A look at how real estate trends are impacting the Washington, D.C. area.
To profit at real estate investing, one needs to be alert to both national and local real estate trends. There are macro trends that impact every U.S. housing market: growth/recession and capital costs are national drivers. Local trends include the availability of housing stock and labor/construction costs. It is critical to monitor both the national and local trends to maximize profits.
At the national level, flippers are targeting gains of 15 percent or more in markets all around the country. Markets with a lot of older housing stock that are also showing economic growth are the best markets for flippers. The markets are especially hot when accompanied by a readily available and affordable labor pool and reasonably priced construction materials. We are hearing more and more about work being done in Denver, Charlotte, Raleigh, and Orlando, just to name a few markets. Mature markets where gains are priced into the older housing stock, like Seattle and San Francisco, are showing price pressure on flippers and are not as attractive.
After product availability, the next most important driver for house flippers is the cost of capital. There are very large players who are entering or doubling-down on the house-flipping space. Funds are coming out of the woodwork to enter the house flipping space. KKR, Goldman Sachs, and venture capital continue to invest huge monies into the space. They are entering from all directions: some are investing directly in lenders, while others are financing large platforms like LendingHome and PeerStreet that facilitate flip lending. The money flowing into the space is driving down the cost of capital for flippers.
For those who are wondering if a recession is looming; most probably. Price growth in the housing market can’t continue indefinitely. There are already submarkets in the D.C. region where prices have pulled back. Another indicator in our region is the slowdown of residential multifamily construction inside the beltway. This is being driven by the reality that fewer large lots are available. The profit margins are very thin for big developments. All development gains are priced into the purchase price of the land. The cost of construction labor, materials, and taxes/permits continues to rise quickly in the Washington, D.C. market.
When looking for investment property in the Washington, D.C. area, the most important question to ask is, “Where are people going in the region?” They are leaving Montgomery County, where the school system is locked into no growth, and an aging population is being replaced by young families. The taxes in Montgomery County are insufficient to maintain the high level of services offered in prior years. Prince George’s County is poised for growth. There is a lot of housing stock to revitalize and there is close access to job growth in Anacostia and Alexandria/Arlington.
Buyers continue to pay a premium to live in Virginia. Job growth, proximity to D.C., and Virginia’s favorable business environment are the primary drivers. Buyers remain especially focused on Alexandria, Arlington, and Fairfax. The close-in locations are still commutable in a car. The effectiveness of metro stops far out into Loudoun County remains uncertain. A long ride on a Metro to the city and changing Metro lines may not be palatable to many commuters. Ridership continues to fall on the Metro, which indicates that a location close to the city will continue to demand premium prices.
Whether you are looking for your next flip investment or are financing one, staying abreast of real estate trends is crucial. Attend industry groups, read about changes in the market, and, most importantly, keep an eye on price trends and available product.