House hunters find it’s a jungle

May 4, 2012

On a recent rainy Sunday, David Albersheim and Andrea Cohen were yet again hunting for their first home. Their preferences: a house near a Metro station for less than $400,000.

So at $450,000, the rowhouse they looked at cost more than they ideally wanted to pay. The old house in Northwest Washington was in the process of being renovated and had a few glaring flaws, such as a backyard that was a mess of cracked concrete. As the couple looked, they tallied the thousands they would have to spend to fix it up.

The pair already had looked at dozens of properties, and in the process they uncovered an all-too-common problem for homebuyers in the District and inner suburbs: There are too few houses available in the less-than-$400,000 price range, as low mortgage rates and high rents have pushed demand to an all-time high.

“It’s very difficult to get a house in a desirable neighborhood for less than $400,000,” said Andrew Riguzzi, a managing partner at D.C. Real Estate. “If they’re out there, they probably haven’t been cared for and need several thousand to bring them up to conditions.”

So Albersheim and Cohen had adjusted their price range up slightly and their aesthetic expectations down. They house hunted almost every weekend, but they had thus far only bid on one: A $350,000 Petworth fixer-upper, located a block from Section 8 housing. That house sold the same day they placed their offer; it had been on the market for 48 hours.

From the rowhouse in Northwest, the couple headed to a nearby $500,000 open house, where a handful of other house hunters were peeking in closets and inspecting the (aged) countertops. Downstairs, rainwater leaked into the basement.

“Most of these houses need too much work put into them,” Albersheim said. “And yet they think they can charge whatever they want because the D.C. market is, you know, hot, hot, hot.”

By Monday, there were already offers on both homes, but Albersheim and Cohen bid on the rowhouse anyway.

Unnatural shocks

Even though there’s a glut of homes throughout parts of the country, the Washington region seems to have the opposite problem, especially in the lower price ranges.

Of the 30,000 active listings on the market in late April, only about 20,000 were priced below $400,000 — a 30 percent drop from this time last year, according to regional sales data analyzed by the real estate company Redfin.

Many of the outer suburbs still have plenty of houses in the lower price ranges. But less-expensive homes are very hard to find closer to central D.C.: 68 percent of homes offered for less than $350,000 are located in the outer suburbs beyond Montgomery County, Arlington and Alexandria. In the District, Redfin counts only 862 listings for less than $350,000.

So how did it get this way? As John Heithaus, chief marketing officer at MRIS, describes it, a “perfect storm” of economic issues and policy decisions have created the gap between the supply of affordable homes and demand for them.

Development slowed during the recession, and in the District, housing starts have been at historic lows for years. Meanwhile, in 2011, D.C. enacted legislation requiring mediation for all foreclosures — a process that stalls the foreclosure process and, according to some experts, keeps the number of available foreclosed houses at artificially low levels.

“Foreclosures are a stock of less expensive housing, but the lack of foreclosed homes is also not putting any downward price pressure on non-foreclosures,” said Lisa Sturtevant, an assistant research professor at George Mason University’s Center for Regional Analysis.

Hung over from the housing crisis, some homeowners remain reluctant to list their homes, said Trish Szego, president of the Virginia Association of Realtors, particularly if they bought recently or owe more than the home is worth.

On the demand side, the District’s population grew by more than 5 percent during the past decade, and the new wave of residents were largely upper and middle class: a key homebuying demographic. And while rents continue to rise, mortgage rates remain incredibly low, hovering near 4 percent for a 30-year. On top of that, the D.C. first-time homebuyer tax credit gave a boost toward homeownership for those on the fence.

“We’ve had a number of unnatural shocks to the system that altered the demand and supply equation,” Heithaus said. “A flood of buyers came out of the woodwork and pulled all the normal supply out of the system.”

As a result, homes are getting more expensive, and it’s harder to find them. Home prices have increased year-over-year in Arlington, Falls Church, the District, Fairfax, Bethesda and Alexandria.

