SUNDAY, MAY 8 , 2022. THE WASHINGTON POST EZ EE G5
Home prices have
been setting
record after
record, making
this a great time to
be a homeowner.
Unlike stocks and
bonds, which have
fallen sharply this
year, U.S. home
prices have kept on rising.
Stocks were down a record
13.5 percent for the first four
months of the year, as measured
by the FT Wilshire 5000 Total
Market Index, and bonds were
down a record 9.4 percent for the
period, according to the
Bloomberg Aggregate Bond Index.
Not so houses. Freddie Mac
says that house prices rose
5 percent for the first quarter of
this year, and the National
Association of Realtors (NAR)
says the median price of homes
changing hands was up 6 percent.
From the start of last year
through this year’s first quarter,
median home sale prices were up
21 percent, according to the NAR,
and Freddie Mac’s home price
index rose 24 percent.
And wait, there’s more. From
the start of 2020 through this
year’s first quarter, the NAR says
median home sales prices were
up 41 percent, and Freddie Mac’s
home price index was up 38
percent.
But if you step back a bit and
do some elementary arithmetic,
it’s clear that the days of such
rapid home price growth are
almost certainly over.
Why? Higher mortgage costs
caused by the Federal Reserve
raising rates to try to bring down
inflation. On Wednesday, the Fed
raised interest rates by half a
percentage point, saying inflation
was much too high.
Not long ago, when the Fed was
in full stimulus mode, rates on 30-
year fixed-rate home mortgages
were at record lows, dipping
below three percent for a good
part of 2020 and for parts of last
year.
Now, mortgage rates are rising
sharply — up almost two points
from the end of last year through
late April.
The combination of rising
house prices and rising mortgage
rates means greatly increased
monthly interest and principal
payments for people buying
homes these days compared with
what their payments would havebeen last year. That makes it
much harder for people buying
homes to qualify for mortgages
and holds down the rise in home
prices.
Let’s look at some numbers,
using Freddie Mac’s house price
statistics and Bankrate’s
mortgage payment calculator.
Let’s say you bought a home for
$500,000 at the end of last year
and took out a $400,000, 30-year
fixed-rate mortgage to help pay
for it. (That’s a 20 percent down
payment, the ratio that I’m using
for all my calculations.)
The interest rate on that
mortgage would have been
3.11 percent, and your monthlyinterest and principal payments
would have been $1,710.
Now, let’s say you took out a
$400,000 mortgage at the current
5.1 percent interest rate to buy a
$500,000 house in late April. Your
monthly payment would have
been $2,171 — a 27 percent
increase that would cost you
about $5,500 more a year than it
would have cost last year. Which
means that you needed 27 percent
more income to qualify for that
mortgage than you needed last
year.
But what was a $500,000 home
at the end of 2021 would have
become a $525,000 home, based
on the 5 percent increase inFreddie Mac’s home price index.
That would mean a $2,280
monthly payment, a 33 percent
increase over last year that would
add $6,840 to your annual
mortgage outlays and require
33 percent more income to
qualify for the loan.
Obviously, if you keep jacking
up the price of homes by double
digits and combining that with
sharply higher mortgage rates,
you get fewer and fewer eligible
buyers. As a result, we don’t see
people lining up to bid on homes
the way they did a few months
ago. That’s why I don’t think that
the double-digit annual growth in
house prices since the start of
2020 can possibly continue.
And I’m not the only person
who thinks this way.
“Price growth will steadily
decelerate where year-over-year
annual home price gains will look
quite normal at five percent by
the end of the year,” Lawrence
Yun, chief economist of the
National Association of Realtors,
said in an emailed statement.
That’s pretty close to Freddie
Mac’s home price projections.
Freddie’s predicted price increase
falls to 2.2 percent this quarter,
down from 5 percent in the first
quarter, then continues to fall to
1 percent a quarter next year.
“I think we’re at the most
pivotal part of the housing
market since the aftermath of the
Great Recession about a decade
ago,” said Len Kiefer, Freddie
Mac’s deputy chief economist. “If
we’re not in a period of
permanently high inflation, then
the days of 10 percent annual
growth are coming to an end.”
But even though the days of
double-digit national home price
growth seem to be over, I don’tthink we’re looking at anything
like the home price bubble that
popped in 2006 and helped touch
off the Great Recession, which
ran from late 2007 through mid-- That’s why I don’t think
there will be a price crash.
“This hasn’t been a credit-
fueled housing bubble,” Kiefer
said.
These days, you don’t hear
about “liar loans,” no-down-
payment mortgages and similar
financial excesses that were a
feature of the house price bubble
in the early 2000s.
We’ve got legitimate mortgage
lenders these days rather than the
predators we saw during the
bubble. We’ve also got borrowers
who have put up down payments
of 20 percent or so, giving them a
serious financial stake in their
homes and the financial ability to
weather price downturns.
