Asymmetrical Information - Megan McArdle

01.11.13

DC Rents Are Falling. Are House Prices Next?

The local housing shortage is an artifact of the national housing crisis. Now that's starting to change.

When I moved to the District in 2007, it was pretty easy to find a one bedroom apartment close to downtown for $1500.  It might not be the most attractive apartment you ever saw, but it would have an actual separate bedroom and a full kitchen.  

Five years later, the $1500 one bedrooms are thin on the ground, especially if you want to be walking distance from work.  That's one of the reasons that I've been reluctant to label our soaring home prices an actual bubble; while home prices have certainly leapt upwards, they're roughly tracking the rising rents.  The comments sections of local real estate blogs are filled with outraged residents who simply refuse to accept that anyone could possibly charge that for a rental.

But now rents in DC have started softening. While demand has certainly risen--DC has been gaining population for the first time in decades--in normal times, it might easily have been absorbed.  Though DC's restrictive housing regulations do restrict supply, there are still plenty of sites within the district borders that could be built on.  And houses are being subdivided into apartments at a pretty brisk clip.  

During the financial crisis, however, all that building activity stopped.  For 18-24 months, it was difficult to break ground on new projects, because builders couldn't get the financing.  In most locations, that didn't matter, because there was a big supply glut.  But in Washington, where the unemployment rate remained low, this meant that rising demand collided with radically diminished new supply.  Hello, massive rent increases.

Well, the supply has arrived.  All those backlogged projects are coming onto the market at once.  The apartment complex down the street from me has been renting for four months, but I don't see many lights on when I go past at night.  They--and many of the other local complexes--are now trying to offer all sorts of concessions (short of actually lowering the rent) in order to get people into their buildings.  

In the long run, the purchase market is supposed to track the rental market; it doesn't make much sense to buy what you can rent for half the price.  DC's economic boom may not be over.  But I wonder if the housing boom might not be getting ready for a little setback.