Will Amazon’s HQ2 Cause Housing Bubbles in Arlington and Alexandria?

Highlights from this report:

  • Amazon’s new headquarters (HQ2) will be located in Arlington, Virginia.
  • The HQ2 location is just to the north of Alexandria, Virginia.
  • Housing markets in Alexandria and Arlington are already heating up.
  • Some fear the “Amazon effect” could create real estate bubbles in the area.
  • Our view: It’s too early to call a bubble in Northern Virginia, but it’s plausible.

The residential real estate market in Washington, D.C. appears to be cooling down. According to the latest S&P CoreLogic Case-Shiller Home Price Index, home values in the nation’s capital dipped slightly from June to July of this year.

The research team at Zillow is also reporting a drop in home prices in Washington, D.C. They predict that values will continue dropping through the end of 2019 and into 2020.

But if you cross the Potomac into the Norther Virginia cities of Arlington and Alexandria, you’ll find those housing markets are heating up.

Both of those markets are highly competitive right now, with buyers competing fiercely for limited inventory. Amazon’s expansion has something to do with this, but there’s more going on as well.

Now, some are starting to use the ‘B’ word regarding the Arlington and Alexandria housing markets — bubble.

Is a Real Estate Bubble Forming in Northern Virginia?

Some within the local community are expressing concerns that Amazon’s new headquarters could create a housing bubble situation in cities like Arlington and Alexandria (and others in the area).

The company’s HQ2, as it is known, is being developed in Crystal City. Crystal City is an urban neighborhood located in the southeastern corner of Arlington, and just to the north of Alexandria. The company estimates that 25,000 employees will work in the new headquarters. But they won’t all arrive at once. It could take years for the new HQ to reach that staffing level.

Still, the company’s expansion has some Northern Virginia residents concerned that home price will skyrocket and inventory will fall. (Both of things are entirely possible, by the way.)

It’s not that Amazon’s future employees will “swoop in” and gobble up all of the housing. Sure, those new employees will need some place to live. And yes, their presence will increase demand for housing on both the rental and purchase side. But there’s more to it than that. A lot more.

The map below shows the Crystal City area of Arlington, Virginia, where Amazon’s new headquarters will be located.

How Tech Companies Affect Home Prices

History shows us that when big tech companies move into town, several things happen:

  • First, the company creates jobs in the area. These jobs typically pay well. This means the new employees can afford to buy homes as opposed to renting, if they choose. This increases housing demand, decreases inventory, and puts upward pressure on home prices.
  • Investors also target these kinds of housing markets, hoping to get ahead of the “frenzy.” This is happening right now, in both Alexandria and Arlington. Investors often purchase homes in bulk, hoping to rent them out to those high-earning employees, or maybe sell them at a big profit down the road. This reduces inventory even more, forcing buyers to compete even more fiercely.
  • So we have demand for homes rising and inventory falling, all within a relatively short period of time.
  • In these scenarios, a sort of housing market “price bubble” almost always develops. This occurs when prices rise significantly faster than wages, creating affordability issues for many residents.
  • When a local real estate market reaches the point where an average earner in the area can no longer afford to buy an average-priced home, you know the tipping point is near.
  • Home prices begin to rise more slowly … and then level off … and then start to drop. This is actually happening now, in California cities like San Jose and Mountain View (home of Google). Both of those markets are essentially in free fall right now, from a home-value standpoint.

That’s not to say that Alexandria and Arlington will follow the same pattern. We do not expect to see such extremes within the Northern Virginia real estate market, as a result of Amazon moving into town. But the company’s plans are clearly having an impact in the area.

Inventory Is Very Low in These Two Cities

Housing inventory is very low in Alexandria and Arlington. These are currently two of the “tightest” real estate markets in America, in terms of supply. And this will likely remain an issue for some time.

According to the national real estate brokerage Redfin, both cities had about a 1-month supply of homes for sale as of August 2019. The nation as a whole had a 2.5-month supply.

Both of those levels are well below what’s considered to be a “balanced” market. But the inventory numbers in Arlington and Alexandria are exceptionally low in 2019. At the time this article was published, we were unable to find another metro area with supply levels that low. This is clearly the biggest challenge right now, from a home buyer’s perspective.

There is also evidence that some homeowners who initially planned to sell have taken their homes off the market, in hopes of a bigger payoff down the road.

According to Ben Sage, director of the Mid-Atlantic Region for housing research firm Metrostudy:

“In October, there were 423 [residential real estate] listings in Alexandria, and in November there were 243 listings. In January 2019, there were 149 listings in Alexandria, compared to 289 listings in January 2018. But the sales pace stayed steady in those months, so that tells us that some people simply took their homes off the market.”

Regardless of how Amazon’s new headquarters affects the real estate market in the short term, Sage feels it’s a good thing overall.

“Amazon locating here is great for the whole area and great for the northern Virginia marketplace,” he told the Washington Post.

As you might imagine, homes are selling quickly in these Northern Virginia cities. In both of these real estate markets, the median number of “days on market” for property listings is well below the national average.

Arlington, Alexandria Named Most Competitive Housing Markets

Given the supply and demand situation mentioned above, it’s no surprise that the Arlington and Alexandria housing markets are highly competitive in 2019.

In fact, a recent report from Redfin ranked these two Northern Virginia cities as the most competitive in the nation. (Grand Rapids, Tacoma and Oakland rounded out the top five.)

To come up with their rankings, the company looked at the number of competing offers and waived contingencies, along with MLS data that shows how quickly homes go under contract after their initial listing.

To quote that August 2019 report:

“Both with a Compete Score of 96, Alexandria and Arlington buyers face the most intense competition anywhere in the country. In the HQ2-adjacent cities, homes are going under contract far faster than the national rate or even the D.C. metro as a whole.”

Of course, a competitive real estate market doesn’t necessarily mean that a price bubble is taking place. And speaking of housing “bubbles,” what does that term mean exactly?

Real Estate Bubbles, Defined

The terms “housing boom” and “housing bubble” are often used interchangeably. But there are some clear differences. You can actually have a boom without a price bubble developing — and vice versa.

While the definition of these terms can vary depending on who you ask, there is a basic distinction to be made:

  • The term housing boom usually refers to a rapid and significant increase in new-home construction. We saw a lot of this during the previous decade, especially in cities like Las Vegas and Phoenix.
  • A housing bubble, on the other hand, usually refers to a situation where house prices within a particular area rise rapidly (and unsustainably) due to speculation and/or inventory scarcity. Eventually, there comes a “tipping point” where homes simply become too expensive too quickly. Then the bubble bursts and prices drop.

The thing about housing bubbles is that you don’t always know you’re in one — until it pops. When home values within a particular market begin to fall sharply, following a period of rapid gains, it’s safe to assume a bubble has occurred. Hindsight is 20/20. Predictions are more difficult.

The bottom line: At this stage, it would be premature to say that the Alexandria and Arlington real estate markets are experiencing bubble conditions. But they could certainly move in that direction in 2020 and beyond. All of the fundamentals are in place.

Disclaimer: This article contains opinions and outlooks relating to future housing market conditions. Such forward-looking views are the equivalent of an educated guess and should be treated as such.