Get Ready for the Spring Market

Get Ready for Spring!

By Nadia Evangelou, NAR Research

Mortgage rates are starting off in the new decade at very good levels. According to mortgage finance provider Freddie Mac, the 30-year fixed rate mortgage dipped to 3.7 percent in the first two weeks of January, compared to 4.5 percent a year prior. Thus, mortgage rates started off the new year nearly 80 basis points lower than they were at the start of 2019. At the same time, the unemployment rate is below 4.0 percent, with inflation hovering around the Federal Reserve’s 2.0 percent target. In this fairly stable interest-rate environment, homebuyers are expected to benefit in 2020. Economic activity early in the year usually provides useful clues about the future. Let’s take a deeper look at some of the economic factors expected to affect the housing market at the national and local levels.

Employment The labor market continues to be one of the economy’s strongest points. Nationwide, employment grew an average of 1.4 percent per month from January through November 2019, pushing the national unemployment rate down to 3.5 percent in November 2019. Employment grew 1.6 percent per month during the same period in the District of Columbia, while increasing 1.4 percent per month in Montgomery County. However, the unemployment rate in Montgomery County as of November was much lower than the national level, at 2.6 percent; it was 5 percent in the District of Columbia.

Employment is expected to increase further in the metro area since Amazon will soon place the company’s second headquarters in Arlington, Virginia. Amazon expects to add 2,500 new jobs in the area annually during the next 10 years. And in regional economics, whenever a new

job is created, the increased demand for local goods and services may lead to additional jobs. This increase in jobs, in addition to the new hires by Amazon, is referred to as the “multiplier effect.” While the multiplier varies by industry and area of the country, each additional hire by Amazon can be expected to add two to four additional jobs to the local economy. Assuming that holds true, then 7,500 to 12,500 new jobs are expected to be added in the market every year. Thus, for the next 10 years, Amazon will boost employment every year about 17 to 28 percent in the Washington, D.C. area.

Construction Nationally, housing starts have increased over the last eight years. NAR estimates that construction around the country will rise 12 percent in 2020. In Montgomery County, permitting increased 19 percent between 2017 and 2018. However, in the District of Columbia, the number of total permits dropped 24 percent during the same period.

Construction is still lagging in both counties. It seems that housing production cannot keep up with population and employment growth. For instance, the population in the District of Columbia grew about 16 percent between 2010 and 2018, compared to 6 percent nationwide. In Montgomery County, population increased 8 percent over the same period. Moreover, vacancy rates are low in both counties (10 percent in the District of Columbia and 6 percent in Montgomery County) compared to the national level (12 percent) as a result of housing underproduction. Thus, an additional 25,000 jobs over the next decade as a result of the Amazon effect, coupled with the additional 50,000 to 100,000 jobs (due to the multiplier impact), will add new challenges in these counties as well.

Mortgage market Mortgage rates have been declining in the first two weeks of 2020. Thus, homebuyers can benefit from lower rates. They should bear in mind that, back in 1982, the rate was over 17 percent for more than a year. Historically, the average mortgage rate dating back to 1972 is 8 percent. Therefore, rates are still historically low. Looking ahead, NAR is forecasting the 30-year fixed rate mortgage to average 3.8 percent for 2020.

How can homebuyers benefit from these lower rates in the District of Columbia and Mont gomery County? Comparing the monthly payment at 3.5 percent and 4.0 percent rates, homebuyers in the area will pay $140 less on average every month for their payment at a 3.5 percent rate in these counties.

Real estate activity

Nationwide, the National Association of REALTORS ® forecasts that home sales will increase 4 percent in 2020. Since employment in both the District of Columbia and Montgomery County is growing faster than nationwide, these two markets are expected to outperform. Every year, transactions and prices tend to be above-trend in the summer while activity typically slows down in the winter. The number of home sales actually increases significantly in the spring season. Nationwide, sales activity between February and March typically increases by 34 percent while prices rise by 3 percent. Therefore, the months ahead will be a busy period for REALTORS ® .

All in all, the combination of strong employment growth and limited housing supply is expected to push up home prices and decrease affordability in the Washington, D.C. area. How the factors above affect the local housing market in 2020 will be worth watching in the months ahead.