- The Washington Times - Wednesday, March 16, 2005

It’s been more than a year since I wrote a column about the frenzied pace of the housing market in the Washington area. For the past four or five years, it has been a seller’s dream and a buyer’s nightmare.

Here’s a typical situation: A homeowner decides to list his house for sale. He chooses a real estate agent, and they decide on a price of $475,000.

The agent lists the house in the multiple-listing service on a Saturday. By the end of the day, there are 15 offers. The listing agent tells all interested buyers that he will review all offers Monday evening.

So the agent and seller get together Monday night to review the paperwork. The offers that immediately get thrown in the garbage are the ones that offer full price with a preapproved mortgage (subject only to an appraisal) and a 20 percent down payment.

Yes, you read it correctly. Full price, preapproved and a large down payment.

Sound like the perfect buyer? Nope, not in this market.

After reviewing all offers, the sellers decide to accept an offer from a buyer who:

• Includes an escalation clause, agreeing to buy the property for $525,000.

• Waives the financing contingency. This means the buyer defaults on the contract and loses his earnest money deposit if for some reason he cannot obtain a mortgage.

• Waives the appraisal contingency. This means that if the property appraises for less than the purchase price, the buyer agrees to pony up the difference.

m Waives the home-inspection contingency. This means that the buyer cannot have a professional inspector check out the house to see if there’s anything markedly wrong before he commits to buying.

As I said, it’s a seller’s dream and a buyer’s nightmare.

When I last wrote about this subject, I predicted that the frenzy would be over by now. Although the market appeared to slow a bit earlier this year, it’s back at its frenetic pace, and, so far, my predictions have been dead wrong.

However, I’m stubborn. I believe in the theory “the bigger the boom, the bigger the bust.” Affordability will eventually play a bigger role, and home values will level off and could decline in some areas.

This is what I warn my clients. Folks are so anxious to buy because they think property values will continue to rise at double-digit-percentage rates.

We just don’t know when the peak of the market will come. The folks who end up buying at the peak and plan on holding the property for a long time are safe. Real estate, over time, is a good investment.

However, the folks who buy at the peak, obtain 100 percent financing and plan to sell in a year or two are at risk.

I’m not trying to discourage folks from buying a home, but it’s important for would-be home buyers to understand that this market isn’t normal.

To compare residential real estate with the stock market is hardly accurate. Stocks are freely tradable in small amounts and are not owned for the purpose of shelter.

All the same, I can’t resist ending this column by pointing out that last week was the fifth anniversary of the all-time high of the Nasdaq Composite stock index, which peaked at 5,048.62. Five years later, it’s hovering a little above 2,000. Cycles happen.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail ([email protected]).

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