What's up now?? Many experts are beginning to buy into the discussions we have been having over the last four or five months. The market has bottomed out, leveled off and is starting to begin on the upswing. Why do I say this despite what the numbers indicated in my last update? There are more buyers out looking at properties, they are making decisions more quickly instead of waiting to see what is going to happen with the bubble, rates, the price of the next house to come on the market, etc. and we are seeing multiple offers again (educate your buyers on how to win in those situations). Typical downturns in our market have ranged from 3 to 7 years over the last 30 years or so. Why is this market different? In my opinion, the players, the economy, S&L crisis and politics are the areas that differentiate this downturn from others we have experienced. Especially the only one most of us experienced in the late 80's & early 90's.
Let's discuss the players first. In the late '80's and early '90's our market featured local and regional builders like Milton, Berry, Landmark, Ferguson & Flynn, Harmon, Monument and many others. They were riding the upswing of a government employee driven market and a strong demand for housing that offered luxurious master bedrooms, bathrooms and closets that this area thirsted for and hadn't seen in "production" houses. Unfortunately, these builders were not financially able to survive a downturn due to lot costs, interest carry costs, margains, and the banking business. As demand increased in areas Western and Northern Fairfax County, ie, Centreville, Herndon, Reston, etc. Lot costs naturally increased which put upward pressure on housing prices. Incomes remained relatively stable so properties became out of reach for many buyers but the builders kept on building. Interest rates were in the 10% range which made the builders carrying costs on vacant land increase on a consistent basis and plain and simple, they couldn't keep up with their payments. Therefore, many of the builders went under. Our market today is driven more by publicly traded builders more so than local builders. As a result, they were able to "finance" this last correction and stay in the game.
The Savings and Loan crisis also hurt development. The banking industry made it difficult for builders to obtain loans due the "loose" lending practices that many S&L's had that lead to their downfall. The real estate loans made by S&Ls were considered by many to be speculative and very risky. Their loans were based on how they could charge fees to generate revenue and restructure bad debt that was made to poor credit risk borrowers on speculative real estate deals that were going bad to "cook" the books and make them look profitable. As a result, many S&Ls closed leaving tax payers with a "bail" out of the thrift institutions in excess of $124 billion. At this point, banks became gun shy to lend on vacant land especially with so much undeveloped land in Loudoun County. The S&L crisis mainly affected Florida and Texas but the ripple effect was felt in the Northern Virginia real estate market as well but to a lesser degree. Again, a lot of the land was purchased by the National Builders and large area developers with deep pockets that could finance land acquisition or find new/different sources for financing their land purchases.
At this time, Loudoun County became very pro growth. From 1990 - 1999, Loudoun County was the fastest growing county in the United States. National Builders came into the picture to pick up the pieces left behind by local builders and take advantage of the opportunity offered by Loudoun County and lax zoning laws in Prince William County. Trafalgar House, Centex, Toll Brothers, Pulte, Laing, and Ryan (which would later become NVRyan) capitalized on low land costs as the next housing boom began to occur. During this time, our economy changed as a result of the change in jobs from a Government driven employee region to a market spurred on by growth of other industries. Tax incentives/credits were given by the state and local governments to bring in businesses from the IT, Communication, Defense Contacting, and support services for these industries which lead to job growth in those sectors. This made our region less dependent upon the government for jobs and helped to expand the need for housing as well. Now the political environment has restricted growth as transportation issues, environmental concerns, and more slow/no growth advocates are being heard.
So what spurred the decade long housing boom in our area? Job creation and corporate relocation, the development of Homeland Security and subsequent Federal Procurement money flowing into NOVA, low interest rates, new loan products, relatively stable housing prices (until '03-'05), a political environment which helped foster growth through rezoning, and the overall attraction of our area with close proximity to DC, mountains and ocean. So what happened? Gravity. What goes up, must come down. All markets have cycles. It keeps things healthy and balanced. The media scared a lot of people with talk of a housing bubble helping to slow the market. Builders over built leaving us with an oversupply of inventory. Too many inexperienced REALTORs sold to inexperienced investors. Lending practices, again, became too relaxed allowing too many people to become homeowners that maybe shouldn't have become homeowners. Our area will be more resilient than others. As we know from Morgan's update and David Lerah's book, all real estate is local and we still have good fundamentals in place to sustain a healthy real estate market. This downturn will be or was (cross your fingers) shorter than others because we have good fundamentals in place: Extremely low unemployment, job creation/growth, Federal spending, affordable housing prices compared to other major markets, low interest rates, multiple international airports, Federal Government and more.
We have every reason to be optimistic about our market and where we live and sell houses!