That’s why I think that even
though house prices are going to
stop rising rapidly and may even
fall a bit, we’re not going to have a
massive, sustained price drop.
Yes, the days of rapidly rising
home prices are drawing to an
end. But we’re not looking at a
Great Recession-like implosion or
the steep drop that we’ve seen so
far this year in U.S. stocks and
bonds.
If you’re rushing out to buy a
home today because you’re
hoping to turn a big, quick profit,
you’re likely to be disappointed.
But if you’re thinking long-term
and buying a home to have a stake
in our economy and be an owner
rather than a renter, the value of
your equity will probably grow
gradually even if home prices rise
only modestly over the years.
And you will probably do just
fine.
Expect rising interest rates to cool the housing market — but a crash is unlikely
Deals
ALLAN SLOAN
SCOTT OLSON/GETTY IMAGES
A home for sale last month in Chicago. Stocks have fallen sharply this year, but U.S. home prices have
gone in the opposite direction, rising 5 percent for the first quarter, according to Freddie Mac.chael Edwards said. “That’s the
future for downtown D.C., and
that’s the future for the Loop.”
D.C. is already planning for
that future. In March, the city
council’s Special Committee on
COVID-19 Pandemic Recovery
approved a report with a recom-
mendation to explore policies
that support “the transformation
of the downtown core to more
vibrant, mixed uses and to sup-
port the creation of job centers
across the District.”
This shift away from an office-
only downtown model was not
created by the pandemic, said
Tracy Hadden Loh, a Brookings
Institution Metro program fel-
low. But the pandemic has rapid-
ly sped up the timeline for a
traditionally slow-moving sector.
“These are trends that were
going on before the pandemic
and are really long-burning,” Loh
said. “What covid did was kind of
supercharge those trends.”
Part of those changes in D.C.
was the emergence of new dense,
mixed-use submarkets in areas
like the Southwest Waterfront,
Capitol Riverfront and NoMa —
which have become competition
for the traditional downtown.
Loh said the demands in the
types of office space have also
changed. New businesses are opt-
ing for more modern spaces, leav-
ing much of the city’s office va-
cancy concentrated in older
downtown buildings.
Even outside the District,
downtown has had rising compe-
tition with developments across
the region, especially in areas that
have embraced the mixed-use
model like Arlington, where Ama-
zon launched a second headquar-
ters, and Tysons, where the grow-
ing mixed-use community is
sprouting shiny new high-rises.
(Amazon founder Jeff Bezos owns
The Washington Post.)
“You see these mixed signals
coming from the D.C. office mar-
ket because there’s some signs of
strong demand, like a lot of leas-
ing activity, a lot of new construc-
tion, but then there’s also a high
vacancy rate,” Loh said. “It’s this
kind of more specific question,
what do you do with these older,
obsolete office buildings?”
While the capital city has his-
torically relied on its status as
home to the federal government
to attract a wealth of political,
professional and business ser-
vices — and its convention center,
Capital One Arena and hotels, as
well as entertainment, retail and
food fronts for tourism — office
properties continue to represent
about three-fourths of total
square footage in D.C.’s central
business district, according to
CoStar, a company that tracks
real estate.
So when the pandemic hit in
March 2020, the office buildings
that were usually filled 10 hours a
day, five days a week emptied —
and the blocks of the downtown
that Washington had always
known transformed almost over-
DOWNTOWN FROM G1
night.
In February 2020, just before
the onset of the pandemic, nearly
99 percent of the office workers in
the Washington, D.C., metro area
were working in person, accord-
ing to Kastle Systems, an office
security firm that tracks key
swipes into the 2,600 buildings in
138 cities that use its system.
In mid-March 2020 that figure
dropped to 47.9, and by April 15 of
that year, only about 12.9 percent
of workers swiped into a build-
ing. In the DowntownDC Busi-
ness Improvement District (BID)
alone, it dropped to 9.69 percent,
according to Kastle data. Differ-
ent firms use different borders for
D.C.’s Central Business District,
but the area is generally under-
stood as downtown, and made up
of the DowntownDC BID, Golden
Triangle BID and parts of Capitol
Hill.
That shift left virtually no one
to shop in downtown businesses
and dine in restaurants that have
so long relied on lunches, happy
hours and errands from office
workers.
“This will have far-reaching
implications for cities if the num-
bers don’t increase,” said Mark
Ein, Kastle Systems chairman. “If
cities aren’t full with people in
offices, that affects the ecosystem
of the city.”
