- The Washington Times - Thursday, August 18, 2005

Q:My wife and I are overseas on military assignment. We are being transferred back to the Pentagon this fall and are wondering whether purchasing would be suitable for us.

Our post will be for a minimum of three years.

I know that real estate prices have skyrocketed in Washington, and I am concerned about the housing bubble. Any thoughts?

I am a colonel in the Marine Corps, and my wife is a captain in the Navy.

A: There are more opinions on the future of Washington-area real estate than there are commuters jamming the Beltway.

Let’s go many years back and look at the real estate market from a historical perspective.

From roughly 1985 to 1989, the Washington-area real estate market experienced robust growth and price appreciation. Typically called a “seller’s market,” the imbalance between buyers and sellers was evident from the quick turnover and short average time a property was on the market.

In the early 1990s, despite falling interest rates, supply finally exceeded demand. Chairman Alan Greenspan and the Federal Reserve Board increased short-term rates several times in 1994, making things worse. Overly optimistic suburban developers were falling like flies, and more and more banks were forced to get in the development business in order to complete projects started by now-bankrupt builders.

I recall a town-house subdivision in Lorton that enjoyed peak sales prices at about $165,000.

The developer saw the downturn coming and slashed prices on the remaining units. Owners who bought for $165,000 saw comparable homes selling for $130,000. Prices remained flat for the remainder of the decade.

Here’s another example. I know of a fellow who purchased a new town house in Springfield, closing in 1989 for $268,000. He sold the property in spring 1997 for $180,000.

I recall that the average time a house remained on the market in 1996 was six months.

By 1999, the market began to favor sellers again, and it has grown more and more robust since.

During most of the first half of this decade, it was standard practice for buyers to include price escalations in contract offers — something completely unheard of in prior years. Not only that, but buyers are also continuing to waive appraisal, home inspection and financing contingencies.

It doesn’t take an Einstein to conclude that Washington real estate once again has been experiencing a severe imbalance between buyers and sellers. The rise in values is indicative. The Springfield town house that the poor fellow sold for $180,000 in 1997 is now worth somewhere in the upper $400,000s.

At present, I don’t see any strong signs of a severe market downturn, but it does appear that the frenetic pace of the market is ebbing. Multiple offers are fewer, and homes are staying on the market longer.

There’s one thing I haven’t mentioned that’s very important. If you search the Internet and look for regional housing statistics, you will probably find that the Washington area has a history of less severe downturns, thanks to the strong presence of the federal government and its consistent economic muscle.

This concept can be applied not just to a region, but to a neighborhood, as well. For example, I think that, by and large, most neighborhoods inside the Beltway and within close proximity to Washington and the Pentagon have a far lower chance of price depreciation than, for example, the outskirts of Loudoun County, where development has been rampant.

For a military family deciding whether to buy or rent, here’s some foodfor thought:

• Real estate appreciates over time and has proven to be a good investment. Even if a house is purchased at the peak of a cycle, over time values increase.

• Real estate is not subject to any kind of Nasdaq-type bubble. Real estate is used for shelter, and transactions are not instantaneous.

• A vibrant real estate market has proven to stagnate, and I have no doubt that it will happen again. In my opinion, areas in highly desirable neighborhoods, such as Arlington Ridge, near the Pentagon, are less likely to experience price depreciation in the event of a downturn. Price flattening or very modest appreciation is more likely.

• The buyers who face the biggest risk are those who put little or no money down and have a short holding period with no alternative plan — meaning they must sell within two or three years. As I said, values go up over time, but not without interim dips. You don’t want to be caught being forced to sell at a bad time.

• The cost of renting is on the historical low end when compared with buying. On average, the cost of renting is something like 65 percent to 70 percent of buying, suggesting an overbought market.

My take is this: High-ranking officers in the military receive a generous housing allowance when they are transferred to the Pentagon. If you have the ability to hold the property for five years or more in case you need to ride out a downturn, a real estate purchase will always be a good value in some of the more desirable neighborhoods.

But purchasing a home with an overly optimistic certainty that real estate values will continue to rise at the current pace is dangerous.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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