The Predictions Are In: Either the DC Market Will Crash Or It Won't

Washingtonpost.com article describing how different approaches to market analysis are leading to highly conflicting predictions. Me personally, I find the mortgage vs. rent analysis easiest to follow. From a common sense standpoint, it just seems like the ratio of owners to renters should remain pretty stable over time. Sure, there are lots of factors that go into an individual home owner or renter's decision to own or rent. Interest rates, job security, income, etc. Over time, these factors may fluctuate and as they fluctuate, so does the ratio of owners to renters. But with owning vs. renting we're talking about two things that are very closely related, opposite sides of the same coin, so to speak. For every increase there's a decrease and for every down there's an up. I think that's what the guy means when he says "[t]hey're the same market, at the end of the day."

When owning becomes more attractive relative to renting for whatever reason, be it interest rates, tax incentives, a buyer's market or what have you, people who are currently renting rush to buy. Under normal circumstances, the increased demand for homes to purchase leads to a seller's market causing prices to increase and allowing lenders to raise rates driving up monthly mortgage payments. At the same time, the sudden increase in supply of rental units abandoned by these new buyers forces rents to come down. Soon some of the people making monthly mortgage payments begin to notice how low monthly rents are and they rush over to rent at the first chance they get, reversing the trend and restoring equilibrium.

The run on buying was extended this time around I think in part because of all the conversion projects that took place. So as people abandoned renting for buying the supply of rental units came down and the supply of ownable units went up to help meet demand. So we didn't see as much pressure as we usually do from oversupply of rentals and undersupply of homes. Does this mean that when equilibrium is restored, there will be a higher ratio of owners to renters? Possibly. Or possibly the rate of rental unit development will simply increase at a greater rate than we would have seen had all those conversions not taken place. I think we'll end up around where we started.

In any event, none of this means we are headed for a crash of any sort. Just a return to normalcy. From the article:

Economy.com's [Mark] Zandi, who ranked Washington No. 36, says it is 32 percent overvalued. However, he said, that does not necessarily mean that prices will drop that much.

"There's different ways the market can adjust," said Zandi, a believer in the soft-landing scenario for housing. Prices could be flat, he said, "and the economy can catch up to it, or the market could fall 5 to 10 percent, trade sideways and let the economy catch up."

Ahhh a voice of reason.