The number of people coming
into offices has slowly started to
rise, according to Kastle’s analy-
sis, but has generally lagged be-
hind other sectors, and has been
deeply impacted by periodic
surges in coronavirus case num-
bers.And office real estate has strug-
gled to rebound at all — in fact it’s
weakened over the past six
months. In 2019, 11.1 percent of
office space downtown was va-
cant, and in March, more than
17 percent of office space down-
town was vacant, according to a
Brookings analysis of CoStar
data.
The DowntownDC BID wrote
in its winter 2022 economic up-
date that February 2022 reached
a record level of office vacancy in
downtown, with 9.7 million
square feet of vacant office space.
The trend tracked for the rest of
D.C. as well, which reached a
record office vacancy of 14.6 mil-
lion square feet.
The report also noted that
economic activity in downtown is
at 52 percent of pre-pandemic
levels, up from 33 percent in fall
2021 and 16 percent in winter
2021 — but office, hotel and
office-serving retail markets are
all well behind in their recovery.
The District is n ot alone in its
downtown struggles. Officials
and researchers around the coun-
try cited many of the same chal-
lenges in their regions, especially
in smaller cities that don’t have
tourism attractions or other sec-
tors to attract customers.
Based on the number of people
who’ve returned to working in
offices, D.C. follows closely with
trends in cities such as San Jose,
Chicago and Philadelphia, ac-
cording to the top 10 cities where
Kastle has offices. The highest
levels of return have been in cities
in Texas, where coronavirus miti-
gation measures have been morerelaxed; more than 50 percent of
workers consistently swiped into
buildings in Austin, Houston and
Dallas in April.
D.C.’s connection to the federal
government gives it a unique
asset. The federal government
owns about 21 million square feet
of real estate in the DowntownDC
BID, where about 50,000 to
60,000 employees work. When
more of those workers begin to
return to their offices — as Presi-
dent Biden vowed will happen
eventually — the organization
expects it could significantly in-
crease daytime foot traffic.
“There is always going to be
an inherent demand and benefit
to what downtown has to offer
because of our proximity, really
to the seat of the federal power.
We’re right next to the White
House. We are right next to the
U.S. Capitol building,” said act-
ing DowntownDC BID president
and chief executive Gerren
Price.
However, as more companies
embrace remote or hybrid work
policies, banking on a full return
to pre-pandemic office levels,
even with federal employees, may
not be reliable for the future of
downtown D.C. — or any down-
town in the nation.
Some leaders in D.C. are work-
ing to attract new schools, busi-
nesses and people to those valu-
able locations by making down-
town a live, work, play destina-
tion — rather than just a work
destination.
According to its winter report,
there are 741 units under con-
struction or announced in the
DowntownDC BID, equating to a
10.6 percent increase in the hous-
ing supply there. D.C. Mayor Mu-
riel E. Bowser’s (D) 2023 budget
also includes investments in of-
fice-to-residential conversions
with affordable housing, which
could lead to the conversions of
500 to 1,000 residential units per
year downtown over the next 10
years.
Price, the DowntownDC BID
president, said he hopes that will
“help tremendously in terms of
both removing some of the vacant
office, commercial office space
out of the supply, but also helping
to create more of that 24-hour
vibrancy that you want in a city.”
Some of these projects are
already underway. In the Golden
Triangle BID, the building that
formerly housed the Peace Corps
is being transformed into resi-
dential space. BID Executive Di-
rector Leona Agouridis said
these kinds of projects, along
with other investments and pro-
gramming, make her optimistic
about the future of the neighbor-
hood.
“There’s something just great
about being in a hustle-bustle
kind of environment. So we’re
hopeful. There are things that
you experience here that you
don’t experience at your dining
room table,” Agouridis said. “You
can do yoga on K Street in the
middle of rush hour. You can’t do
that in your dining room.”With downtown o∞ces still echoing, D.C. looks to adapt
MATT MCCLAIN/THE WASHINGTON POST
A sparsely occupied office building along G Street NW in the District. The DowntownDC Business Improvement District reported last
month that economic activity in downtown is at 52 percent of pre-pandemic levels, with office, hotel and office-serving retail lagging.Source: Kastle Systems KARINA ELWOOD/THE WASHINGTON POSTData represents the percentage of workers who swiped Kastle access controls in
the top five U.S. metropolitan office markets.Office workers in offices during the pandemic2021 2022020406080100%New YorkChicagoLos AngelesDallasWashington, D.C.Source: Brookings analysis of CoStar data KARINA ELWOOD/THE WASHINGTON POSTOffice vacancy rates in U.S. downtownsPhiladelphia7.4% 10.6%New York 8.9%Atlanta 10.2% 12.2%Washington, D.C. 17.5%Chicago 16.3%Phoenix 20.2%Los Angeles 14.1% 17.1%
Miami 15.7% 16.6%Houston 18%Dallas 25.5%2019
|2022
|10% 15% 20% 25%11.1%11.1%
12.2%24.1%22.2%12.6%