Navigating the real estate market in the D.C. region has become a daunting task for prospective homebuyers, as they grapple with high mortgage rates, inflated home prices, and a severe shortage of available properties. Even for those who can afford to make a cash purchase or manage loan payments at an interest rate above 7%, the primary obstacle remains the scarcity of homes that match their preferences. “The extreme lack of inventory of homes,” as Dan Fulton, a senior vice president with Zonda Advisory Group, puts it, is pushing potential homeowners to explore the new-home market.

However, the lack of inventory doesn’t stop at existing homes. The new construction sector is also experiencing a significant shortfall, with the number of actively selling new home projects dropping by 49% in 2022 compared to 2015 in the D.C. region. This shortage, combined with rising mortgage rates, is pushing property prices even higher, making homeownership an unaffordable dream for many. "The shortage of existing homes and of newly built homes is pushing prices higher," Fulton noted. Despite these hurdles, the demand for new homes remains strong, particularly among growing families and those looking to downsize.

Homebuyers Face a Triple Threat in the D.C. Region

The D.C. region presents a challenging landscape for prospective homebuyers who are dealing with a triad of obstacles: high mortgage rates, inflated home prices, and a scarcity of homes for sale. The most pressing issue is the shortage of available homes, particularly for those who have the resources for a cash purchase or can manage payments on a loan with interest rates exceeding 7 percent.

"Extreme Lack of Inventory of Homes"

Dan Fulton, a senior vice president with Zonda Advisory Group, points out that homeowners are reluctant to sell due to being locked into loans with lower mortgage rates than what’s currently available. This situation is prompting people to explore the new-home market. However, the supply of new construction is also significantly limited, with the number of actively selling new home projects 49 percent lower in 2022 than in 2015. Elevated mortgage rates and a shortage of both existing and newly built homes are pushing prices up, making homeownership unaffordable for many.

Trends in New Home Construction

The conditions have led to a decline in the start of new home construction compared to 2021 and 2022, down by 29 percent from the peak in the third quarter of 2021. Some builders are responding by producing "spec homes" at a faster rate than usual. These are homes built without preconstruction contracts and sold once completed or near completion. Fulton notes that in the current market, spec homes are selling at prices not much different from to-be-built homes due to the low inventory.

Changing Demographics and Building Trends

Demand remains robust, especially among 35-to-44-year-olds looking to accommodate growing families and those aged 65 and above seeking to downsize. Builders in the D.C. region are increasingly constructing townhouses and townhouse-style condos due to high land and construction costs. As a result, 60 percent of new homes are attached, compared to 38 percent in 2015.

A Glimpse at the Future

Fulton speculates that if mortgage rates subside, home prices could skyrocket due to pent-up demand. He also notes a continued strong appreciation rate in the region. The most significant number of new home sales are in the outer suburbs of Maryland, Virginia, and West Virginia. Homes are available across a broad price range, from the $300,000s to over $1 million, with several communities currently selling or expecting further development.

My Takeaways

The housing market in the D.C. region is a reflection of what’s happening nationwide: high prices, low inventory, and a shift toward newly built homes. It’s a challenging environment for buyers, but there are opportunities for those willing to look beyond traditional single-family homes. The increasing popularity of townhouses and condos may indicate a shift in buyer preferences, and the increase in spec homes points to builders’ confidence in continued demand. As always, the market will adjust, but for now, patience and flexibility seem to be key for homebuyers in the D.C. region.