DC’s Property Sales Market: Trends and Fluctuations – 2000 to 2020

An Overview of the City’s Property Market

Between 2000 and 2019, the District of Columbia property market experienced remarkable growth. According to annual District property assessment data, the total value of all taxable property grew from $46.6 billion in 2000 to $224.4 billion (382.4 percent higher) in 2019 (Figure 1). The value of the residential sector grew at an annual average rate of 9.5 percent over the period, and the commercial sector grew at a slightly slower annual average rate of 8.7 percent. The higher growth rate for the residential sector caused the share of all residential value to increase to 56.5 percent in 2019 and the commercial sector share to decline to 43.5 percent (Figure 2).

Whereas most of the value of all taxable real property is attributed to the residential sector, most of the value of property sales subject to total deed taxation is commercial property. Based on annual deed tax data from the District Recorder of Deeds, we estimate that the total property value subject to total deed taxation grew from $4.1 billion in 2000 to $17.4 billion in 2019 (Figure 3). The value of the residential property sold grew at an annual average rate of 7.3 percent over the period, and the value of the commercial property grew at an annual average rate of 8.7 percent. And while there are many factors (nationally and locally) that contributed to the rapid appreciation of property prices and values, the 10-year treasury rate also fell from 6.05 percent in 2000 to 2.05 percent in 2019. And in contrast to the rapid growth in property values, the national consumer price index only grew at an annual average rate of 2.1 percent between 2000 and 2019.

Additionally, the faster growth of property sale values in the commercial sector caused the share of all commercial value to increase to 51.1 percent in 2019 and the residential sector share to decline to 48.9 percent (Figure 4).

Figure 5 shows that commercial property sold as a share of all commercial property in the city was 13.4 percent in 2001, and residential property sold as a share of all residential property in the city was 13.4 percent also in 2001. The slight but general downward trend in the ratios over the years in the figure reflect the robust annual growth on the total value of both sectors since 2000. In 2005, a record high of 23.2 percent of the total commercial property value in the city was sold. This reflects the brief period of very rapid expansion in commercial office space in the city prior the Great Recession. A record of 50 investment grade office buildings were sold in 2005 (Delta Associates). 

Annual Fluctuations in the Property Sales Market

The above figures may suggest that the property sales market has grown in a relatively smooth upward trending fashion, but that is not the case. Figure 6 shows that more recently the Great Recession caused deed recordation taxes to decline 35.4 percent in 2009. It appears that major broad-based cuts to federal spending (or threatened cuts) in 2012, 2013 and 2015 contributed to deed taxes declining significantly in those years.  The figure also shows that the current COVID-19 pandemic (and resultant national recession) also caused deed tax collections to decline 23.6 percent in 2020. (Coincidentally, the District increased its deed recordation and transfer tax rates from 1.45% to 2.50% for commercial properties valued at $2 million or higher in October 2019. We estimate absent that tax rate increase, deed tax collections would have declined approximately 38 percent in 2020 compared to 2019, making it the largest decline in deed tax collections in over 20 years.)

Figure 7 shows the annual percent change in deed tax collections by class.  In years of major decline, there tends to be a greater reduction in commercial sales activity than in residential sales activity. The greater contraction in commercial sales activity caused the value of all residential sales to account for 50 percent or more of all value sold in those same years (Figure 8). (Interestingly, the commercial office sales activity in the city began to decline in 2006, three years before the Great Recession of 2009. Hence, this sector may at times be a leading indicator of the broader economy and not just a lagging indicator.) But more generally, figures 7 and 8 suggest that annual residential property sales are the bedrock of annual deed tax collections, and the level of sales or notably lack of sales of commercial property causes the greatest declines/swings in annual deed tax collections activity.

Residential Property Sales in 2020

There were 9,270 residential homes sold in 2019 but only 8,469 (8.6 percent less) sold in 2020. The lower number of homes sold in 2020 is largely attributed to the 23.7 percent drop in single-family attached homes (Figure 9). Interestingly, neither of these three subsectors of the residential market experienced a decline in median sale prices in 2020 (Figure 10).

In addition to single family home sales, the residential property sales sector also includes the sale of multifamily (rental) properties. When we examined the sales of the largest multifamily properties in years 2014 to 2020, we find that there were fewer sales in 2020 than in 2018 and 2019. While this subsector tended to produce an average of $594 million in transaction volume in years 2014 to 2019, only 35 percent of that average was generated in 2020. This appears to be a major factor in the 27 percent decline in deed tax collections from the residential sector in 2020 as shown in Figure 7. Consequently, the total value of residential property sales as share of the total value of all residential property value in city dropped from 6.0 percent in 2019 to 4.3 percent in 2020. The properties shown in Figures 11 and 12 are large Class A & B multifamily residential properties with more than 100 rental units that were built or renovated after 2000. The average sale price for the over 2 million square feet of large multifamily building space sold in 2019 was $373 per square foot (CoStar).

