Determining Market? It's More than Price Statistics

I spent nearly an hour on the phone with a gentleman the other night talking statistics and the real estate market in the Washington, D.C. area (one of the hottest markets in the nation). He's trying to decide on buying a home in this area and whether he would be wise to wait and buy or buy and wait.

Looking over the statistics provided by the D.C. area's local multiple listing system (Metropolitan Regional Information Systems, Inc.), it was apparent that you can make the stats say anything you want them to. And in this renter's look over, his view of inventory and sales prices is pushing him more toward renting.

Remember a few months ago when nearly every media outlet was concerned about dropping average sales prices during the fall? Well, this guy got me looking deeper than just the average monthly price and guess what I found? In the final quarter of every year in the last five years for the D.C. area, the price appreciation slows. Another piece of information was that without fail, from 2001 to 2006, every January, the average sales price was less than the average sales price in December.

And for those stat-o-philes out there -- for the last five years, every February average price has dropped from January's average sales price, except for 2005. Even this year's month-to-date average sales price is down for February 2006, right on schedule.
You have to be careful with statistics. Especially when those who are quoting them are just now looking them over for the first time -- they might hurt themselves if they're not careful and take a few homebuyers with them.

What's really amazing are those who point to huge price drops in Los Angeles a few years ago after many years of unprecedented growth as a lesson for markets such as Washington, Phoenix and Miami -- all of which are experiencing hot real estate markets. In L.A., some homes lost half their value in the late 1990s. Naysayers warn homebuyers and owners that this could happen right in the Washington, D.C. market, right?

According to the Center for Regional Analysis at George Mason University in Fairfax, Virginia, when Los Angeles' "bubble" burst -- the local economy was also losing more than 400,000 jobs during that time period. That is not happening in the D.C. market.

This is why I always tell investors to look at the local economy before investing in a particular market. Home sales prices, rent to mortgage ratios, all of that is secondary when it comes to your analysis of the local economy. It's pretty simple: houses are where the jobs go at night. If a market can't keep up with its job growth, then home price appreciation will follow.

That's what's been happening in markets like the Washington, D.C. area. In 2005, the economy picked up more than 80,000 jobs -- right after a year of 72,000 new jobs being added to the economy in 2004. In 2006, local economists are projecting another 75,000 new jobs for the area, making it, once again, the hottest job market in the country. Since we keep building only about 30,000 new houses each year, according to CRA, the only thing that can keep the housing market from moving ahead is the vacancy rate in apartments and less expensive residential rentals. Which, statistically, are disappearing at a good clip in the region as well.

Fairfax County, for instance, one of the largest suburban counties for Washington, D.C., is experiencing a landlord's market of sorts. In the 4th quarter of 2005, rentals through the MLS are disappearing faster than they are listed. About 80 percent of hi-rise apartments rented out for an average of $1,599 (a 19 percent increase in rent); mid-rise apartment rents rose 24.5 percent to $1,609 with an 85 percent absorption rate.

Meanwhile, single-family homes rented on average $2,164 with an 85 percent absorption rate. Investors with townhouses and garden-style apartments rented out 94 and 95 percent, respectively, of their listings in the 4th quarter. The average town house rented for $1,785, while the gardens went for $1,331. As rents move upward, tenants will again begin moving toward purchases when they hit the level of being able to buy for the price they rent.

When it comes to statistics, the astute investor and home seeker will look at more than just one number reported each month. Average sale prices are driven by supply, demand and job growth. Rentals are driven by expensive residential home prices and vacancies which soften rents in the area. As you look toward purchasing your own home, be sure to take all numbers into account.

Published: February 24, 2006