Rent or Buy? Markets Reach New Equilibrium

By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, March 25, 2006

During the real estate boom of the past five years, many area renters anxious to enter the caffeinated market before it was too late stretched and searched and scraped to become homeowners.

But now, most market-watchers agree that double-digit increases in prices won't continue this year.

So is this the time to buy rather than rent?

There is no quick answer. There are a lot of individual factors -- the financial situation and lifestyle desires of each would-be buyer differ. But here are some things to consider.

In the cooling real estate market, more than a few builders are offering incentives to buyers and some home sellers are dropping asking prices.

At the same time, vacancy rates in the region's apartments have declined, rents have risen and concessions have become increasingly uncommon, according to recent surveys.

The Washington area, with its steady stream of transient workers, has traditionally been among the nation's stronger rental markets. But a growing economy and solid job growth have made the market particularly tight for today's renters.

By the end of 2005, the vacancy rate for higher-end apartments, or "Class A" buildings, had dropped to 2.3 percent, from 2.8 percent in 2004 and 3.4 percent in 2003, according to Delta Associates, a real estate information firm based in Alexandria. The vacancy rate for all types of apartments is now at 2.4 percent, said Greg Leisch, Delta's chief executive.

"We have the healthiest apartment market in the country from a developer's standpoint," he said. "From the tenant's perspective? Bad news."

The going rent for the region's apartments had been fairly stable through 2002 and 2003, but began creeping up after that, especially in the higher-grade buildings, data show. By the end of 2005, the going rate for Class A apartments were $18.16 per square foot, or $1,816 for a 1,000-square-foot apartment per month, according to San Francisco-based Global Real Analytics, which researches real estate markets.

That was a 5.9 percent increase from 2004, which saw a 5 percent increase from 2003.

The strong rental market means apartment managers are offering fewer freebies.

At the end of 2004, Washington-area tenants in an average 1,000-square-foot Class A building were getting the equivalent of about $70 off each month's rent; by late last year, the concessions had dropped to about $40, Global Real Analytics said. And with the fewest number of new apartment units in the pipeline since the 1990s, according to Delta, rents are likely to keep climbing.

Home prices, however, won't keep going up at the breathtaking rates of recent years, most economists agree. Signs of a cooling market are everywhere -- inventory is up, sales volume is down, homes are taking longer to move, price appreciation is slowing.

In fact, the sale price of condos was flat locally during the first quarter of 2006, according to a recent Delta survey. And unlike with apartment rental units, developers are planning more condos. Nearly 26,000 units are under construction or being marketed in the region now, up 78 percent from a year ago, Delta said. That translates to 2.7 years of inventory, making it unlikely that there would be "a meaningful increase" in condo prices for the next 18 months, Leisch said.

A note, however, to those who are considering paying the rent while waiting for a condo market crash.

"That could happen, if in the next three to six months we see either a significant increase in the number of projects under construction, or if there's a decline in sales velocity," Leisch said. "But we don't expect either of those things to happen."

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