Will DC's Low Housing Inventory Mean Higher Home Prices?

• January 12th 2012

by Shilpi Paul

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Since news came earlier this week that the DC area ended 2011 with its lowest housing inventory since 2005 and foreclosures have fallen almost 60 percent over the course of the past year, UrbanTurf has been wondering what this will mean for the area housing market. By simple supply versus demand math, we initially felt that the low inventory would push home prices up in the coming year. But it may not be that simple.

Jonathan Miller, president of the real estate appraisal and consulting firm Miller Samuel, was able to provide a different perspective. As he sees it, the overall numbers all come back to foreclosures and may not indicate a healthy housing market with prices on the rise.

Miller’s take:

While I’d still characterize the DC metro as having one of the better housing markets in the country, a lot going on in the data has to do with the drop in foreclosure activity.

The robo-signing scandal in late 2010 served to hold back foreclosure inventory entering the market as servicers still needed to figure out how to prove they actually owned the properties they are foreclosing. As such, the rate of foreclosure filings and inventory has fallen not just in DC, but across the country for the past year. The decline in foreclosures has little to do with the problem taking care of itself, or some sort of hidden strength in the market. It’s better characterized as the market being given a reprieve for a year or two while lenders/servicers get their act together.

As a result, the DC metro inventory market share of foreclosures fell by half, and the absorption rate slowed. This is probably why the inventory of homes for sale in DC is at a multi-year low. I am skeptical that this will translate into an uptick in housing prices in 2012 since foreclosure product is not the same product as non-distressed properties. As servicers/lenders begin ramping up their disposition of distressed assets, all markets will likely see an uptick in foreclosure activity in 2012.

In other words, the DC area seems to be holding its own — which is a good thing — but the foreclosure anomaly/reprieve of 2011 is a “one-off” that has little to do with showing the housing market is improving and more to do with the legacy of bad mortgage lending decisions of the last decade.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/will_dcs_low_housing_inventory_mean_higher_home_prices/4912.