Washington, DC Area Economy – Navigating the Shutdown and the Sequester

October 4, 2013

As a 19-year veteran of the Washington, DC housing market and head of a DC-based consulting practice, I have plenty of experience dealing with the federal government’s impact on the local housing market. With federal government employment and spending making up 37% of the local economy, the Washington region normally enjoys resilience to volatility that affects the national economy. What we are now experiencing is the disadvantage of being a government “company-town” with Sequester 2013 and now the federal government shutdown significantly slowing the economic recovery. How catastrophic are these events to the housing market?

Government Shutdown Had a Big Impact in September

The extent of the government shutdown is not yet known, but even the threat of a shutdown affected sales at new home communities throughout the region last month. Our JBREC Builder’s Survey reports that Washington metro sales per community were down 27% from August to September and that consumers are still spooked due to the uncertainty about the shutdown. Prices are also softening around the DC region with 22% of builders reporting net price increases in September compared to 47% in August. Communities in submarkets that are popular with employees of the Defense Department and other government agencies are clearly more affected than communities in other submarkets that serve many high-tech and private sector employees. Be assured, though, that all regions are affected by the shutdown.

The Washington Post reports that nearly 700,000 employees are affected by the furloughs, and the cost to the region is approximately $200 million per day in lost wages and tax revenue. If the shutdown extends beyond one week, home sales will slow even more in October and will worsen through the end of the shutdown as the furlough’s effects ripple through the economy. You can expect the inventory of listed resale homes to rise, and that will ease pressure on home prices. New home builders will see fewer buyers as more housing options become available in the resale market.

Sequester 2013

The regional job numbers show that jobs lost to the sequester and federal downsizing are slowing the pace of employment recovery in the Washington MSA. This federal downsizing has been underway since May 2011, well before the sequester went into effect in March 2013. In January 2011, there was a 3.5-point spread between the 9.8% national unemployment rate and the 6.3% Washington MSA unemployment rate. As of July 2013, that spread is only 2.0 points with the national rate at 7.7% and the Washington MSA rate at 5.7%.

While slow, economic growth is steady as the private sector gains are offsetting the public sector losses. From July 2012 to July 2013, the Washington MSA added approximately 46,700 private sector jobs and 10,800 state and local government jobs. The size of the federal workforce decreased by 7,600 jobs during that same time for a net gain of nearly 50,000 jobs. That growth will continue to be tempered as the federal government’s expenditures (employment and procurement) shrink from 37% of the local economy in 2012 to 29% in 2017. These projections are made by George Mason University’s Center for Regional Analysis.

In conclusion, the DC region has already been hammered by the debt ceiling crisis and will continue to suffer dramatically until our leaders get their act together. Fairfax and Loudoun counties, which are two of the strongest and most popular housing markets, will fare much better than the markets that are more dependent on the federal government.

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