said Ben Sage, Director of Metrostudy’s Mid-Atlantic Region. “Even so, overall starts activity is below expectations based on otherwise supporting factors such as job growth and low resale supply. The good news is there are fewer open communities, so builders actually reported a slight increase in the number of sales on a per-subdivision basis.”

The median price of an existing home sold in Northern Virginia is $388,000 in 4Q18.  This is up 3.3% from one year. The median price of a new home sold in the fourth quarter is $539,000, which is up 2.1% from one year ago and is the highest on record. Despite these lofty prices, rising operational costs and minimal home price appreciation are narrowing builder profit margins.

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In the resale home market in Northern Virginia, 45,558 units sold through the MLS during 2018, according to MRIS. This represents a 3% decline from one year ago, but 4Q sales are down 11% from this time last year. Demand has tapered in the face of rising mortgage rates, and a lack of resale supply may be compounding the softness in sales activity. Listings are down 6% from this time last year to a mere 6,304 units – attached and detached – which corresponds to only 1.7 months of supply. This is unchanged from one year ago, and it is well below normal. These dynamics are contributing to steady home price appreciation, but not by as much as the supply-demand imbalance would signal. The Case-Shiller Home Price Index for DC Metro is up only 2.7% during the year ending December (latest available). This is below DC Metro’s long-term average, and it is second-to-last among the Case Shiller 20 markets.

Loudoun County remains the most active market area in Northern Virginia, though it continues to lose market share. During the year 2018, builders in Loudoun started 2,590 units, which is down 14% from one year ago. Loudoun’s share of Northern Virginia activity now measures 31% over the past year, which is down from 44% five years ago. Demand for homes is strong in Loudoun, but it is more expensive and very supply constrained.

In Fairfax/Arlington, condo starts are down 58% as the market absorbs the wave of mid and high-rise activity that occurred in 2017. Look for another wave of condo activity in the next few years with the phased arrival of Amazon’s second headquarters.  Single-family and townhome starts in Fairfax/Arlington, combined, are down 8%, which is in line with trends occurring in the rest of the market. In the outer suburbs, Frederick County experienced the largest numerical increase in starts activity. Its 600 starts in 2018 are up 93 units and represents growth of 18%.

“The market is seeing both headwinds and tailwinds,” said Sage. “The government started the year shut down but Amazon is coming. Stocks are volatile, but employment is strong. Home sales activity is softening, but mortgage rates are moderating. Resale supply is very low, but home price appreciation is weak. Consumers should save on taxes, but the tax incentive to own a home is mostly gone. There are many variables to consider, but if the government avoids more partial shutdowns then new-home demand should be flat this year.”

For information contact:
Ben Sage -703.574.8429

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