Ask McEnearney: Is it a boom or a bubble?

This week’s Q&A column is written by Rebecca McCullough of McEnearney Associates Realtors®, the leading real estate firm in Alexandria. To learn more about this article and relevant Alexandria market news, contact Rebecca at 571-384-0941 or email [email protected]. You may also submit your questions to McEnearney Associates via email for response in future columns.

Question: Is it a Boom or a Bubble?

Answer: Happy New Year, real estate readers! I hope you’re as excited as I am for another unpredictable year in real estate in Northern Virginia. These last couple of years have been ones for the record books — unprecedented times have led to unexpected results. Who would have thought the real estate market would soar during a global pandemic? More than surviving, the market is thriving. But…

Is it a boom or a bubble?

In my view — after analyzing the reports and many a deep dive into the economics — if it’s a bubble, it’s one made out of titanium.

Let’s look at why. There’s a trifecta of circumstances occurring right now, including:

  • Economic Inflation — We are starting to see inflationary pressure. Economic theory tells us that inflation leads to increases in real estate prices. The U.S. Bureau of Labor Statistics showed inflation was 6.2% from November 2020 to October 2021. Inflation as an isolated factor drives real estate price increases. But it’s not an isolated factor…
  • Housing Shortage — This is an enormous factor in our current outlook. There simply aren’t enough houses to meet the demand. After the 2007-2008 financial crisis, building decreased dramatically. This has had a carry-on effect, and today you’ll see reports that we are a whopping 5 million units short of national housing demand (!!).
  • Low Interests Rates — Finally, interest rates remained in the 3% range for almost the entirety of 2021, even falling below 3% at some points. With inflation rising, it is likely that interest rates will increase as well. However, as such a low baseline, an increase to 4% or 5% still leaves us with great mortgage lending rates. If a buyer can lock in 30 years at that rate, they are likely in a solid position with their investment.

Ah, but “it’s bound to slow down soon,” right? “Prices will moderate?”…right?

There is some belief that yes, we will see a more moderate market this year. However, demand is still incredibly strong, and inventory is so very low as we start the new year, that there’s no indication of things slowing any time soon.

We shall see. But here’s a current example in the zip code where I live (Alexandria/Ft Hunt area). There are almost 4,800 detached homes in existence here. Of that, there are six for sale. Six. (That’s 0.125% availability for my fellow math geeks.) The demand hasn’t waned, so that’s dozens of potential owners looking to buy now, with six available homes in this area. That is just one example, of course, but it’s representative of the current constraints (or opportunity, depending on your position!). There are neighborhoods all across Northern Virginia with similar statistics.

Unsurprisingly, the current environment is impacting the price of homes. There are daily headlines of double-digit home value increases. What’s the reality here in Northern Virginia? Take a look at the chart below — you may find the numbers surprising.

As per the chart, there was an 8.6% increase in median home prices in Northern Virginia in 2021. No doubt you heard stories of crazy sales prices. We can see that the communities with double-digit increases are more suburban areas. This makes sense when we factor in the impact of COVID-19. The pandemic has many people changing the way they live. With many now working from home, the demand for homes with offices, with space to play and “spread out” have caused people to move further away from the city.

So, what, if anything, will change over the course that could threaten this “titanium bubble”? There is not a single indicator to look to, other than the concept that markets are cyclical. But when price increases do eventually subside, they may never fall back even to where they are today. Looking to buy? There is no point in waiting if you desire to buy a new home. Prices will continue to rise, and as interest rates rise — even as they remain reasonable — your buying power will decline relatively.

So, the time is now! Inventory and prices historically peak in May. Start looking now, possibly taking advantage of the current inventory before the mass of buyers wake up from their hibernation.

Finally, if you’re planning on a buying a home in 2022, get ready, keep your expectations reasonable and your patience reserve high! It may take many offers before you are successful, but in my experience, everyone with patience and a positive outlook eventually finds the place that is meant to be theirs. And if you want to sell, make sure you secure a reputable agent who can maximize your opportunities in the face of high buyer demand. And, you know you can always reach out to me.

Rebecca McCullough has built a successful real estate business in Alexandria and Northern Virginia by providing excellent service to her clients. If you would like more information on selling or buying in today’s complex market, contact Rebecca today at 571-384-0941 or visit her website RebeccaMcCullough.com.

If you would like a question answered in our weekly column or to set up an appointment with one of our Associates, please email: [email protected] or call 703-549-9292.

McEnearney Associates Realtors®, 109 S. Pitt Street, Alexandria, VA 22314. www.McEnearney.com Equal Housing Opportunity. #WeAreAlexandria