Laura Pacheco’s search for a new home in Northern Virginia began with high hopes and a $650,000 budget. It ended in frustration and a blueprint to build anew in a small Maryland community more than an hour’s drive away from the District.
Pacheco, who now lives in Springfield with her husband and three children, spent several months looking for homes but came up dry. Eventually, she gritted her teeth and entered into a contract to build a single-family home at a new development in Eldersburg, Maryland. And although she’s happy her family will be able to stretch into more space, the process was maddening.
“We wanted something affordable that was move-in ready,” Pacheco said. “Not necessarily brand new, but something with relatively modern features. Everything we looked at was like $800,000. It’s crazy to me that we could build a brand new beautiful home in Maryland for less than the cost of an older house in Virginia. But that’s how the cookie crumbled for us.”
Stories like Pacheco’s are common if you’re living in the Washington region with modest means and seeking a new home. A tight, aging supply of housing stock and prolonged increases in median prices are likely keeping thousands of buyers like her on the rental sidelines or in their current abodes. A shortage of midpriced, market-rate homes, which range from $400,000 to $600,000 in the Washington region, is of particular concern for prospective first-time buyers or those seeking an upgrade from a multifamily unit or starter home — all as the region’s population continues to rise.
This may seem irrelevant to those who can afford a home well more than twice that value, but economic experts say the lack of midrange stock has harmful implications for the region’s long-term future. Millennials, like Pacheco, represent the bulk of the new wave of homebuyers and the future of the area’s workforce. So, with such housing tightness, where do they go? Unfortunately, out of Washington. Which means they’re not around to support increasing demand in the labor force. Or spend their money at restaurants, stores or other businesses that help feed the local economy.
Of the 15 largest metro regions in the United States, only Washington and Chicago recorded a decline in 25-to-34-year-olds between 2014 and 2016, according to a report from the Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future. That age group shrunk by 0.7 percent in both regions, compared with a nationwide overall increase of 2.8 percent.
And worse yet, there’s no easy solution. At current zoning laws and incentives, the region’s builders can’t — and won’t — justify erecting a new supply of mid-level housing stock just to draw in younger buyers.
“Market-rate affordable, probably since post-World War II, it’s hard to build new,” said Jeannette Chapman, deputy director and senior research associate at the Fuller Institute at George Mason University. “The vast majority of this stock, it’s just older. Developers tend to build toward the top of the market, that’s not new. But the fact that we aren’t building new market-rate affordable, yes, it can be considered a problem.”
Few would refute that Greater Washington is an expensive housing market. But few may realize just how much it’s tightening of late.
The median home sales price was $410,000 in February, up $10,300 from a year ago and the highest February price in 18 years, according to Bright MLS Inc. the multiple listing service for the Washington region. This past February also marked the 17th consecutive month of year-over-year price increases.
Annual increases in median prices are not rare, but when paired with declines in available stock, it spells heightened competition and fewer opportunities for buyers. Active listings in February were down more than 13 percent from a year ago, marking the 22nd consecutive month of declines in year-over-year inventory, according to Bright MLS.
That’s the third-longest stretch of annual declines in inventory since 2000. The longest was 31 consecutive months from March 2011 to September 2013, bucking a relatively weak economy in the region at the time because of the federal budget cuts called sequestration.
Part of the problem with the lack of market-rate affordable homes lies with demographics. In 2015, nearly one-fourth, or 23.3 percent, of the Washington region’s single-family homes had not been on the market for 20 years, up from 20.6 percent in 2010 and 19.3 percent in 2000, according to the Fuller Institute’s report. More of the baby boomer population is opting to stay put in their older homes.
“The baby boomer cohort is very large, and that’s part of it,” Chapman said. “Improvements to both health and the way we live in communities, and the ability to live in place longer, has benefited baby boomers. It’s a good thing, but not necessarily for the cycling of the housing market.”
Of course, several factors come into play here. More often than not, trends in housing sales vary from neighborhood to neighborhood. Some areas become more attractive due to increased amenities, and others may be a tough sell due to the age of their inventory or quality of schools. And buyers’ personal finances and preferences are significant factors that drive sales trends.
“So, yes, the region’s housing stock always ebbs and flows, said Joanne Ritchick, a Realtor with Long & Foster in Arlington. But she can attest that the current inventory has made life particularly difficult for many prospective buyers.
