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Why Buying A Washington DC Home Now Is A Moment Of Opportunity

Why Buying A Washington DC Home Now Is A Moment Of Opportunity

By G. Taylor Johnson

Anyone interested in buying a home has surely been following the news the past few years with stories of homes selling for tens of thousands over asking price and a feeding frenzy experience of ten to twenty offers on the same property with Buyers having to wave away all their rights and protections in order to be competitive. Those who succeeded in putting forward a winning offer have already seen appreciation of their homes’ values by 15%-20%.

You might ask, “Why should I buy now with inflated prices and high interest rates?” That is an excellent question and to answer it fully we need to take a look at economic principles, demographics, amortization schedules, and historical trends. In brief we can say that home prices will continue to rise while mortgage rates will likely decline and when they do there will be another upward surge in home prices for buyers (or appreciation for owners.)

What The Numbers Show

First, let’s take a look at the past two years of real estate activity. Contrary to what many at first anticipated, the pandemic sparked unprecedented levels of purchase volume. Take a look at closed sales volume for the Washington, DC region. This graph shows closed sales each month compared to the same month the previous year.

From July 2020 through June 2021, sales volume was exceptionally high. And while the sales volume decreased on a year over year basis July 2021 through May 2022, that decrease was not as great as the previous year’s increase, so over all, sales volume was still at a record high. Another way to put it would be to look at existing home sales nationwide. Even with the current decrease in sales, we are predicted to have sales volume .4 million homes above the total sold in 2019.

My point here is that the past two years have been exceptional years and comparisons to them can skew one’s interpretation. Let’s instead look at pre-COVID conditions to have a “normal market.” Doing so one can see that we are perhaps returning to normal. More on what that means for Buyers later.

Median Home Prices Will Continue To Rise

For those who are waiting for home prices to drop, keep in mind that the median home price in the Washington, DC region is today $160,000 more than it was five years ago. Don’t you wish you had purchased five years ago? Let me show you why this upward trend is likely to continue. It is a basic case of supply and demand. The supply of homes available is low and the demand is high, thus driving prices upwards. This is likely to continue for the next seven to eight years. The Millennials age group is currently at the age of the average first time home buyer, roughly 33-37 years old. As you can see from the graph below, the population of this age range continues at elevated numbers for close to another decade.

In addition to this high demand, there is a shortage of supply. The graphs below show the low levels of new home construction for the past fifteen years and the low levels of homes for sale.

The prediction therefore is that continued high demand for homes by those wishing to move out on their own will remain strong and the supply of active homes for sale will remain low, thus continuing to push up median sales prices in the long term. During the pandemic, some areas of the country witnessed exceptional rates of price appreciation due to high levels of migration, well above 20%. We are now seeing some price correction in those areas while other areas, such as the DC region, that had more reasonable price rises of 15-20% are slowing their rate of appreciation while the trend remains upward.

In the DC region, we still see listing prices holding level to a small increase while the median sales price continues to rise modestly. However, we do see more opportunity for Buyers to negotiate with the Seller for appraisal, finance, and inspection protections, more Sellers willing to give the Buyers a credit to help with closing costs, and in some cases, a negotiation for a lower price. However, the average sale remains competitive with at least two to three offers so it remains a Seller’s market.

And compare to the thirty-year average for median home prices.

Clearly the trend for both is upwards. I recommend to my clients that they buy their first home at the bottom of their budgets, perhaps a home that is not quite what they want, but it will do. Then in four to five years, they turn it into a rental and purchase a second home that fully meets their needs. In this way they can take advantage of both of these thirty-year trends and build generational wealth over time.

Now Is The Time To Buy A Home In Washington, DC

Let’s take a look at why buying a home in Washington, DC now is a good idea. Yes the interest rates are high, especially compared to the abnormally low rates we had the past few years, but historically over the past 30 years, the average rate was just under 8%, so the current rates are still below the 30-year average. And as we say, “you marry the house and you date the rate,” so you buy now and in a few years you take advantage of declining rates to refinance. (Or take advantage of cheaper buy-down rates to lower your interest rate now.)

Meanwhile, you are building equity through home ownership. Equity is the difference between what you owe and what the home is worth. With every monthly payment, you pay back a bit of principal on the loan and therefore raise your equity. Take a look at the amortization schedule below for a $360,000 home at an interest rate of 7%

You can see that in two years’ time you will have added over $6,700 to equity (over $19,000 in five years). Now if you add appreciation to that, assuming appreciation of 2.5% per year, in two years’ time the home is worth $378,255 (or conversely, it would cost you that much to buy it if you waited.) That is now an increased equity of $24,700 or nearly $30,000 in two years. You won’t get that paying rent or putting money into a savings account! Remember that equity is your money. This is an asset that can be tapped through a home equity loan or realized in cash through a home sale.

Let’s Find Your Next Home In Washington, DC

Your dream house in Washington, DC is out there. Let’s find it.

Keeping in mind that if mortgage rates decrease in the next two years, as expected, home prices will surge due to pent-up demand and the cost to purchase will increase, or the rate of appreciation of your owned asset will increase. It is your choice which side of the equation you want to be on. If you would like to explore how you can participate in building wealth and net worth over time, please reach out to me to have a conversation. I would be happy to share resources to help you get you on the path to home ownership in the Washington, DC area.

G. Taylor Johnson, Realtor

Eng Garcia Team

Keller Williams Capital Properties

Office: 202-243-7700

Mobile: 202-763-2483

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