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Fell in love with a great house this weekend and thought of making a bid on it, only to be deterred by news of the rioting in Paris? No, I didn’t think so. But that’s just the kind of fuzzy logic that doomsayers who claim the real estate bubble is about to burst continue to promulgate. The golden rule of real estate is that location is king, and when it comes to forecasting the future of the market, we would all do well to remember that real estate, above all else, is a local business. It’s like what they say about Las Vegas: What happens here, stays here. The real estate market is unlike the stock market, because each region of the country has a real estate market that, although affected by national events, is independent of other areas. Thus, although there may be bubbles brewing in other areas, the Washington, D.C., metropolitan region is in a unique position to continue to see solid growth in the near future. LAW OF SUPPLY AND DEMAND Those who believe we are in a bubble are failing to appreciate the basic law of supply and demand. The demand for housing in the Washington region is very high, and the driving force behind demand is job creation. The more jobs that are created, the more people will move into a region. And there is no shortage of jobs in the Washington region, thanks in large part to terrorism-prevention efforts. In a recent study about job creation, the Northern Virginia Association of Realtors found that in the last year, Washington added “84,500 new jobs, which translates to a need for approximately 53,000 new housing units. In a typical year we build between 28,000 and 30,000 new units in our area, including rentals. Therefore this year alone will result in a housing deficit of 25,000 units.” One reason real estate markets decline is that a major employer in the region collapses or moves. This region’s major employer is the federal government, and there is no chance of the government disappearing or moving to a new city. This stability provides a cushion for our region that other areas of the country simply don’t enjoy. Perhaps even more important than the solid demand for more jobs in our region is the incredible restriction on supply. Land, unlike stocks, is a limited resource that cannot be created as demand increases. In fact, the supply of buildable land is decreasing as demand is increasing. All three jurisdictions have issues with continued real estate development. Washington has many historic districts that limit growth opportunities that would otherwise allow more development. Community groups often protest proposed new developments, such as the baseball stadium in Southeast. In order for the stadium project to move forward, the city has been forced to use the costly and time-consuming power of eminent domain, which allows the city to appropriate private property for public use, in order to assemble a parcel of land large enough to build the stadium. Add the city’s notoriously difficult permitting process and bureaucratic inefficiency to the mix, and it becomes almost impossible to add significant housing stock to the District. The surrounding suburbs are in no better position to alleviate the shortage of supply. In Northern Virginia, “smart growth” proposals in Loudoun County aim to restrict the availability of buildable land by requiring new homes to be built on large lots to preserve the more rural feel of the county. In Maryland’s Montgomery County, there is the interminable fight over the Intercounty Connector, and there is a temporary moratorium on issuing building permits in Clarksburg. The town of Chevy Chase also approved a six-month freeze on demolition and construction of new houses, which limits the availability of more housing near the city. And in Prince George’s County, Md., it has taken decades to bring the National Harbor project to life, despite the clear need for economic growth and new housing. Further complicating matters is the fact that new housing that is permitted to be constructed is increasingly more expensive to build. With the devastation to housing in the South from the hurricanes, the cost of building materials has reached unprecedented levels. Add to that the dearth of skilled tradesmen, such as carpenters and masons, which has forced builders to pay higher salaries to the few craftsmen that are available. What do you think builders do with these increased costs? They pass them right on to buyers. These hard costs are forcing up the sales prices of new construction whether the market slows down or not. POP, POP, FIZZLE? Despite the enormous growth in property appreciation in Washington, D.C. real estate still is a bargain compared to some of the other major markets in the United States. In August, the National Association of Realtors (NAR) released its most recent report on the median sales prices of metropolitan areas in the United States. The median sales price for existing homes in the Washington metropolitan region is $429,200. Compare that with the median in New York of $506,800 or San Francisco at $726,900, and it’s clear that Washington prices could go up substantially and still be below those in similar major U.S. metropolitan markets. Doomsayers frequently point to the rapid rise in the price-to-income ratio. They assume that if housing prices have increased by 77 percent in the past three years, which they have, according to NAR, then incomes must rise commensurately or there will be a bubble. This is misleading, since what buyers are most concerned about is the ratio of the cost of servicing the loan to income. In other words, what percentage of your gross income is used to pay your mortgage? Because Washington employs so many highly skilled workers, the median income for local residents is higher here than in other metropolitan areas of the country. This higher wage scale allows Washingtonians to pay more for homes and still have a low income-to-mortgage-payment ratio. Washington’s median buyer is paying 24 percent of his income toward mortgage payments. In the top 20 metropolitan markets in the United States, the average is 30 percent. Again, this clearly demonstrates Washington’s comparatively affordable housing. OUTLOOK FOR 2006 If, as expected, the Federal Reserve continues with its current interest rate increases, and there is a smooth transition in the Federal Reserve once Alan Greenspan bids his final farewell, mortgage rates will continue to rise slowly. NAR expects rates for 30-year fixed-rate mortgages to hover at approximately 7 percent by the end of 2006. This modest increase in interest rates still keeps the cost of borrowing money at near-historic lows. Couple this with continued job growth and constraints on the availability of developable land, and there is only one conclusion: Prices will be forced up again in the next 12 months. Expect prices to increase at a moderate 4 percent to 5 percent in the next 12 months.
Joseph Himali is the founder and principal broker of Best Address Real Estate, a full-service brokerage licensed in the District, Maryland, and Virginia, and based in Georgetown.

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