DMV MARKET

MONTHLY PAYMENTS AND MONTHLY SALES VOLUME – % CHANGE FROM 2021

Monthly Payments and Monthly Sales Volume – % Change From 2021

Assuming 20% down, 30-year fixed rate

Mortgage Rates

Following three years of historic lows, mortgage rates began to creep up at the end of 2021. In January 2022, Freddie Mac’s national market survey pegged the average 30-year fixed rate at 3.45%, 71 basis points higher than a year before and the highest rate since March of 2020, but still near the all-time low of the survey’s 50-year history. In the spring, the Federal Reserve began raising rates aggressively to curb accelerating inflation, and mortgage costs increased accordingly.

The increased mortgage rates drove average monthly payments up dramatically, and the decreased affordability had cascading effects on demand. Consumers who secured mortgages with the lower rates of the past decade were less inclined to move, which constrained the inventory coming onto the market. The unprecedented pace and scale of the Fed’s rate hikes shook consumer confidence and sparked public discourse about a possible recession.

These market conditions cooled activity in the DMV’s residential real estate market, as illustrated by the chart below. Urban Pace used Freddie Mac’s survey to estimate monthly payments on the homes bought each month, assuming a 20% down payment and a 30-year fixed rate. As rates increased steadily, monthly sales volume fell short of 2021’s totals by growing increments. Per Freddie Mac’s survey, mortgage rates peaked in late October at just over 7%, and in November and December, sales volume was 45% lower than in 2021.

Lenders have been pushing more diverse products in an effort to meet consumers at a point that makes buying feasible. Adjustable-rate mortgages, which made up just 3% of new home loans in 2021, surged in late 2022 as rates climbed, and finished with 10% of the year’s market share. That’s the first time they have had a double-digit share of the market since before the financial crash of 2008, when they made up over a third of all mortgage applications in a much less cautious atmosphere. Lenders are offering other incentives as well, such as buydowns and free future refinancing.

The Fed has signaled that rate increases are not over yet, but also acknowledged that inflation has started to meaningfully ease. Whether or not that trend holds will be a significant factor in the vitality of 2023’s housing market.

TOTAL SALES VOLUME (UNITS) AVERAGE SALES PRICE

TOTAL SALES VOLUME (UNITS)

Residential sales volume in the DMV began with approximately 4,000 closings in January, nearly matching the pace set by 2021, which had the highest volume of the last five years. 2022 totals continued to mirror 2021 for the rest of the first quarter before falling behind 2021’s robust pace in the spring market as interest rates crept up. In the second half of the year, volume was consistently short of 2021 levels by a significant margin. While the first six months of the year totaled 14% fewer closings than the previous year, July through December missed the mark by 34%, causing 2022 to end with 55,034 sales compared to 72,460 in 2021, a 24% decline.

Average Sales Price

The average sale price in the DMV climbed by 5% in 2022, marking the fifth consecutive year of price growth. Pricing fluctuations followed the same seasonal patterns as 2021, but tapered off in the second half of the year as escalating rates suppressed demand.

Average Sales Price By County

The year’s decrease in sales activity was shared evenly across all counties in the DMV and in the District itself. Volume drops ranged from 19% in Prince Georges to 30% in Loudoun. At the end of 2022 sales totals were comparable to 2019, the last full pre-pandemic sales year. While activity was down, prices were up in every jurisdiction, with the largest increases in the least densely populated counties: Fairfax, Loudoun, Montgomery, and Prince George’s.

By Product Type

The challenging market conditions affected sales volume of all product types. Sales of single-family homes and townhomes both dropped by about 25%, while condo sales slipped by 21%. Single-family home prices increased the most, climbing 8%, while townhomes and condos grew moderately, up 4% and 1% respectively.

Rental Market Summary

The DC area’s Class A rental market saw a significant slowdown in leasing pace and overall demand in 2022. Granted, the torrid absorption rates of 2021, when thousands who abandoned the city during the pandemic came flooding back, were always going to be hard to follow. Vacancies were essentially re-stabilized by the first quarter of 2022 at 10.3%.

Rents followed exaggerated seasonal trends in 2022, surging through the first half of the year before tapering off in the Fall, and finishing Q4 with a 2% year-over-year increase. Many renters have likely seen their rents go up as the generous concessions that lured them back to the city expired. Class A renters are one of the primary consumers for new construction condos in the region, so it might have been expected that these rent increases would push many to consider buying. However, the increased mortgage costs and general economic uncertainty likely discouraged many of them from making a purchase until the market steadies and in turn supports rent growth.

The rate of rent growth will likely slow in 2023. According to CoStar, the DC region is projected to set a record for new apartment deliveries this year, with nearly 15,000 market-rate units scheduled to come online. It will be difficult for absorption to keep up, which means vacancies will likely increase and rent growth will stagnate.