Demand Pulled Forward, Or Breakout Growth? | Pound Ridge NY Real Estate

The housing market in the Washington metro area eased in March, but fundamentals remain strong.  Because of distortions in recent years, it is difficult to know definitively if sales for the entirety of 2012 will outpace 2011.  However, demand is likely to continue to grow in the near term, posting stronger figures in April.

Home sales in the Washington metro area[1] as reported by Real Estate Business Intelligence (RBI) jumped 33.4% from February to March, but eased 3.8% in March of 2012 compared to March of 2011.  The year-over-year change in sales is important as it tells us how the trend compares to a typical spring or at least the most recent.  If the year-over-year trend is rising, it bodes well for the market.  While the year-over-year pace of sales in March eased 3.8%, it was up 1.8% in February.  News reports are rife with concerns that this year’s strong spring market is a reflection of demand being pulled forward from the late spring or summer, when it would typically peak.  Mortgage rates rising from record lows, higher fees at the FHA, and a warmer winter have all been cited as factors.  So, which way is the Washington metro area headed?

Home sales typically rise through the late spring due to the end of the school year and the surge of families delving into the housing market.  Families tend to require more bedrooms and square footage.  As a result, the absolute number and the share of homes sold in the 1,200 to 2,999 square foot range[2] tend to rise during the spring and summer and decline slowly thereafter.  As pictured below in the bars to the left of the green line, the share of home in this range indeed followed this pattern in 2010 and 2011.  Note that both the winter markets of 2010 and 2011 were atypically strong.  The pattern for the spring of 2012 is depicted to the right of the green line in the chart below and contrasted with the spring of 2011.  It shows that there was a surge in demand in the family-sized homes during January and February, the type of demand that typically occurs later in the spring.   However, this pattern might also suggest that there was a large group of buyers with the ability to move during the school year; couples planning to have children, families with pre-school aged children, families moving within their neighborhood, or families with enough income to pay two mortgages simultaneously.  Sales of homes smaller than 1,200 square feet or larger than 2,999 fell in January and March relative to last year, so they were not a contributor to this springs’ strength.

The important question is whether sales of family-sized homes will decline in late spring giving back the early gains, or if they will continue to grow through the spring, outpacing last year’s sales levels.  A look at the pattern for new pending sales provides insight.  The share of new pending sales in March that were in the 1,200 to 2,999 square foot range rose in December and January, pictured below, which translated into stronger sales in January and February.  The share of new pending sales in this range eased in February, but jumped again in March.  This pattern suggests that sales of family-sized homes are likely to climb in April in the typical pattern and will outpace last year’s figures extending the strong spring sales pattern that has occurred to date.

Market fundamentals support a pattern of growth.  The unemployment rate in the Washington metro area averaged 6.0% in February of 2012, which is above the 5.9% level from a year ago. However, there were more than 70,000 additional employed persons in March than a year earlier, suggesting that the market’s strength has drawn more people back into the labor market to look for work.  While the unemployment rate can impact confidence and perception, for home sales, the number of employed persons is what matters.  Employment has been trending upward and is likely to continue.

Finally, total new pending sales jumped in March of this year compared to February as depicted in purple below and they are 19.0% stronger than in March of last year.  Some may be alarmed by the rise in pending short-sales in the area, which tend to sit in pending status longer.  However, pending short-sales rose only 8.9% over the 12-month period ending in March and have a smaller share of new pending sales, which implies that the bulk of new pending growth was non-distressed and will likely translate into new sales in the near future.   Furthermore, Bank of America as well as both Fannie Mae and Freddie Mac announced new programs to streamline and speed up short sales, drawing down timelines.  Faster responses would reduce the number of short-sales hung up in pending status or those that roll into foreclosure and add them to completed sales.  If the programs are success, other banks would likely adopt similar programs, speeding up these transactions, which would in turn reduce the price discount on short-sales relative to the non-distressed portion of the market and reduce the flow of properties into foreclosure.  As this pattern catches on nationally, it would take stress of lenders, allowing them to lend more easily.

The Washington metro area has experienced a strong, early spring market.  Fundamentals remain strong in the area and the dynamics within the market suggest that sales should remain robust in the near term, outperforming last year.


[1] The Washington metro area is defined by RBI as Alexandria City (VA), Arlington County (VA), Fairfax City (VA), Fairfax County (VA), Falls Church City (VA), Montgomery  County (MD), Prince George’s County (MD), and Washington, DC

[2] This range was selected as typical of a family with children.  Homes greater than 2,999 square foot require an income that may not be representative of a typical family household and who may therefore not be budget constrained to owning just one home during the school year.

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