Commercial Office Building Sales in 2020

The city’s commercial sector experienced a greater decline in deed tax activity than the residential sector in 2020. In the large commercial office building subsector, there were also fewer sales and lower transaction volume in 2020 (Figure 13). Although the average annual transaction volume in this subsector for years 2014 to 2019 was about $4 billion, 2020 saw only about 42 percent of that average amount (Figure 14). Assuming 2020 would have been relatively similar to the prior years, this suggests that approximately $2.3 billion in sales transactions did not occur in 2020, which is likely a major factor in the 42.7 percent decline in deed tax collections in the commercial sector in 2020 (Figure 7). Consequently, the total value of commercial property sales as share of the total value of all commercial property value in city dropped from 8.9 percent in 2019 to 5.0 percent in 2020. The average sale price for the over 7 million square feet of large commercial office space sold in 2019 was $516 per square foot (Delta Associates).

An Interpretation of Recent Trends and Fluctuations

Over the past 21 years, DC’s property market experienced not only remarkable growth but also major market fluctuations.  The greatest annual fluctuations appear to be correlated with national recessions, major broad-based cuts (or threatened cuts) to federal spending and the COVID-19 pandemic.  From the perspective of annual deed tax collections, it appears that these national economic shocks took a greater toll on the city’s large commercial office building sales sector than on the city’s residential sales sector. Also, the years in which such shocks occurred were promptly followed by strong rebounds in deed tax activity in both sectors. This suggest that these shocks caused a significant slowdown in sales activity (or even a postponement of a considerable number of sale transactions) for that year and maybe the following year with a relatively prompt return to more normal sales levels resuming shortly thereafter, particularly in the large office building subsector. 

The residential and commercial sectors of the city property sales market each account for about half of all taxable property value sold on an annual basis. The residential sector tends to grow healthily and is the relatively less volatile sector of the city’s property market. Hence, it can be considered the bedrock of annual deed tax collections. The commercial sector, on the other hand, has been growing faster on average and appears to be responsible for most of the volatility in annual deed tax collections activity.

$15 Minimum Wage and the Earned Income Tax Credit: Public Policy Interactions

On July 1, 2020, the minimum wage in the District of Columbia will be $15 per hour. Our  recently published study in the Economic Development Quarterly, finds that a $15 minimum wage will produce significant income gains for most of the District of Columbia’s 61,000 low-wage resident workers and only slightly impact the city’s level of relatively low-wage jobs (see here and here). The study also finds that in 2021 approximately 62 percent of the resident workers impacted by the city’s $15 minimum wage policy ($15 MWP) will consequently lose a sizable amount of their Earned Income Tax Credit (EITC). This policy-induced increase in wage income, however, is estimated to more than offset the amount lost in EITC for this subpopulation of resident workers.

Fig1

The Income Effects of the $15 MWP on the Workers that Claim the EITC

The federal EITC is based on a schedule where many EITC recipients earn a decreasing EITC amount as their annual income increases. The policy simulation models we used in this study indicate that most of the resident workers in this analysis are expected to lose some federal and DC EITC dollars as a direct result of the $15 MWP. Figure 2 shows that the average full-time worker in 2021 will gain $3,097 in higher annual wage income.  (Year 2021 is one year after the full implementation of the $15 MWP and when the national & local economies are estimated to be recovering from the current pandemic and recession.) However, the higher income from the $15 MWP will cause the worker to lose an average of $332 in combined federal and DC EITC, causing the average worker (with 1 EITC dependent) to be better off with a net increase in resources amounting to $2,765 or 11.3 percent (Figure 3). In contrast, full-time workers that do not have dependents and are not EITC recipients are likely to be only $2,587 or 10.5 percent better off (Figures 4 and 5). The interplay between the $15 MWP and the EITC is such that the consequent lower federal and DC EITC amounts for many under the $15 MWP are more than offset by the policy-induced wage rate increase.

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Conclusion

On July 1, 2020, the minimum wage in the District of Columbia will increase to $15 per hour, and every year thereafter the wage will be increased in tandem with the area’s inflation rate. Via the policy interaction of the $15 MWP and the EITC, we find that there is a substantial overlap of subpopulations of DC resident workers from each policy. We estimate that of the 61,000 resident workers impacted by the $15 MWP, 38,000 of them will lose $16.4 million in federal and local EITC payments in 2021 in exchange for $54.6 million in higher wage income.

