Two major factors contribute to a real estate market becoming overvalued – an increase in the median sales prices and a demand for property that exceeds the current supply.
In the past year (April 2016 to April 2017), real estate prices rose by 4.1% overall putting the market into a category where the prices are more than 10% of what is considered to be a long-term sustainable level. This alone means that the DC real estate market has indeed become overvalued.
Contributing to this state of affairs is the simultaneous lack of available real estate in Washington DC and the surrounding areas. New listings for properties in The District of Columbia are down by a margin of over 13% while overall listings are down by nearly 14%. The lack of available locations is driving prices even higher resulting in the market becoming overvalued.
Another factor that is currently affecting the real estate market is that the average income for residents in the area has not risen to match the increase in property prices making them less affordable. It is estimated that homeowners in the Washington DC area use the majority of their disposable income to pay off a mortgage or home loan. Taking both these factors into consideration, real estate is fast becoming unaffordable to the majority of potential home buyers in the area.
However, this is good news for current homeowners but bad news for individuals who are in the market to purchase a property. Homeowners are likely to receive at least 10% more than the actual value of their home if they decide to put their house up for sale now.
Potential buyers, on the other hand, are likely to pay more than 10% over and above the sustainable value of a property if they buy in the current market. This means that it is a very good time to sell but not the best time to invest in property in the Washington DC area.
An overvalued market should lead to more homeowners putting their properties on the market to maximize their profits from the sale. However, due to the lack of available homes and the increased prices, homeowners are reluctant to sell as they are unlikely to find a property of equal or greater value in the area.
Potential buyers who need to buy in the area are being forced to pay the inflated prices, further driving the demand for properties higher and the supply further down. With property prices continuing to increase, real estate is becoming less and less affordable in DC.
It is important to note that overvaluation has, as of yet, not affected all areas in DC. However, these properties are generally located on the outskirts of the DC area and are therefore less desirable than those located in the Metro or nearer the city center.
There is little end in sight, to the overvalued property cycle for the Washington DC area. Prices are unlikely to drop anytime in the foreseeable future whereas property is set to become even less affordable.