- The Washington Times - Thursday, December 22, 2005

For the past seven years, Washington area real estate has been in a seller’s market. Each year, area sellers increased their advantage over buyers, as prices rose and the selection of homes for sale fell. Everyone got used to it. It’s the way the market was, year in and year out.

Until now.

In recent months, the region’s real estate market has cooled off dramatically. All of a sudden, the 2006 market is looking a lot different from what we were used to.

“I believe it will be a healthy, normal market with more give-and-take between sellers and buyers,” says Holly Worthington, 2006 president of the Greater Capital Area Association of Realtors, whose members come from Montgomery County and the District.

“We’ll see 5 to 10 percent appreciation, which isn’t huge compared to recent years, but it is healthy,” she says.

Throughout the first half of 2005, it appeared that home prices were going to grow by 20 percent or more, just like they did in 2004. Sure, inventory was up a bit, but sales were strong and that meant prices were still rising.

By July, however, inventory was up 19 percent over 2004, and sales were down. This meant homes weren’t selling as easily as they had been just a few months earlier. Prices stopped rising as quickly as they had in the spring.

“Sellers and agents had been jumping prices for several years, always pricing one home higher than the home before it,” says Dolly Riegert Woodruff, a Realtor with Prudential Carruthers in Alexandria.

“That has changed. Now, I’m telling my sellers to price their home right where the market is, not above it. Some even price their homes a little below the market, to sell quickly,” Mrs. Woodruff says.

“Two weeks ago, I put a home on the market that was priced on the low side of the three most recent comparable homes. Six months ago, we almost always priced a home on the high side,” says Mrs. Woodruff.

Earlier this year, sellers could price their homes aggressively because buyers were competing fiercely with one another.

Competition was strong because buyer demand was high and the inventory of homes for sale was very low.

The number of homes available to buyers on a given day is known as the inventory, and a low inventory means buyers often have to outbid one another to get the home they want.

Fortunately for weary buyers, the inventory situation has changed. There were nearly 28,000 homes in the Washington-area inventory at the end of November, compared to only 10,000 last year.

Where did all these homes come from? “Some investors are dumping their properties, trying to sell them at the peak of the market,” Ms. Worthington says. “Plus, the number of buyers on the street is lower now. Consumer confidence has been affected by the hurricane, gas prices and the economy, and many buyers are feeling afraid. It takes guts to buy a home for 10 percent more than any other home in the neighborhood.

“So, many buyers just stopped buying,” she says. “They went into a holding pattern. Some thought prices would drop, although they haven’t. But a lot of buyers are taking a ‘wait and see’ approach right now.”

One area market continues to see significant buyer demand. Low prices and proximity to the District still draw buyers to Prince George’s County.

“I’ve been reading stuff on the other markets in our area, and I don’t totally understand it,” says Don Frederick, 2006 president of the Prince George’s County Association of Realtors. “To stay like it has been for the past few years was impossible, but the market has really been pretty good for us lately.

“Affordability is a very big issue in this region, and we have affordable homes in this county that draw buyers,” Mr. Frederick says. “And, with gas prices going up, people realize that we are close to D.C. and have the Metro, so they can have an affordable home and an affordable commute. Things that are bad for other markets are good for us.”

One segment of the market that may not be so enthusiastic is the new-homes industry. Only 17 percent of the homes sold this year have been new homes, which are usually priced higher than existing homes. How will home builders fare in 2006?

“Obviously things have slowed down, and it’s because buyers have a hit a brick wall. Home prices finally reached a tipping point,” says Debbie Rosenstein, president of Rosenstein Research Associates.

“I think buyers are out there, because the region’s demographics are good and employment is really strong,” Ms. Rosenstein says. “But next year’s buyer will be more cautious. They could receive more quality time from salespeople, who will no longer be able to simply take orders. Sales staff will have to do some selling.”

Because existing-home prices rose so much in recent years, builders have been able to raise their prices, too. But, will builders be able compete if home prices level off next year?

“Builders today are offering incentives and deals to attract buyers, but most say they are going to stop those at the end of the year,” Ms. Rosenstein says.

“I don’t see new-home prices increasing in 2006 — they will remain flat,” she says. “The condominium market will be most affected because there suddenly is a ton of condo supply.”

That’s a significant change that will be worth watching in 2006.

In the past few years, condominiums became the most-popular housing type among buyers. Particularly inside the Beltway, home prices reached a level that forced many buyers into the condo market.

As a result of all that demand, builders put up condos and apartment buildings were rapidly converted to condominiums.

“Now, however, some of those conversions may be canceled,” says Ms. Rosenstein.

If there is insufficient demand for the supply of condos in 2006, we could see a rerun of the mid-1990s. Back then, many owners were stuck with high-priced condominiums that were difficult to sell.

Still, buyers are likely to have a continued interest in condos next year because they are so much more affordable than detached homes and town homes that aren’t getting any cheaper.

“It’s not scary, and it’s not a bubble,” Ms. Worthington says. “Real estate is cyclical, and we’re just slowing down a bit. That seller’s market was just too hard on everyone, so I really think this change is going to be healthy.”

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