The economic burden of the pandemic is currently being borne mainly by low-wage workers in the hospitality and retail sectors. As the economy reopens and these workers are re-employed, the planned increase in the minimum wage will help in 2021 to reverse some of the economic setbacks to low-wage workers in the sectors most affected by the pandemic.

The District of Columbia Reforms its DCEITC for Childless Workers

In 2015, the city replaced its local Earned Income Tax Credit (DCEITC) policy for childless workers as a fixed percentage of the Federal Earned Income Tax Credit (EITC) with a formula that appreciably increased both the local credit amounts and maximum eligible income. (See full policy brief here.) In this new formula, the city applies the federal maximum credit amount to a much larger income range ($6,600 to $18,111) and the federal phase-out credit rate to higher income levels ($18,111 to $24,040). As shown in Figure 1, the DCEITC encompasses all the city’s childless workers eligible for the Federal EITC plus a substantially larger number of workers who earned between $14,800 and $24,040 in annual wage income in 2015.

Fig1

In 2014, 53,839 tax filers received the EITC and DCEITC. These were comprised of 41,391 filers with qualified children and 12,448 without qualified children (Figure 2).  With the expansion of the DCEITC for childless workers in 2015, there was a 26.8 percent increase in total DCEITC claimants with nearly all the increase being attributed to 12,490 new childless workers (2,983 who were also eligible for the Federal EITC and 9,507 who were still not eligible for the Federal EITC and not previously eligible for the DCEITC).

Fig2

Structure of the Childless Worker EITC: DC v. Federal

A comparison of the structure of the expanded DC childless worker EITC with the federal credit focuses on the five income ranges. In Figure 3, the first income range (wage and salary income less than $6,600), labelled Income Range 1, is the phase-in range for both the federal and District credit, where both the federal and local credits increase by 7.65 cents for every additional dollar of earnings. The second income range (income between $6,600 and $8,250), Income Range 2, is the plateau of the EITC structure, where the credit is $503 for both the federal and local credits, regardless of earnings. Income Range 3 (income between $8,250, and $14,800) is the phaseout range for the federal credit, where the federal credit is reduced by 7.65 cents per dollar of earnings, while the District credit remains at $503 regardless of earnings.  For Income Range 4 (income between $14,800 and $18,111) each childless worker receives a DC credit of $503 regardless of earnings but receives no federal credit. And for Income Range 5 (income between $18,111 and $24,040), a DC childless worker receives a DC credit that decreases by 7.65 cents for every additional dollar of earnings up to an income level of $24,040. Beyond $24,040 in income, a resident is ineligible for the DCEITC childless worker credit.

Fig3

The DCEITC Impact on Low-income Households

Table 1 shows how the DC childless worker credit varies across the identified income ranges and compares the DC childless worker credit to that of the federal’s for Tax Year 2015, the first year the new DC credit was in effect. In 2015, there were 2,983 new claimants who were eligible for both the Federal EITC and the DCEITC (Income Range 3), and 9,507 new DCEITC claimants who were not eligible for the Federal EITC (Income Ranges 4 and 5). Tabl1_After Fig3

 

In tax year 2015, the District expanded the eligibility for its local credit for childless workers by extending the credit to childless workers with income from $14,800 to $24,040; it also increased the local credit amounts. The maximum Federal EITC for a childless worker in 2014 was $496, and the maximum local credit amount a childless worker could receive was $198 (Figure 4). Under the 2014 policy, childless workers in a narrow range of income ($6,600 to $8,150), making up 12.8 percent of all DCEITC childless workers, claimed a combined maximum amount of $694. Workers that earned more than $14,550 that year were not eligible for either the federal nor local credit.

Fig4

Under the new 2015 policy, 12,632 claimants (50.7 percent of all DCEITC childless workers) that earned between $6,600 to $18,111 in income received a DCEITC of a maximum amount of $503 (Figure 5). And further, claimants with income between the narrow range of $6,600 and $8,250 received a combined EITC and DCEITC of $1,006. Stated differently, childless workers with income less than $8,250 received a DCEITC that was a 100 percent match of their federal credit, and claimants with income between $8,250 and $14,800 received a DCEITC that was an average of 192.3 percent more than their Federal EITC.

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The DCEITC in a Changing District

The expanded DCEITC for childless workers provides additional income support and security for the city’s lowest income earners, encourages labor market participation, and helps to facilitate poverty alleviation. But, it may also be incentivizing continued city residency for a growing number of the city’s lowest income earners through higher refundable tax credits that could be used to help counter the rapidly rising costs of living in the city.