- The Washington Times - Friday, October 18, 2002

Spending by American consumers fell last month by the largest amount in 10 months, yet the Washington-area housing market was still red-hot. Area sales of existing homes were up 27 percent over September 2001.

Nationally, consumer confidence has fallen each month during the past four months, but you would never know it if you visited area Realtors' offices.

Nearly 8,000 existing homes were sold in the Washington area last month, when only 14,500 were on the market. Numbers like that mean that buyers are fighting one another tooth and nail for attractive homes and that sellers are reaping significant profits from every sale.

"The nation's housing markets have been pretty hot all year," says Kevin Thorpe, an economist at the National Association of Realtors. "Existing-home sales are on pace to set an all-time record in 2002."

Most of the country has enjoyed strong housing markets this year, but some have seen a slowdown caused by the sluggish economy.

In Houston, for instance, inventory is up and the market has changed from one that favors sellers to one where buyers have the upper hand. Other once-hot markets underwent the same transition in the past 18 months.

"But we have never been subject to the kind of fluctuations in the work force and economy that the rest of the nation is," says Stephen Israel, president of the Buyer's Edge real estate firm in the Washington area. "Even the slowdowns in our tech sector haven't meant a hill of beans to this area, because the defense contractors are taking up the slack. We are losing thousands of jobs on one hand and picking up thousands on the other."

The reliance on government jobs in the Washington area lends strength to the housing market during times of national crisis. During World War II, thousands moved to the area to build the Pentagon and fight the war. Most of the two-story, red-brick Colonials in Arlington were built to house those newcomers.

"We can always rely on the federal government and on those companies that rely on the government to provide jobs for our area," Mr. Israel says.

"Sales in this area have been robust locally all year, particularly among condominiums," Mr. Thorpe says. "Condos are on pace for an all-time sales record, and the inventory situation in the District is quite a bit tighter than in other cities."

It has been widely reported that people are pulling their money out of the fallen stock market and putting it into the rising housing market.

Mr. Israel has some clients who recently pulled almost $1 million out of the stock market, using it to buy several rental properties in Bethesda.

"They are doing very well," Mr. Israel says, "but I haven't seen a lot of people taking money out of the stock market like that. More often, people today are saying: 'I'd rather have put my money into a higher mortgage than my stock portfolio.' Buying a home is just another form of investment."

The demand among buyers for existing homes also has been pumped up by the lack of new-home inventory. Builders don't have enough land to build on in this area, so their sales figures do not reflect the strong demand among buyers who would like to buy new homes.

"That has always been the case inside the Beltway," Mr. Israel says. "There are no new homes in Bethesda, Northwest D.C. or Chevy Chase that are below $1.2 million. That's because the scarce empty lots cost $400,000 to $500,000, but you can find plenty of higher-end resales in those areas."

In the first seven months of this year, 83,000 total home sales occurred in the Washington area a record. Only 19 percent of those sales were new homes, however. As recently as 1996, 35 percent of area home sales were new.

Buyers today who would like to buy new are turning instead to existing homes, further pushing up prices and competition among home shoppers.

"Today, the median price for an existing home in the Washington area is $249,700," Mr. Thorpe says. "That's an increase of 20.8 percent over the second quarter of 2001. Appreciation like that is to be expected with inventory this tight."

Inventory is likely to loosen in the coming year, however. As the demand among buyers cools and home prices rise beyond the reach of many home shoppers, homes will begin staying on the market longer, and appreciation will cool.

"We do anticipate some balance to return to this market," Mr. Thorpe says. "The pace we were at early this year was unsustainable. The inventory situation will improve, which means home prices will continue to rise, but less dramatically."

Some Realtors say the slowdown has already begun in the upper end of the housing market.

"I think it has already started," Mr. Israel says. "There is significantly less pressure above $700,000 but still plenty of demand for the low- and midpriced homes.

"Buyers should be much more careful now. A year ago, people were confident that prices would continue pushing up, so overpaying a little wasn't a concern. Today, we are nearing a shift in the market," Mr. Israel says. "You don't want to be the last one in who paid 20 percent higher than everyone else just did."

Even if the change has begun, the Washington area is still a long way from being a buyer's market. The inventory of homes for sale remains near record lows. There were only 14,500 homes on the market last month, compared to 33,700 in September 1997.

Perceptive and flexible Realtors will be needed when the housing market slows down. As a seller's market makes a transition to a buyer's market, sellers continue to believe prices are rising, so they will price their homes high and expect offers at full asking price.

Buyers, however, will see the inventory of available homes rise.

They will have more homes to choose from and will feel less pressure to buy. They also will face less competition from other buyers. These factors will cause buyers to bid lower and expect more concessions from sellers.

After a time, it will become clear to sellers and buyers that the market has changed to a buyer's market. At that point, sellers will begin paying closing costs again and will be more willing to be flexible on price, repairs and contract contingencies.

"The transition to a buyer's market probably won't happen until 2004," Mr. Israel says. "But when we make that switch, the Washington area will be a very different marketplace than it is today."

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