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Wednesday, April 27, 2005


In the Washington Post last week, Daniela Deane reported that "some economists warn of a housing bubble" in the DC area, with prices up 89% over the last five years. On the whole, it's an excellent article, with Deane suggesting that there is a bubble in the DC area.
Among the symptoms that some say point to a bubble: a widening gap between rental and ownership costs, a spike in the number of investors rather than occupants buying, and a ever-tighter affordability squeeze. Much of the boom in recent years has been sustained by low interest rates...But the consensus among economists is that interest rates will rise at least a little this year.
One economist who disagrees is David A. Lereah of the National Association of Realtors, who argues:
"Right now, most local areas have a lean supply of homes. And the Washington area is creating tens of thousands of jobs rather than losing any."

Continuing, Deane writes that

the Census Bureau reported last week that the Washington area added 75,000 residents last year, making it the fastest-growing metropolitan region outside the Sun Belt.

Today, the National Association of Home Builders writes in to the Post, making the same point about DC's rapid population growth.

One problem with this explanation is that the city of DC and the inner ring suburbs of Arlington and Alexandria aren't growing rapidly. They're actually losing population. And yet they have some of the steepest increases in house prices.

In fact, within the DC area, there's almost an inverse relationship between population growth and house price growth. Except for the outer-ring Loudon and Prince William counties, the fastest growing counties have the slowest rates of price growth.

Now, one could certainly reconcile the facts with the realtor's theory, by thinking about supply as well as demand. Maybe job growth is attracting people to the DC area but they're relatively indifferent betweeen living in the city or the suburbs. If there are supply constraints in the city, say because there isn't much land left to build on in the city, increased demand could drive up prices in both the city and the suburbs, even without the city's population growing.

But I'm not all that convinced. The suburbs with the most rapid population growth are fairly far out. It's hard to believe that many of Loudon's new arrivals would move to DC if only there were more housing available. And supply constraints in the city would have to be awfully severe for the city to actually be shrinking. So my money's on a bubble.

% Change from 2000-2004
County House Prices Population
Loudoun 83.8 41.0
Prince William 95.5 19.9
Calvert 35.8 16.0
Charles 46.3 12.7
Frederick 46.2 11.5
Howard 48.1 7.6
Montgomery 68.4 5.5
Prince George's 48.0 5.2
Anne Arundel 59.1 3.9
Fairfax 80.4 3.4
Alexandria 91.3 -0.1
Arlington 82.0 -1.8
District of Columbia 85.9 -3.2

Source: Washington Post (house prices seem to appear only in the print version); Census Bureau

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