Cheaper homes sell faster, too: Homes in the $300,000 to $400,000 price range were on the market for a median of 35 days in March, as compared with 41 for all listings, according to data from Real Estate Business Intelligence. Redfin found that more than 25 percent of listings that hit the market last quarter were under contract within three days.

The supply is further depleted because, within the District, developers often snap up older, less expensive homes to either “flip” them later for a higher price or to rent them.

“Washington is a crazy place,” Riguzzi said. He estimates that 15 percent of his deals each year are in cash, which generally means a developer is buying the property. For his realty agent friends in other markets, he said it’s closer to 2 percent.

Riguzzi said houses below $400,000 in good neighborhoods are gone in a matter of days. A recent open house for a $399,000 one-bedroom condo in Dupont Circle drew 65 groups of people, he said.

“The day we go out looking at properties, you have to be prepared to put down an offer that day,” he said. “If you’re not, there’s no sense in looking.”

Great lengths

As a consequence of the low inventory, many buyers are going out of their way to accommodate sellers, and sellers can command terms that would seem unthinkable in more balanced markets.

Christopher Klenner, a financial adviser, began looking for a single-family home in the $300,000 range in Northern Virginia in January and describes what he saw as unappealing — foreclosures in disrepair or, closer to the city, overpriced townhomes. He said he was shocked by how tough his search was.

“I had figured that all you do is go out and look for a house and buy it,” he said. “But trying to find something that was reasonably priced was really tough.”

Eventually, he and his girlfriend settled on a short sale, but it was a months-long process marked by constant uncertainty. Klenner called it “the most stressful experience I’ve ever dealt with.” When the former owner’s new living arrangement fell through at the last minute, Klenner had to agree to rent to her for a month while she found a new place to live.

“I really had no choice but to do that, otherwise she could just say, ‘We’re not going to sell it to you,’ ” he said.

For in-demand properties, bidding wars are common. For Redfin’s listings, 53 percent of homes for sale had multiple offers in D.C. last quarter, while in an area such as Atlanta, that only happened 31 percent of the time.

Eva Su, a Government Accountability Office employee, and her husband Clarke, a professor, had an ample down payment and an 800 credit score. Still, they made eight offers on $300,000 to $400,000 condos in downtown D.C. before finally closing on one in March. To stay on top of it all, they made an Excel spreadsheet with their top 20 choices. They got nothing in their top five.

“There were multiple issues — sometimes there was a bid competition and our offer was not accepted,” she said. “Sometimes a cash offer from a developer was accepted prior to a resident offer.”

Some buyers have begun including escalation clauses — provisions that increase the bid price in the presence of competing offers — in their contracts, Sturtevant said, and some are even forgoing home inspections. When there are multiple offers, Szego said some real estate agents are asking buyers to write letters to the homeowners describing how much they love the property, in hopes of swaying them.

Sturtevant said she thinks the inventory problem could have deleterious economic effects on the region if white-collar workers — and their prospective employers — are spooked away by the lack of affordable homes.

“There is a point where people may say, ‘I love my job, but Austin is looking pretty good,’ ” she said. “At a certain point, we may start to worry that people won’t come here, and we need them to do so in order for the private sector to want to be here.”

Heithaus said he thinks the market will eventually right itself as builders light up again. In the meantime, he said it’s inadvisable for anyone to “get emotional” when bidding on a dream house.

“If the real estate agent calls and says, ‘You’re gonna lose it,’ don’t let that enter into the decision-making process,” he said. “Sunlight comes right at your darkest hour.”

Albersheim and Cohen didn’t get the rowhouse. A competing bidder offered to close within 10 days, an extremely fast turnaround that the couple didn’t think was possible. They said they plan to keep looking, and they now think they’ll make clear that their closing date is negotiable in future offers.

“It’s frustrating because I feel like I’m wasting time looking for houses every Sunday,” Cohen said. “I do have faith that we’ll eventually find the right one, though. I’m trying to stay optimistic.”

Next week: Strategies for buyers

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