The Federal government isn't the only employer in the region, but it is the largest single employer at 39% of the GRP. The other large portion of the GRP, composed mostly of private service firms ranging from healthcare, hight tech, to mom and pop shops, and restaurants, brings in 42%. This is a higher share, but counts significantly on the buisness that the Federal government provides. How many of these privately owned businesses will get wiped out or have to make severe cuts in people and/or budgets when Uncle Sam starts trimming the fat in this area? Many folks can recall the Clinton years and it was fairly lean in terms of spending and the flat costs of real estate reflected sharply in that. It wasn't until the explosive growth in jobs in the region with the onset of the Bush II administration and the Long War and ridiculously low interest rates that real estate shot prices beyond the range of common sense.

Make no mistake about it, yes, the DC region will survive a reduced Federal spending and job growth environment better than one-trick-pony Detroit, but the second and third order effects of reduced Federal spending and jobs still carries into the private sector here by orders of magnitude greater than the private sector can pick up the slack for, especially in terms of salaries and real estate.

The foundation of the economy in this region is the Federal government and all other business ventures are tied to that directly (part of it, buying from it, or selling to it), or indirectly (counting on business from its employees, or its growth to increase the customer base). Any instititution that drives 39% of your GRP is gonna make the market moves at it moves.

The Federal Govt isn't the only employer in the region. And the many thousands of businesses in the Washington Metro region do not depend on Government spending to make money. Which means the regional economy can sustain itself even if Uncle Sam tightens the purse strings. Verizon, Nextel, Juniper, Marriott, are a few of the big employers who can still employ high salaried workers without Uncle Sam's money. There are also many small businesses that work on a national scale. Howard Hughes Medical (not that small) is building its HQs in Loudoun County. They are the private version of NIH with billions to spend. Fairfax and Loudoun sustain some of the highest median incomes in the nation. Unless all these existing and future high income workers will become unemployed for some unknown reason, the money exists to rebound a sagging real estate market. Who's only flaw is a large inventory supply. Its not like Michigan, where the Auto Industry is laying off people, who then cannot sell their homes because the local population doesn't have the money. In the Washington Market, the money is exists, its just that Buyers have 20 homes to pick from. Whereas in 2004-2005, it was 20 Buyers fighting over 1 house. Keep your eye on the falling inventory numbers. Because as it declines, the "buyers market" days will be numbered. In Loudoun, the question is, will inventory drop by 1500 (50%) units before the Spring/Summer buying/selling season? Merv's stats would suggest that a 200/unit per month decline in the inventory will put Loudoun with 1500-2000 units forsale in Spring 2007. If there isn't a mad glut of new listings, the future looks bright for sellers next year.

I agree with the moderation view propounded by Dr. McClain. However, he conveniently leaves out the timetable on which this 7% year over year recovery will occur. The article leads you to assume it will begin next year.

What really happens is a slowly graduated return that will take at least 5-10 years to play out before a possible return to a boomlike market (look at his own research and presentation on the Center for Regional Analysis website which contradicts, or rather clarifies, his article). He has the DC area GRP (Gross Regional Product) and employment changes dropping through 2010. In fact, their latest economic outlook states:

"With consumer spending and job growth slowing, the future growth rate of the Washington area economy is also expected to slow. This slowdown in the broad economic indicators is explained by the natural growth sequence of the business cycle—slower consumer spending—that was compounded by a substantial slowdown in federal procurement spending last year. As the Washington area economy moves through the fifth year of its expansion, its growth rate has been projected to slowly moderate. This anticipated slowing has been impacted by the slowdown in the growth of federal procurement spending from its 19.0% rate in 2004, which drove job and income growth in 2005 and the first half of 2006, to a 2.5% rate in 2005. This slower federal spending growth will impact the local economy over the last half of 2006 and during 2007. Whether this impact becomes more significant will depend on federal spending levels in 2006.

With GDP growth projected to grow at below 3 percent annually over the next six quarters, as consumers adjust their debt loads and the supply imbalance in the housing sector is corrected, the Washington area economy will also slow but continue to outperform the national economy. Key to its continued growth is the growth of federal spending and the ability to attract qualified workers to the work force. The projected combined growth of 125,000 net new jobs in 2006 and 2007 will susstain the already tight labor market, lowering unemployment below its already low level and raising wage rates. The resulting higher costs of doing business in the Washington area will act to further slow its growth next year and into 2008."

