Exogenous market forces impact DC's housing market
Themail, the twice weekly e-letter on DC good government issues, calls our attention to a recent piece, "What Is Going On in The DC Housing Market?," by Megan McArdle at the Daily Beast. From the article:
Renovated homes on our block are selling for more than 150 percent of what we paid for our (less renovated home); even wrecks are going at a substantial premium. We’re glad to think that our house is worth more, of course, but we’re also mystified. It seems to me that there remains a distinctly bubbly mentality in the city, which you can [see] a bit of in this comment thread on a local blog [Prince of Petworth]. People seem to have a hidden assumption that every house in the District will eventually be crowding $1 million in value. This doesn’t seem possible to me. Ultimately, home prices have to have some relationship to incomes. And at a traditional salary-to-value ratio of two or three times income, I don’t see where the money would come from to push everyone’s house into the $800,000 range. (Nor, needless to say, would it be a good thing for society if this happened).”
The problem with McArdle's analysis of the DC housing market is her perspective is too narrow.
She's focusing on her neighborhood and not the more "global" or exogeneous forces that shape the "local" market for residential property in the city and the region.
The market for real estate isn't limited to just people living in DC, but is shaped by people working here, and is also open to nonresidents from the US and abroad who have the money and inclination to own housing units in multiple cities.
And of course, we can't ignore the reality of a market economy. People with higher incomes can bid up and outbid people with less money for desirable goods and services, in this case, housing. (Also see the past blog entry "Low income, high income, the market and the right to the city.")
As DC becomes a global city, there will be greater demand for housing by itinerants, which pushes prices up. We won't be like London (wealthy Russians and Middle Easterners make up a big proportion of the market, see this report or start reading the House & Home section from the Weekend edition of the Financial Times), but there is impact on the "local" housing market from global buyers. Certainly most people remember the "first" condo units downtown earlier last decade and looking up at night at the buildings and seeing very few lighted units.
So what happens is that the people crowded out of the submarkets that are increasingly global--especially in the core of the city--in turn relocate elsewhere in the city to outlying neighborhoods that aren't part of the global market, in the process the prices go up.
So in the context of the metropolitan market for residential property, DC neighborhoods are being priced upwards, while outlying areas may decline or remain steady (Arlington for example is a very strong market for residential property).
As more neighborhoods become pricy, people move to the next closest but cheaper neighborhood, continuing the process with the end result of "reintegrating" the neighborhood into those set of neighborhoods considered attractive and repricing upwards the real estate in that neighborhood.
It's not exactly the same dynamic, but Loretta Lees' writings on "super-gentrification" are extendable to the issue, such as her paper on Brooklyn Heights, "Super-gentrification: The Case of Brooklyn Heights, New York City," which makes the point that stratospheric salaries paid to financial industry workers allows them to outbid others for the highest quality spaces. The abstract says in part that:
This intensified regentrification is happening in a few select areas of global cities like London and New York that have become the focus of intense investment and conspicuous consumption by a new generation of super-rich ‘financifiers’ fed by fortunes from the global finance and corporate service industries.
We might not have Wall Street traders bidding up properties in DC, but it's all relative, people with more money outbidding people with less money, for the most desirable places to live.
Note that this is nothing new, it's a process that's 100 years old or more, at least in the US, and is called the process of ecological succession and is an element of the theories on the city postulated by the Chicago School of Sociology in the 1920s.
What is "new" in the DC/US context is the inward refocusing back on metropolitan cores, whereas previously all the energy focused on moving on up was focused outwardly. See "Downtowns enjoying robust population growth" from USA Today.
This upends the underpinnings of those theories of the U.S. city, which were based on the idea that people with the most income would always want to live further away from the core of the city.
Invincible green lawns,"Economist).
Also relevant to this issue are two articles from the New York Times. One is more recent and about NYC, "Homes Dark and Lifeless, Kept by Out-of-Towners," while the other is from 2004 on Charleston, "Charleston: The Case Of the Missing Neighbors."
Both make the point that itinerant residents--people who own multiple homes in multiple cities and only occasionally stay at them--absorb housing, which increases housing prices, and at the same time depopulate the city.
From the first article:
New Yorkers who stay in town during summer and holiday weekends know the empty-streets, Potemkin-village look that parts of the city take on. But some Manhattan neighborhoods are assuming that vacant feeling the year round, because the people who own or rent apartments there actually live somewhere else most of the time. This explains why, in a city of bright lights, so many windows dotting the imposing facades of Fifth, Madison and Park Avenue apartment buildings are pitch dark every evening.
Wealthy out-of-towners have always had pieds-à-terre and unused investment properties in the city. What is new is how many.
In a large swath of the East Side bounded by Fifth and Park Avenues and East 49th and 70th Streets, about 30 percent of the more than 5,000 apartments are routinely vacant more than 10 months a year because their owners or renters have permanent homes elsewhere, according to the Census Bureau’s latest American Community Survey.
Relevance of the argument to commercial property in neighborhood commercial districts
For what it's worth, a similar process of nationalization/globalization of the commercial property market in the Central Business District in turn has similar pricing effects on commercial property throughout the city, with overpricing of real estate in "neighborhood" commercial districts specifically.
DC's commercial districts have asking prices for rents 50% to 150% higher than comparable districts in other cities such as Philadelphia, Richmond, and Frederick (which is why those places tend to have more interesting and successful "neighborhood" commercial districts than DC).
This is discussed in the past blog entries "Avoiding the real problem with DC's property tax assessment methodologies," "Another example of flaws in commercial property tax assessment methodologies," and "Cleveland Park Retail: My off-hand evaluation, the rents are too high" among others.