Why Some Buyers Are Still Waiting and What This Means For The Washington DC Regional Housing Market

I was at a meeting the other day and was asked by a colleague why I thought more buyers were not coming out and purchasing homes. After all, rates are at all time lows, prices have dropped significantly and the prices seem to be stabilizing across the region, and even increasing in some communities.

From this Agent's perspective, it was a great time to buy.  Everyone should be purchasing a home.

Well, it's not that simple.

There are two types of buyers that drive housing demand.  The first is our basic "shelter" buyer.  They need a place to live. Period.  They buy the house they can afford because renting isn't an attractive option. They NEED a roof over their heads. Often this buyer purchases in outlying communities, or entry level price points.  The second type of buyer is the "discretionary" buyer. These buyers WANT to either invest in real estate, or to "move-up" into a larger home or "move-up" into a better neighborhood.  Put simply this is the age old battle between;  NEED AND WANT.

The buyers, for the most part, that have been out buying in NOVA have been "shelter" buyers and "investors".  However, both of these groups tend to focus on the entry level price points.  Investors look here because this is where they can make the greatest return on their investment through flipping or acquiring rental properties.  Shelter buyers have been looking here because this is where the majority of them can afford to buy.  Since they buy at the low end of the market, they have created high demand for these homes and as a result the price points for these homes have increased.  

Unfortunately, before the market can truly begin to pick up steam across the board, it will need a heavy dose of the buyers thatWANT to buy a new home, and are willing to pay higher prices and/or make significant improvements into the home after purchase. We still don't see very much of these "move up" buyers that are going to either sell or rent their current home in order to move up into a "better" lifestyle for themselves.  Now, why is that?

Confidence

Let's face it, excess isn't exactly in vogue these days.  We're all wired to do more with less, to cut unnecessary expenses, and to seek value in every dollar spent.  Only the most severely disconnected of us don't focus on a budget. In order for these WANT buyers to come out and play, they need confidence in; 

1. Credit - Yes, credit is available and rates are low, but buyers have to have confidence that "their" credit is sound and that they have confidence in their ability to repay a higher mortgage payment.  Most do not want higher payments at this point, so buying up requires much larger down payments in order to buy these homes than we have seen in a long time.  For example, you have a $400,000 mortgage on a $600,000 home and you want to purchase an $800,000 home.  To keep your payments even, you'd need to put $400,000 down on the new home, not just the $200,000 you have in equity. (This is also why buyers are requiring that homes either be as updated as possible to consider purchasing, or severely discounted.)  Well that money has to come from somewhere, and few people want to deplete their savings.  As rates rise from their current crazy-low level this will be even a harder hurdle for buyers to get over, because the payment shock will be so much higher in the future.

2. Market Confidence  -  People have to believe in real estate again.  The fact is that so many people were burned in the housing meltdown that I doubt if they will ever truly believe in real estate as an investment again.  Even though the long term facts are on the side of real estate, prices are stabilizing, average days on market decrease, and supply of homes for sale drop, many buyers still "feel" that there is an avalanche of shadow inventory out there just waiting to come on the market.   That may or may not be true, depending upon where you live.  In addition, with the national real estate story being dominated by Las Vegas, Florida, and California, even in markets where things have returned to normal all you hear about is the doom and gloom of these bubble markets.  This takes a huge tool on buyer Market Confidence.   Until buyers have strong market confidence needs will outweigh wants.

3. Overall Confidence in the Economy  - Move-up buyers tend to hold leadership, or senior positions at their places of employment.  As a result they are more focused on the overall big picture.  Even if they are still drawing a steady pay check, they see how hard business has become and how fragile their current level of success may be.  As a result, they are not overly optimistic in the short term.  They see that another economic downturn could occur and will only come back into the housing market when they are confident that their companies will continue to be profitable and stable.  When you add in the changing political climate for the DC area, these business leaders are deeply worried about how the US Government's budget will be adjusted.  This will have huge ramifications for our local market, and there will surely be winners and losers when the dust has settled.

What Does This Mean

So where do we go from here?  For buyers, if you are renting a home and have strong earnings, good credit, and want to own the home and eventually pay off the mortgage, then now is a great time to buy.  If you have liquid assets and you are looking for safe predictable streams of income to supplement your retirement, then buying an investment home is a great opportunity right now.  That's not going to change for sometime.  If you're thinking of moving up, then now may be the best time to do it in your lifetime, but tread carefully and seek the best deal possible.

However, if you're a seller, then what do you do? Go back to basics, price, location, and condition.  The location can't be changed, the price is ultimately set by the buyer, so condition is the only competitive advantage to be gained by the seller. Focus on kitchen, appliances, bath, fixtures, floors, paint, hardware, and landscape.  The higher priced your home is in any given price range, the more important these elements are to buyers.

I remember what my Grandmother used to tell me when I was a kid, "This too, shall pass."  There will come a time when this market is behind us, but I don't see it happening soon. We've got another 3-5 years of this in front of us so focus on the basics, be realistic with your expectations, and hold steadfastly to your goals.

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