Doesn't sound like we will be hitting a boom anytime soon, despite the population growth numbers. And wait till the next round of federal spending drops, particularly if the Democrats get a hold of Congress and the White House...that wonderful job growth in the area will mitigate and dissipate rather quickly. Housing starts may be down to a trickle, but builders are ready to pounce as soon as they get a whiff of any shortage in the market...they pretty much have all the permits in the NOVA region scarfed up and ready (although not building now) and can put the required housing amounts down on the ground pretty fast. Faster than sellers can drop prices anyway.

And since we won't be seeing incredible interest rate drops like at the start of the century, prices will max out well below record highs of the last few years for a while.

I still think Dr. McClain is tracking with the concept of a return to moderation, it is just going to play out more slowly than he lets on. The population could be 100 billion in the area and it still wouldn't matter as much as this simple fact: The federal government's fiscal and budgetary policy (particularly spending on its contracts to private companies in the area and control of interest rates) and the reaction of homebuilders to federal movments hold the key to the future of supply and demand (housing prices) in the region.

I have been following the publications and radio interviews from GMU's Center for Regional Analysis for over a year now. They have been consistently bullish for the Washington region. Stephen Fuller practically yawns when interviewed, saying the region's economy and housing is special and will remain status quo. (Or maybe it's me yawning when I listen. He isn't challenged by the interviewer to back up his generalized statements).

The Center's studies break down job growth into typical categories, and it's difficult to say which specifically are related to real estate and mortgage financing, although construction is of course listed. As of August 2006, just in Greater Northern Virginia, there were six billion dollars less in residential real estate transactions than in 2005. (Granted, 2005 was off the charts). That means a percentage of that six billion has not been gained in commissions by realtors and mortgage brokers, and on down the line to appraisers and termite inspectors.

I looked back to this January and found what John McClain's predictions were for 2006.
http://www.cra-gmu.org/06%20conference/Housing.pdf
In January's PowerPoint presentation he states "2006 prices will increase in the range of 6%-12% compared with 20% in 2005." So far this year N. VA prices are down -3.6% and falling. He thought sales volume would drop back to 2002-2003 levels (98-100,000 transactions). As of August this year in the Greater Northern Virginia Area (according to NVAR's web site), home sales are down 34% to 25,078. We've got a long way to go to come close to the 100K transaction level by the end of the year.

He predicted that in 2006, more affordable regions like Prince William County would have 15%-20% price increases. (Gasp). I don't expect perfection in economist's forecasts. I do suspect this department at GMU to be chronically bullish, and I wish they would study the local economic impact of a slowing housing market. Also, if the bull run in housing is a nationwide phenomenon that is unwinding just about *everywhere*, why is our region especially immune to a national downturn? I don't think it's necessarily "different" here in that regard just because our economy is strong. Is the economy (in part) strong because of the housing effect? (It does sound circular).

Looks like I've not been far fetched in my own predictions. A 5%-20% correction is far from a real estate bubble crash. Just like I've been saying, the regional economy is strong, which is the backbone of the real estate market. The short term might have a glut of inventory which is making it harder to sell. But the long term trend is Good. Growing Population and a Strong Economy will pull this region out of the current situation and back into a booming market.

Virginia's population is growing at the rate of around 100,000 people a year and is expected to keep that rate of increase over the next 30 years. Ending up with about 10/million people by 2030. Those 2.5/million people need to live somewhere and although the current forsale glut is exceeding the market's ability to eat it, it won't last forever. And since new home construction has ground to a halt, restarting that industry, if it sits idle too long, will only add fuel to the pending fire of a housing shortage. Translation, prices will be rising in the future. All the naysayers can pound the table an be angry at high prices for homes. But today's prices might look like a bargin 5 or 10 years from now. Just as they did back in 1996 compared to 2006, where prices have doubled. Because in 10 years, 1/million people are going to need a home in Virginia.

Seems to me that Wheaton's comments were general and national, while McClain's were entirely related to the local market, far more cogent, and less economistese (can't ever be blamed for being cautious).

We're in a slowdown. National events and trends will have temporary effects on local prices, but the economics facts are that we don't have enough housing.