The nation's capital used to be immune to housing cycles. Jobs were plentiful, and the sky was the limit for housing investments. But now, the region's housing market is in cool-down mode, like many other metropolitan areas. Inventory is piling up, and sales are stalled, throughout the region.

“The average driving speed [for the market] is 60 mph. But within the past few years, the market has been going 120 mph to 130 mph [and the appreciation rate has been increasing 20 percent to 30 percent]. Now, the market is slowing down to about 70 mph, not as fast as the past three years, yet faster than the normal pace,” says Victor Furnells, national director, Builder accounts, for HWMI.

Solid job and population growth led to increased housing prices, and growing restrictions on development have put added pressure on the market.

Affordability decreased to 31.8 percent during the first quarter of 2006 from nearly 60 percent in 2001, according to HWMI. A recent report, by Global Insight, a marketing research firm, says the average-priced house is overvalued by 38 percent.

For these reasons, many would-be buyers are either waiting to purchase a home in the Washington region or moving to cheaper places. The D.C. metro area now stretches from West Virginia to Maryland's Eastern Shore as buyers exchange longer commutes for less expensive housing.

Some builders have turned to large proffers to get outer suburban communities to comply with development. Centex Corp. recently offered Warrenton, Va., $22 million to get permission to build 300 luxury homes for active adults. John McIlwain, a senior resident fellow for housing at the Urban Land Institute, says the offer “was necessary because of resistance within the community,” which is approximately 50 miles south and west of D.C.

A lack of public transportation outside the city is not helping nearby markets. As more buyers move out of the District and the close-in suburbs into other parts of Virginia and Maryland, there is a severe need for mass-transit in these areas. To accommodate transportation needs, plans to extend the region's Metrorail system, to areas such as Dulles International Airport, are in the works.

In addition to offering incentives to communities, builders will want to consider a halt on building for now, says Anthony Downs, senior fellow at the Brookings Institution. He says that this is the typical strategy that builders take. To keep inventory from rising too fast, he says builders should wait until they have signed contracts with buyers before even buying a lot.

Despite decreased affordability, increased incentives, and an over-burdened mass-transit system, housing experts aren't worrying too much about Washington's future market. “[The housing market is] not a bubble. The sky's not falling; the market is just correcting itself. Rather, it's a balloon. Homes will sell, it's just a question of when and [for] how much,” says Furnells.

Washington-area builders will also have to consider new laws in place to build more affordable housing. Recently, the district's Office of Planning recommended that developers constructing housing with 10 or more units be required to set aside units for buyers and renters earning less than the area's median income. While the program automatically gives the developer 20 percent of “bonus density” for each project, they will be mandated to use 50 percent to 75 percent of that for more affordable housing. The program is expected to open up 170 new affordable units every year.

“It won't solve the problem of affordable housing, but it will be helpful as long as the market remains strong,” McIlwain says.

Market Snapshot: Washington, D.C. Year-over-year change

(March 2005–2006)

  • Housing growth ratio: 6.93
  • Job growth: 2.7%
  • Building permits: –6.8%
  • Inventory: up 142%

    Learn more about markets featured in this article: Washington, DC.