In Cool-Down, Would-Be Owners Reconsider

By Nancy Trejos
Washington Post Staff Writer
Sunday, September 30, 2007

If there's anything real estate experts agree on these days, it's that you should not buy property unless you are willing to keep it for years.

"I think a person who's buying, they're not going to do quick flips," said Sara Rubida, an agent with Long & Foster in Arlington. She said she advises her clients to be prepared to own their home for at least three years to break even or make a profit on their investment. "But I'd feel more comfortable if they lived there at least five years."

That was the norm before the real estate frenzy began in the late 1990s. Before then, most people lived in their homes for several years before trying to make a profit selling them.

Then the boom hit, and people found they could buy and sell property profitably within months. Investors flooded the market, driving up prices.

No longer, thanks to the bloated inventory of unsold homes and the tightening of lending standards.

"The investors who got into the market recently are really paying the price" for not treating real estate as a long-term investment, said Gregory H. Leisch, chief executive of Delta Associates, a research firm in Alexandria.

That's because selling a home costs money. To walk away with at least as much money as you put into it, your place has to appreciate enough to cover real estate commissions, which are typically 6 percent, and closing costs.

Would-be buyers should consider that before entering the market. And if they're not ready to make a long-term commitment, they should think about renting.

There are other factors that make this an uneasy market for buyers. Because of the growing number of foreclosures among people with weak credit and of people with little money for down payments, lenders are thinking twice before approving mortgage loans. No-money-down loans, which became popular during the real estate boom, are no longer easily attainable. So you had better have a substantial amount of cash on hand if you want to be a homeowner.

"Try to save some money so you can come up with a 20 percent down payment," advised Tom Bryan, a senior vice president of Coldwell Banker Residential Brokerage.

With Washington area prices as high as they are, that's no easy feat.

As of May, the median condominium resale price for the metro area was $303,968, and the median single-family house resale price was $465,726, said Leisch, citing Delta's midyear analysis.

So you'd better have about $61,000 or $93,000 sitting around if you want to get a decent mortgage.

Local real estate agents continue to say this is a time to buy. That's not a surprising position for them to take, given that they make money when people buy. But they make some legitimate arguments. For one thing, interest rates are still historically low. And there are tax benefits to homeownership. Meanwhile, prices have either stagnated or dropped from the peak of 2005.

Condo resale prices in the past 12 months fell in the District and Northern Virginia, though they rose in the Maryland suburbs. New condo prices, meanwhile, declined 0.5 percent across the metro region, according to the Delta report.

The National Association of Realtors reported in August that sales of existing homes fell in 41 states in the April-to-June quarter. Home prices were down in one-third of the metropolitan areas surveyed but not in the Washington region.

Most real estate experts expect prices to drop further nationwide because of all the foreclosures expected in the next year. To afford homes during the real estate boom, many people took out adjustable-rate mortgages with low introductory interest rates that would rise drastically after two or three years. Those rate increases are starting to happen, resulting in payment shock for many. With prices dropping, many people cannot refinance their way out of trouble or sell their homes. Hence, the foreclosures and an even more glutted market.

"We're not going to see too much of a rise in the market until all these foreclosures are cleared up, and that's going to take two to three years," said Randy Morrow, an agent with Keller Williams Realty in Arlington.

You might decide to hold off on buying anything with the hopes that prices will decrease even more. But consider this: If interest rates rise, you probably will have wiped out any advantage from declining prices because your monthly payment depends on both the price and your mortgage rate.

"That's the risk you're running, and I don't think it's a good risk to take," Leisch said.

Renting, however, is not exactly cheap. At 2.7 percent, the Washington area has one of the lowest vacancy rates in the nation, and landlords can often charge what they please.

But that may be changing as many developers are converting condominium projects into rentals and as many frustrated sellers are taking their condos off the market and renting them on the "shadow" market.

In 2005, the pipeline of apartment units planned for construction over 36 months was 18,000. As of June, it had ballooned to 31,030 units, according to Delta.

For the first time in a long while, the tide may be turning in favor of renters. "It looks as though, through anecdotal evidence so far, rents are pretty flat from last year this time," Leisch said. "We were predicting that rents would turn flat for the next year or so because of all the condos turned into rentals. . . . .The more supply, the less pressure there is on rent."