Ask Adam: Are We in a Real Estate Bubble? Dorota Dyman & Associates Real Estate

I’m certainly not an economist by any stretch, but I can share my personal thought based on my professional experience as an Arlington real estate broker.

I think we can all agree that real estate home values have been rising throughout 2013.

·        RBI is reporting that the median price of sold homes in Arlington is up 6% from this time last year.

·        The Case-Shiller index reports a 7% home price increase for the Washington DC area over the last 12 months.

Buyer activity has increased in 2013. Some of this is due to a release of pent up demand from would-be homebuyers that have been waiting on the sidelines for the real estate market to stabilize or the price of their current home to reach a point where they could afford to sell and buy something that fit their current needs.

Another factor leading to an increase in prices is the low supply of housing inventory. New home development is still in hibernation. The rental market has been strong enough that many would-be home sellers are opting to rent their homes rather than sell them because of the favorable rental income they can generate.

Other homeowners are either happy where they are or have not seen the value of their homes reach a point where they are motivated to sell.

So if prices are rising, does that mean we are in a bubble? No, but having been through the bursting bubble of 2006/2007 we are all on high alert. I would even go so far as to say that some of us have been conditioned to feel that increasing prices will inevitably lead to a housing market bubble.

Looking back at what happened leading up to 2006… prices were rising at a much faster speed. You may remember zip codes in Arlington experiencing greater than 20% appreciation in 2003 and 2004. Prices are rising again, but at more reasonable pace. An important (but subtle) difference is that home buyers are not depending on rapid appreciation.

You’ll also remember the infamous mortgages that people were obtaining, which they would never qualify for under the current standards. Today’s growth is happening on a more stable base of financing where homebuyers are bringing equity to the closing table and having to meet higher standards for qualification.

Looking forward to 2014, I do expect buyer demand to taper somewhat. This will be due to an easing of the pent up demand I described earlier and an increase in the cost to own due to higher prices and higher interest rates. There are two other important factors to keep an eye on that can affect the real estate market:

The local job market. Economists and politicians are warning that the local job market may soften as the federal government begins to shrink. I expect the amount that the real estate market is affected will be in direct proportion to how deep and abrupt job cuts are.

I expect that interest rates will continue to climb. I think that the market will be able to absorb rate hikes into the 5’s, but if we start talking about 6% or higher, then I expect them to adversely affect the real estate market.

It’s a polarizing subject to say the least so I am looking forward to hearing your thoughts on the matter in comments.

As mentioned in my previous article, for every new page like we receive before December 15, we are going to make a $1 donation to the Arlington County Secret Santa program. It’s a program that purchases gift cards for children of low income families and in foster care, low income elderly and disabled Arlington residents that would otherwise go without during this upcoming holiday season.