“It’s not uncommon [for a buyer] to be one of many offers on a home,” she said. “Anything under $500,000 is really tight, and many people don’t want to go over that threshold — especially if there is a condo fee, because that can add to the costs. Sometimes, you will explore a little further out and get more bang for your buck.”
That’s what led Pacheco to consider Maryland’s outer suburbs. Pacheco, who has a job with the U.S. Government Accountability Office, works primarily from home while her husband works in Laurel. Still, this arrangement holds challenges. She must drive into the District once a week for work, and they will be further away from other family as a result of the move.
“When we started looking in Maryland, even some spots in Howard County were too expensive,” Pacheco said. “Our family is disappointed because we’re taking the grandkids further away. We have lived in Virginia our whole lives and it feels strange, but you do what you have to do.”
To be clear, the regional housing market’s most severe demand lies with the lowest-income households. But not far behind, said Hilary Chapman, housing program manager at the Metropolitan Washington Council of Governments, is market-rate affordable stock.
“You have to look at it like it’s a dumbbell,” she said. “On one end, you have government programs that are designed to focus on lower-income households. If you’re at the other end of the dumbbell at a high level of income, you have plenty of choices. But if you’re on the handle of that dumbbell, you have too much income to qualify for government assistance, but not enough money to choose the exact house you want to live in.”
And such insufficient housing leads to a whole host of economic development problems, especially the further the region’s outer borders stretch.
“It constrains the economy,” Hilary Chapman said. “If people don’t have a place to live, we can’t grow as much. The implications are not just economic if we don’t meet our housing needs. Obviously, there are negative implications for transportation. There is added congestion if people are having to commute farther distances to find housing they can afford.
“On top of that,” she continued, “there are environmental implications, and implications for the health and well-being of those residents who are spending more time commuting.”
The millennial factor
Those feeling perhaps the most strain are the region’s youngest professionals, the ones your businesses are trying so hard to recruit.
They are attracted to the Washington region for its job market and high salaries. But those factors aren’t always enough to compensate for its high costs and congested commutes, according to new research from American University. Its third Millennial Index report, published in 2017, was culled from the responses of 502 residents aged 21 to 35.
“The loudest complaints we see in our research are directed to the ‘unaffordable, atrocious, insane’ house prices in the region,” said Dawn Lejon, executive-in-residence at American’s Kogod School of Business and lead researcher on the Millennial Index. “Housing costs are a lightning rod of discontent and a major watch-out as millennials grow older, get married and prepare to raise children.”
Fewer than three in 10 of those surveyed said they “loved D.C. and planned to stay here forever,” according to the Millennial Index. But, more notably, more than half said they planned to move within the next three to five years. Among those likely to move, two-thirds want to move to a more affordable city, and 55 percent want a city with less traffic.
Half of the single millennials in the survey are under 25 and half make under $50,000 in salary, so it’s no wonder so many are concerned about the region’s affordability.
Here’s why that’s a problem for the economy and our region’s well-being: The biggest group of millennials is 27 years old this year. With fewer of them moving here and joining the workforce, there are fewer bodies to fill the vacancies left by older millennials who are moving away to more affordable locations and baby boomers who are retiring altogether but staying.
This region is already aging faster than its peers. In 2016, 12.2 percent of the region’s population was over 65 years old, up from just 9 percent in 2000, thanks to the continued growth, and aging, of older residents even as the region lost 2,000 people aged 25 to 34 in that time frame, according to the Fuller Institute. Just between 2015 and 2016, the region saw a 4.1 percent increase in the 65-and-up population compared with the national average of 3.2 percent — and just 0.4 percent locally for people under 65 years old.
Aside from the strain that puts on the job market, that also means fewer dollars being spent at local businesses. In particular, the bar and restaurant scene “may be the biggest casualty” in this scenario, Lejon said.
“Two-thirds of single millennials say the bar and restaurant scene is important to them versus only half of those with children,” Lejon said. “Millennial parents we surveyed are pressed for time and stressed about money, so they’re no longer in a position to spend long hours and big bucks at the city’s hottest restaurants and coolest bars.”
Let’s get creative
In Montgomery County, the lack of diversity in single-family housing is creating a boom in its rental population, said Lisa Govoni, housing planner with the county’s planning department. The problem there? Rental housing isn’t cheap either.
A 2014 county study showed that nearly 50 percent of renter households in the county were “cost burdened,” or spent more than half of their income on housing costs. And most of these residents aren’t young professionals fresh out of college — a full two-thirds of Montgomery’s renters are older than 35.
