How are the interest rate changes affecting the Northern Virginia real estate market?

Diving Deep into the numbers

Northern Virginia Housing Market Report

There has been a lot of talk lately about the cooling housing market, but recent data suggests it is not cooling off as much as many think. We are just coming off of an historic period where pandemic related issues drove demand and prices sky high as people fled the crowded cities in search of larger, roomier homes to facilitate work from home and social distancing needs.

While the number of transactions, both in Northern Virginia, Washington DC and nationwide, has indeed declined, prices thus far have not fallen to any meaningful degree.

Fewer Sales, Still High Prices

In the Washington Metro area, the number of home sales did decline almost 12% year over year in May of this year, but since 2021 was such an outlier due to the pandemic, a 12% decrease is really quite small. For context, May 2021 saw a 60% year over year increase from May 2020, so a drop off of some sort was both inevitable and needed for a healthy market.

Even though there were fewer sales, prices increased by about 8% YoY in May as well. In Prince William County, for example, sales were down roughly 10% from last year with prices still up roughly 15% in April.

It should be noted that by May the Federal Reserve Bank had announced increasing rates, although much of the rate increases had not yet taken effect. It is highly likely that May saw one last swath of buyers jumping into the market before interest start to rise a bit more dramatically, as many homes were still selling within a week of listing.

Though sales were down as a whole, the differences in local markets were quite varied. Fairfax City, for example, managed to see a 26% increase in closed sales in May, with other areas down over 10%.

Effect of Rising Interest Rates

As we head into the second half of 2022, we know that the Federal Reserve is planning on raising rates roughly every six weeks throughout the remainder of the year. Due to the frenzied pace of sales the past two years and the rising rates, we can expect to see a slowdown in the number of transactions, although prices are still expected to rise, though much more modestly than we have seen in the recent past.

We are coming off an extended period of historically low interest rates, and while rates are indeed rising, it must be noted that they are only rising to the historical average, by no means has the Federal Reserve indicated that rates will rise to what would be considered high, especially by the end of this year. So while high interest rates increase monthly mortgage payments and pull down prices, the effect will be rather modest, especially in an area like Northern Virginia with many high paying jobs and a local economy that is not dependent on cyclical industries such as many of the cities in the industrial midwest.

Looking Ahead

Slowly rising rates slow down the market but paradoxically incentivize buyers to jump into the market sooner rather than later. As we look out to the rest of 2022 and beyond, the market will face plenty of headwinds such as rising rates and low inventory, there is nothing to suggest that we will see a drop in home values anytime soon, especially since rates will be rising over a period of some time, as opposed to one big jump.

Chris Colgan

EXP Real Estate

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