Special Report – Market For Small Homes Strong

SOURCE:  RE+VIEW Magazine, Nov/Dec 2013

An interesting trend in the Washington metro area real estate market has been a recent surge in the market performance for small homes. A September 2013 report by RealEstate Business Intelligence, Inc. (RBI) revealed that there were 36 percent more homes with less than 800 square feet sold in August 2013 than in August 2012. The same report also documented a median price increase of 22 percent for 800-999 square-foot homes during the same 12-month period. Are these findings just blips, or are they indicative of larger trends? What is the market for smaller homes in Northern Virginia jurisdictions?

The GMU Center for Regional Analysis examined data on the sales of smaller homes in Northern Virginia that covers the past four years, starting in the middle of the recession and continuing through August 2013. The data examine sales of homes of 1,000 square feet or less (called “small homes” in this article) and contrast them with sales patterns for larger homes.

Sales Pace Trends

During the four-year period from September 2009 through August 2013, there was an average of 606 small homes sold per month in the Washington metro area, representing 17.5 percent of all homes sold in the region. The market share of small homes has remained relatively equal over the past four years. During the same period, however, the sales pace of units with 2,000 or more square feet has increased by about 10 percent; the market share of these larger units has increased from 22 percent in 2009 to 24 percent in 2013.

The pace of small home sales tends to be more consistent throughout each year than for larger homes. For each of the past four years the average number of homes with less than 1,000 square feet sold in January has been 433, compared with an average of 776 in June, a variance factor of 1.79. The June/January variances are far higher for homes with more than 2,000 square feet (2.43) and those with 1,000-1,999 square feet (1.93).

The news in 2013 is that the usual post-June drop-off in sales activity has not occurred for small homes. There were 800 sales of small homes in August 2013, just 1.3 percent below the June level of 811. The August 2013 sales volume was up 22 percent from August 2012 and represents the highest August total since 2006.
There was a monthly average of 250 small homes sold in the NVAR jurisdictions between September 2009 and August 2013, representing 41 percent of all small home sales in the region. Those jurisdictions include Arlington and Fairfax counties, and the cities of Alexandria, Fairfax and Falls Church. Although Fairfax County accounted for nearly half of all small home sales, some have far larger market shares in both Arlington and Alexandria. During the four-year period, just 11 percent of the homes sold in Fairfax County had less than 1,000 square feet, compared with 36 percent of sales in Arlington and 29 percent in Alexandria.

Trends in the pace of small home sales in the NVAR region mirror those of the Washington metro area. As with the entire metro area, small home sales were more consistent throughout the year. The variance between the average number of June sales (328) and January sales (173) was 1.90, compared with 3.00 for homes of 2,000 square feet or more and 2.23 for homes in the 1,000-1,999 square-feet range. Also tracking with the region is the sustained pace of sales into August. There were 343 small homes sold in the NVAR region in August 2013, which is up 37 percent from August 2012 and down just 4.4 percent from the June 2013 peak of 359.
Median Price Trends

The median sale price of smaller homes in the Washington metro area has generally followed the trajectory of all home sales during the past four years, with fluctuations in 2010 and 2011 followed by strong increases in 2012 and 2013. The median price for all home sales in the region changed from $342,000 in August 2009 to $415,000 in August 2013, a 21 percent increase. During this time, the median price of the smallest homes (less than 800 square feet) increased at a slower rate—12 percent—but the median prices of homes in the 800-999 square feet SF range (up 30 percent) outstripped the growth rate for all homes.

As a result of these increases, the median price of smaller homes in the Washington area as of 2013 is not far off from the median price of all homes from just three years prior. The median price of homes in the 800-999 square-feet range in May 2013 was $288,141. In January 2010, at the bottom of the market, the median sale price for all homes in the region was $290,000. As recently as February 2012, the median price for smaller homes was below $200,000; by August 2013 the median price for homes in the 800-999 square-feet range was $280,000 and the median price for sub-800 square-feet homes was $262,250.

Median price trends for smaller homes have varied greatly among the three major NVAR jurisdictions. Though Arlington has maintained its advantage for prices among the smallest units, median price growth has varied by unit size. From August 2009 to August 2013 Arlington’s median price for units of less than 800 square feet increased by 15 percent, while the median price of 800-999 square-foot units decreased by 2 percent. Alexandria experienced the opposite trend: the median price of its sub-800 square-foot units declined by 11 percent, compared with an 8 percent increase for its 800-999 square-foot units. Fairfax County, which has far lower median prices for small homes than do the inner-ring jurisdictions, experienced strong price increases for both size categories: 24 percent for the 800-999 square-foot units, and 14 percent for the sub-800 square-foot units.

Another difference among the jurisdictions was the timing of price changes. Between August 2011 and August 2012, both Alexandria and Fairfax experienced median price increases in excess of 30 percent for their smallest (<800 SF) units, while the median price in Arlington declined by 6 percent. From August 2012 to August 2013, however, the trend reversed, with Arlington experiencing a 17 percent price increase compared with a 3 percent increase in Fairfax and a 13 percent decline in Alexandria.

Conclusions and Outlook
Recent reports that the market for small homes has come out of nowhere to outperform the rest of the market are somewhat overstated. The increases in both sales volume and sales price from August 2012 to August 2013 are due to sustained market activity beyond the typical June peak, rather than a sudden spike in activity.

It will be interesting to see how the sales and prices of small homes perform through the winter. If the typical early winter trough is more shallow than usual, then the market for small homes should be expected to continue its strong growth into 2014.

If the Washington area small home market does remain strong, price gains would be expected in Alexandria and Fairfax, where median prices have stagnated in the past year in spite of increased sales activity. Arlington, coming off a year of strong appreciation, may struggle to maintain its already-high prices.

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