- The Washington Times - Wednesday, December 27, 2006

This has been an interesting year for the American economy. Perhaps the most significant element was the abrupt slowdown in the residential real estate market.

For most of the first half of this decade, the Washington-area real estate market was appreciating at a remarkable pace. The imbalance between buyers and sellers was creating a difficult, even dangerous, situation.

Buyers were stripping themselves of every protection by eliminating such common contract contingencies such as a home inspection and an appraisal report. Such practices were unheard of before about 2002.

Beginning around April or May, things started to change. I contacted my friend and real estate expert Bill Barnes of Barnes Real Estate Co. in Alexandria to get his take on today’s Washington real estate market.

He summarized the current market like this: The time on the market for a new listing is approaching 90 days, compared with less than a week a couple of years ago; home prices are, indeed, declining because houses are being priced at the same levels as when the market was at its peak.

Because there are far fewer buyers, sellers are coming off those peak prices because many sellers do not, for a variety of reasons, have the ability to hold onto their homes indefinitely, waiting to get top price.

A herd mentality exists in the marketplace. When the market was hot, investors flocked to write a contract as soon as a property came on the market. Today, with the help of the media’s incessant negative reporting on the real estate market, the same herd is wary to write a contract, fearful that property values will fall. This creates fewer buyers as inventory grows.

Although this may be bad news for sellers, it’s good news for buyers. The fact is that real estate has proved to be a good investment over time, but it is not without interim dips.

Trying to predict what home values will do in 2007 has been a challenge. Some analysts say that the slowdown is temporary and that the market already is picking up. Others say the opposite, that real estate is inherently overvalued and that the market has more room to drop.

My take is this: The Washington area experienced unprecedented real estate appreciation that is not sustainable. However, it is a growing region with varied businesses and a huge government sector. A thriving region is not immune from a real estate downturn, but it can be insulated from a severe crash.

Unless they bought at the peak and for some reason must sell during a temporary dip, Washington residents have a good investment in their homes over the long term.

What about the future of interest rates? That’s another difficult prediction, one we’ll address as time moves on.

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

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