- The Washington Times - Wednesday, July 5, 2006

Buyers have had a hard time this millennium. Ever since 2000, the Washington metropolitan housing market has made sellers grin and buyers grimace.

Buying a home was so popular in recent years that it was hard to find a home to buy. This shortage of inventory forced buyers to battle one another fiercely to win the home of their choice. Those skirmishes pushed home prices up. That made home buying not only frustrating, but very expensive.

The high home prices seem here to stay, but in the fall of 2005 the region did experience some relief from the frustration of buying in a seller’s market.

Just as the weather began to cool last year, so did the housing market. A surge in the number of homes for sale caused the climate to change, and suddenly the market that once tormented buyers began to favor them once again.

“Right now, we are experiencing the shakeout from the superheated market of recent years, and this is going to continue for the rest of the year,” says Julia Kriss, managing broker of the Arlington office of McEnearney Associates.

“It’s as much an adjustment of mentality as it is an adjustment of the market,” Mrs. Kriss says. “We were in such an extraordinary market for a number of years, now it takes time for people to mentally adjust.”

The most significant thing that has changed is the inventory of homes for sale.

Consider these figures: On a given day in May 2005, there were only 15,000 homes for sale in the Washington region. In May 2006, there were 45,000.

With three times the number of homes to choose from, and sales down by 33 percent, buyers suddenly could do things they haven’t done in five years.

“A buyer can now do the logical, due diligence that was denied them,” Mrs. Kriss says. “Home inspections, negotiating on items to be repaired and realistic expectations about things like termite damage. These are now back in. This makes the market much healthier.”

Buyers also have the luxury of time in today’s market. For example, homes sold in Alexandria in May had been the market for 59 days. Those sold in May 2005 had spent only 12 days on the market.

Throughout the region, homes are taking two to four times as long to sell as they did a year ago. That frustrates sellers, who had grown accustomed to selling a house in a matter of days, but it makes buyers very happy.

In recent years, buyers had to act quickly because homes in popular neighborhoods could sell in just a day or two — for much more than the asking price. It wasn’t uncommon for a buyer to make offers on multiple homes before finally signing a contract.

“Today, buyers are getting the home of their choice in many cases,” says Mrs. Kriss. “There still is some competition for well-located homes — those that are close to Metro and major travel routes. If homes like that are priced properly and in good condition, you might see multiple contracts. But we’re only seeing escalation clauses on 5 to 10 percent of offers these days.”

Multiple contracts were a common circumstance during the seller’s market. Sellers would often have a number of offers to choose from. Many eager buyers would put an escalation clause in their offer, which would automatically raise their offer to beat that of another buyer, up to a set limit.

Escalation clauses became a common strategy among buyers, and it contributed to the rapid rise in home prices. The dramatic decline of the strategy is one reason home prices have flattened this year.

“We are seeing some buyers holding back, waiting to see if prices will fall. But they won’t,” Mrs. Kriss says. “Some buyers are renting now and waiting to buy, but now rents are going up.”

And so are interest rates.

Mortgage interest rates recently reached a four-year high. Add to this the recent, rapid rise in home prices, and you can see how easily many buyers are pushed out of the market. Even a small hike in interest rates can raise the monthly payment enough to make purchasing a home impossible for some buyers.

Historically speaking, however, interest rates are actually rather low.

“Older folks understand how to put today’s rates into perspective,” says Patrick Maloney, a vice president at National City Mortgage in Fairfax.

“Thirty-five years ago, a 30-year fixed rate mortgage was at 7 percent, about where it is today. But they’ve been a lot higher. In 1989, I bought my first house. I assumed a 30-year loan at 9.5 percent. I thought I was the luckiest man alive to get that rate, because the going rate that year was 11 or 12 percent.”

Even though rates have gone up recently, they are still a long way from the double digits that were once considered normal.

“Two years ago, before the Federal Reserve started raising rates, the going mortgage rate was 6.75 with no points. Now it’s only slightly higher, but what has changed is that adjustable rate mortgages have climbed,” Mr. Maloney says.

Today, rates for a 30-year fixed rate mortgage are almost as low as ARM rates, making the most stable of all loans a realistic option for buyers.

Cash-strapped buyers, however, may find that even a relatively affordable 30-year loan is out of reach, particularly considering how pricey homes have become.

These buyers need to be careful that their tight financial situation doesn’t lead them to take a risky loan.

Interest-only loans allow buyers to purchase an expensive home without the burden of a huge monthly payment. However, loans that only require you to pay the interest owed each month won’t help you pay off your mortgage. Your rate may be based on a 30-year payment period, but if you aren’t paying down any principal, you’ll be in the same place as you started after 30 years.

Buyers should be particularly wary of loans that have a minimum payment option. Some of these seem like incredible deals — advertising payment rates of only 2 percent, for example.

When you read the small print, however, you discover that your payment doesn’t cover all the interest owed. The interest you don’t pay off each month is added to the loan’s principal, so that each month your mortgage grows larger. Eventually, it could exceed the value of the home.

“A lot of banks realized this was a good way to lure buyers, by offering a payment that’s very attractive,” Mr. Maloney says. “The problem with these loans is that the payment is much lower than it really should be, so the borrower is eating up his equity very quickly. Assuming you don’t have a prepayment penalty, you need to get out of this kind of loan as soon as you can afford to.”

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