The numbers are worse for residents with lower incomes. Four-fifths, or 80 percent, of Montgomery County renters who make less than half of the region’s median income, or $48,150, were cost-burdened, according to the study. And with the tight market and a median home price of $420,000 in early 2018, many would-be buyers are finding it difficult to stay in the county, she said.
“Many homes are actually selling between one and 10 days, but the highest frequency of sales are in the $600,000 to $800,000 range,” Govoni said. “That makes it hard for millennials and families with lower incomes to buy a house. They get pushed out farther to the exurbs, and that’s a hard thing for the county. We want everyone to live here, but the housing situation makes it hard.”
Part of Montgomery’s difficulties lie with available property for new construction. Eighty-one percent of its land is constrained by “environmental and man-made constraints” — essentially, streams, wetlands, parks and agricultural reserves.
And although new homes represent a small portion of the market – typically about 10 percent of homes sold – they aren’t being built at affordable sizes. The median size of new homes built in the United States in 2016 was 2,422 square feet, down slightly from 2015 but up from 2,215 square feet in 2008 and 2,057 square feet in 2000, according to the U.S. Census Bureau. And those new homes in the Washington region often come with a higher price tag compared with other markets – think of infill developments that advertise sizable “starter” models at $800,000.
Montgomery County’s solution has centered on its inclusionary zoning program, which requires between 12.5 percent and 15 percent of projects with 20 or more semi-detached homes, townhouses, garden condominiums and high-rise condominiums and apartments to be reserved for moderately priced units. For a family of four, the maximum income to be eligible to buy a unit is $77,000, and a three-bedroom townhouse sells for about $165,000. The District and several Northern Virginia jurisdictions also have various “workforce housing” initiatives similar to Montgomery County’s program, which has created 15,000 units for families with low to moderate incomes, Govoni said.
And yet, that doesn’t necessarily help families who need more space but can’t afford a single-family home. Indeed, many of the affordable units are studios or one-bedroom units. Montgomery County is now examining inclusionary zoning on a square-footage basis, which would create more flexibility and bigger units for people with families, Govoni said.
“We need to get creative,” she said. “Land becomes finite, so we need to look at new ways to create housing. Why isn’t the market making duplexes and triplexes? In the past, they were naturally affordable because of their size. We’re interested in that because it’s a great transition from multifamily to single family, and it’s also a great middle-income option.”
No matter how you cut it, local housing demand is expected to increase for the foreseeable future.
Council of Government projections show that by 2045, the region will grow by an additional 1.1 million jobs, 1.5 million people and 650,000 households, said Paul DesJardin, the body’s community planning and services director. Those numbers do not account for churn, he said, but the region is gradually becoming less transient. And it continues to age — by 2023, a George Mason University study shows there will be a 64 percent increase in local households headed by persons 75 or older, or “nonworker households.”
“You’re starting to see more second- and third-generations that are staying here,” DesJardin said.
If so, that’s not good news for movement in housing stock. So, COG’s bottom line is to have the “greatest amount of housing in the right place at the right price point,” DesJardin said. The organization has partnered with several local organizations to address the region’s housing diversity, and in 2017 produced a guidebook for local governments that addresses creativity in zoning and construction as a means to address the issue.
Here are some of its suggestions:
- Adaptive re-use of commercial properties for construction of affordable and market-rate units
- “Medium-density zoning” that would allow for small multifamily units like duplexes and triplexes to be constructed
- Housing trust funds
- Public-private partnerships
- Partnering with faith-based organizations
“That’s the kind of conversation we’re trying to have,” he said.
The retirement churn will be a key factor to watch as it relates to the housing market in the near term, warned Jeanette Chapman of GMU. Most long-time homeowners have recovered their equity, she said, but the leap to retirement also depends on their confidence in their savings and how close they are to paying off their mortgages.
“Looking forward in the next five years, it raises a couple of interesting questions,” she said. “Will the baby boomers downsize? Some won’t be able to. Then, when you think about the types of homes they are in, do they get snapped up by a developer? That may make sense in some spots, because neighborhoods will eventually turn over. As those turn over, if they physically change in an infill situation, those houses are much more expensive.”
“Generation Xers may be in a better position to take these homes if they want them,” Jeannette Chapman said. “Millennials are a wild card, though. Are they earning enough money to make the jump?”