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The Question on Everyone’s Mind – Is This Sustainable?

Avi Galanti

It is no surprise that the current real estate market can be summed up in two words – CRAZY HOT. We saw property values (mainly of detached homes) begin to climb shortly after the initial shock of the COVID-19 pandemic (May 2020) and that trend hasn’t stopped since. It seems like every day we witness another record-breaking sale. Here are the big questions that are on many people’s minds, especially buyers – is this sustainable? and will the market reverse itself, resulting in massive price depreciation? Some even float the word “bubble”.

I am not an economist, and certainly can’t predict the future, but I am going to try and explain why I believe there is no bubble, and why market values will sustain, perhaps plateau to “normal ” annual appreciation levels, but not reverse.

One of the fundamental market forces that has historically and continues to drive the DC metro area, especially the city and its close-in suburbs, is that there is no new land to be developed. The small tracks we sometimes see being developed are all but negligible in terms of having the ability to “flood the zone” with newly developed housing and tip the scale of supply vs demand. The reality is that in order to build a new home, an old one needs to come down – it is a one-for-one exchange! In other words, the supply of new homes in close-in neighborhoods is limited and finite! New subdivisions and new neighborhoods are being developed in the outermost circles of the DC Metro, not in the red-hot neighborhoods in or around DC.

Housing supply shortages are not a new concept in our area, it’s been the case for many years. However, it’s been exasperated and brought to new levels with the pandemic! It really is the perfect storm. On one hand, we have the “baby boomer generation” living longer, healthier lives, aging in place, and delaying any move they might have contemplated because of the pandemic. At the same time, we are witnessing a booming Millennials economy fueling the new home-buyer market, looking to leave small condo apartments in the city in search of the perfect urban-suburban home! This dynamic is exacerbated by problems with supply chain and building supply shortages, as well as rising labor costs – the classic definition of “the perfect storm”!

If I were to provide an educated guess, I would say that we are looking at another 5-6 months of an extremely competitive market, followed by what I suspect will be a bit of a “tapering off of demand”, allowing the market to achieve some kind of normalcy, or perhaps better said, a “new normal”. I do not think that supply will outgrow demand anytime in the near future, but with a bit more balance, we’ll see mild appreciation rates as we did for a decade before the pandemic started.

If you would like to delve deeper into my market thoughts or explore how these trends might impact your next estate decision, feel free to reach out.