As Arlington Housing Prices Soar, Supply Is Unresponsive

The worst fears of Amazon critics are coming true. Housing prices are becoming increasingly unaffordable — even before Amazon sets up shop at its HQ2 facility in Arlington and floods the region with 25,000 employees.

The average home price in Arlington County jumped 7% in the past year to $713,000, as investors poured into the market in anticipation of Amazon’s arrival, reports the Washington Post. Inventories are so sparse that some popular Zip codes in Arlington and Alexandria show no homes for sale at all.

Alexandria saw a comparable increase in average home prices, while Fairfax County saw a year-over-year gain of 6%. Said Terry Clower, director of George Mason University’s Center for Regional Analysis: “This is a market response to the Amazon HQ2 announcement, with investors competing with residents for a shrinking number of homes for sale.”

In a functioning real estate market, prices act as a signal for the allocation of capital. A surge in home prices would be matched by a surge in home building as developers and builders. But, as seen in the table above, based on Arlington County permit statistics, the supply of housing is increasing negligibly. In 2016 the county’s housing stock stood at 111,549 units. According to Arlington County permitting data, the increase in housing units (completions minus demolitions) was only 810 units in 2017 and a negligible 220 units in 2018 — roughly a 1% increase in the housing stock over two years.

What’s going on here? Are developers and home builders insensate to the growing gap between the supply and demand of housing? Or could we be looking at the wrong numbers? After all, it takes time after building permits are issued to actually complete construction of a dwelling. Perhaps there is a flurry of housing construction in the pipeline.

Let’s see. Here are the numbers for housing “starts” and “approvals” for the past two years.

There has been a fairly significant increase in the number of housing “starts” — nearly 5,500 units over the past two years. However, those “starts” have not translated into a remotely comparable number of completions. I cannot explain the discrepancy. If the Washington Post wants to dig deeper into the dynamics of Northern Virginia’s housing market, it might seek to understand these statistics.

What does seem reasonably clear, however, is that the number of new residential housing “approvals” was meager in 2017, even weaker in 2018, and came to complete halt in the second half of 2018. What does this mean? Did developers simply submit very few proposals in 2018? Was the zoning board hostile to new projects? Is there some other explanation entirely?

As I have said repeatedly, the phenomenon of sky-rocketing housing prices in Arlington, Alexandria, and Fairfax County is readily understood in terms of supply and demand. Thanks to the region’s dynamic economy, demand is increasing faster than a lagging supply. Indeed, the gap is the greatest in Northern Virginia’s urban core, where demand is strongest.

For whatever reason, the supply of housing in Arlington County is inelastic — unresponsive to surges in demand. A simplistic explanation would point to the lack of undeveloped land to build upon. But that doesn’t explain why developers are unwilling or unable to recycle land of marginal value (used car lots, aging malls and shopping centers, outdated office parks, long-in-the-tooth neighborhoods of tract housing) into higher density, mixed-use projects of the type that are currently in vogue.

Trying to solve the emerging housing crisis through direct public and private subsidies for low-income households is a fool’s errand. Public authorities can’t possibly build enough workforce housing at $350,000 per unit to make a difference. Arlington, Alexandria and other inside-the-Beltway localities need to increase the supply of housing. If they fail, Arlington will displace the middle class and create armies of homeless like San Francisco and Los Angeles, with all the attendant social ills those cities seem so helpless to solve.

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6 responses to “As Arlington Housing Prices Soar, Supply Is Unresponsive

  1. A peripheral effect will be windfall tax revenue for the local governments, reflecting increased assessments resulting from the increases in market value.

  2. NEWS FLASH —– they aren’t making any more land in Arlington & Alexandria!!!!

    Anyone who knows anything about NoVA saw this coming one second after the announcement. Builders will not be wasting what little land there is on so called ‘affordable housing’ when they can build and sell a $1 million town home in a matter of hours, if not minutes.

    • The “unfettered” market is NOT going to build “affordable” workforce housing – why do we think it would when as kls59 correctly observes that the market will extract the highest return it can on any investment.

      Next – people who actually have a good paying job do not become “homeless” when they cannot afford housing near their job – they commute instead. The “homeless” in LA and SF are not your typical gainfully employed – they’re totall a different demographic!’

      We have a couple of problems with the continuing “affordable housing” narratives here. The first is a phalanx of “core confusing words” as a fellow blogger used to post here.

      Second is conflation. We are conflating the meaning of “affordable” with “workforce housing” and other variants with who builds them and with what capital and what expected returns on their investments?

      Just to keep things real – Government CAN make low interest money available as incentive to build what they prefer and they can sweeten the pot with things like TIF for desired infill re-development.

      They can do what we’ve done down in Spotsylvania – and approve developments that provide a certain percentage of “affordable” housing in a market-priced development.

      There are a LOT of options to include ANY developer making ANY proposal to the locality to consider. It’s NOT at all locked-down, inflexible zoning rules. It’s almost always – “by-right” with negotiation for more and both govt and the private sector engage in those negotiations.

      The biggest problem they do not have much control over is the transportation network which is designed and maintained by other Regional and State agencies – who – at this point in NoVa have almost no options for more roads and converting the existing ones into dynamically tolled roads.

      I just don’t see Govt turning down development. They turn down development that they feel is not right but they also often approve rezones that are over and above the base zoning.

  3. And then there are rents. Within days of the announcement my brother heard from co-workers in Crystal City and the Five Sided Puzzle Palace about rent hike notices. The home value and rent hikes will radiate 20-30 miles easily. Another element of Californication…..

  4. So don’t buy a house/condo or rent an apartment in Arlington.

    Zillow claims housing prices in McLean (22101) will decrease by more than 2% in the coming year. I can’t explain it but housing prices have been increasing much faster in lower-priced areas of Fairfax County.

  5. Well heckfire… since Arlington is as left-wing as you can get why not be like NYC and have rent control?

    And remember – NYC turned Amazon down – precisely because of the affordable housing issue.

    Let me guess – Dillon does not allow it, right?

    There’s a bigger question here – If you have ANY company that wants to locate in a urban area and bring jobs – doesn’t that put more pressure on housing costs?

    And if that is true – why is it the responsibility of the government to “do something” instead of letting the private sector do it?

    At some point, I’d like to hear from the Conservative/Libertarian types here as to why they think it’s up to government to fix it?

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