By Elizabeth Razzi
Sunday, April 27, 2008
With hope of gaining perspective on the Washington-area housing market, I recently asked two deans of the brokerage business, John McEnearney, 81, founder of McEnearney Associates, and P. Wesley Foster Jr., 74, founder of Long & Foster Real Estate, to chat over lunch.
Alexandria-based McEnearney Associates has sold real estate in the region since 1980. Foster founded his brokerage in 1968, and with offices stretching from North Carolina to Pennsylvania, it's the largest independent residential brokerage in the country.
They agreed, based on all their decades involved with Washington area real estate, that this is no ordinary downturn. Here are some lightly edited highlights of their discussion.
How does this market compare with others you've seen?
Foster: I've never seen anything like it.
McEnearney: It's a little bit disconcerting; 1980 to '81 was a terrible market because interest rates got up as high as 18.45 percent. We had to go through novel approaches to put a deal together.
Foster: But this damn thing we're in here now is another one that's giving us hell. I mean, pure hell. We're sweating.
McEnearney: I agree with that wholeheartedly.
Foster: Right now we're fighting for our lives. We're closing offices, laying off people. We're going to make it, but never in 40 years have we lost money. This could be the first year we've lost money, though we're fighting like hell not to.
McEnearney: I can't say we've never lost money. The first couple of years we were in business we definitely lost money. Also in 1991. But we haven't since then. But this is a tough market to make a profit.
Foster: This is entirely different because all the others, in my memory, were caused by the Fed's running rates up to stall the real estate market. They caused it purposely. This one was not that way.
McEnearney: And it has extended for a longer period of time. We've been in this for two years now. I started noticing a decline in the "energy" in the market, if you will, in the fourth quarter of 2005.
Foster: That was the best year we ever had in our lives, but it did start in that fourth quarter. From 2005 to 2006, our business was off 30 percent. From 2006 to 2007 we were off 12 percent.
Did you think the boom would end?
Foster: Oh sure, it had to. We had five years that were too good to be true. This is a cyclical business.
McEnearney: We just didn't think it would come to an end with such a big bang. People were trying to buy more than they could afford. They were anticipating that everything would work out because prices would continue to rise 20 or 30 percent a year. And that had to come to an end.
How much longer might this go on?
McEnearney: I would say it's probably going to be at least another year before we're going to be out of this. This market could continue into 2009 before returning to a more normal level of activity, as it surely will.
Foster: My pick is the third or fourth quarter, we'll see a little bit of pickup. Next year will be fair. Certainly by 2010 there's gonna be so much damn pent-up demand.
We're seeing life in some places already. Our Gaithersburg/Potomac office is just as lively as it can be. We're going to have a good April. And yet other places are still floored. Close-in has perked along pretty well, anyway, and it's still lively.
But, yet, and I've never seen this before in all our other recessions, there is a ring around Washington now. You go out to Prince William County, 40 to 50 percent of our sales are foreclosures or short sales. Go out to Prince George's County and 25 percent are foreclosures or short sales. Loudoun, it's probably 20 to 25 percent. Montgomery County is not nearly as bad, say it's 12 to 15 percent, and 13 percent of Fairfax. That has never been! This has never happened here!
We're in the Philadelphia market. We're in Baltimore, Richmond, Roanoke, Norfolk. We're on the Eastern Shore. I checked all those markets, and there are a few foreclosures but nothing like there is in this outer ring around Washington. Why is that happening? I don't know why! I know it's happening in Phoenix, in California, in Florida, and in this outer ring around Washington. I have no idea why, I really don't.
McEnearney: Fortunately we don't have that kind of a problem because I've kept our offices within the Beltway, and that was done with conscious intention. It's helping us out.
Foster: But we're getting used to it. We're loading buses up [to tour foreclosures]. Now, that's a bit of a gimmick, but we're getting used to short sales. The banks are getting used to 'em. They're speeding up the handling of them, but not as fast as we would like, because they're still running about two months slower.
How much of the run-up in prices was due to inflation, and how much to changes in the Washington area?
McEnearney : Inflation certainly was most of it. We'd been appreciating at a rate of almost 20 percent a year through the first half of the decade. And 20 percent a year is fine for a year, maybe for two or three years, but beyond five you're in real trouble. But this is a good area to be in. If you're staying three or four years, you're going to be all right.
Foster: Farther out [three or four years] is not long enough, but it will come back.
McEnearney: Interest rates were excellent, and they're even better now. We have good job growth in this area. The biggest company in the world is the U.S. government, and they're supporting the people in this area.
Foster: It's a good, stable area with good job formation.
What should buyers do now?
Foster: Stay away from ARMs.
McEnearney: It's a good time to buy. Interest rates are under 6 percent.
Foster: Foreclosures, that would be where I'd head. Buy for investment and rent 'em.
McEnearney: Yes. If the rent will support it, I'd pick up one. As long as the rent supports the payment.
Foster: At one time I owned 72 houses. They can be wonderful investments.
Advice for sellers?
McEnearney: If they don't price it right, it's gonna kill 'em.
Foster: You've got to price it right.
McEnearney: I think sellers are getting more accepting about the prices they can get now, but not enough, because homes are still remaining on the market.
Foster: If they've got a real need to sell, they do [accept the lower price]. They have to have a real need to sell, otherwise they don't.
What if the economy doesn't recover soon?
Foster: We're going to struggle. But people need housing. We're going to keep this company going. I've already given a third of it to my children. Before I die we'll give the whole company to my children.
McEnearney: I turned over the presidency in 2007 to my daughter [Maureen McEnearney Dunn].
Is traffic a housing issue?
Foster: It sure is.
McEnearney: I just heard that the number one city in the United States with a traffic problem is Washington.
Foster: We beat Los Angeles?
McEnearney: We beat Los Angeles. And that's incredible. It obviously is affecting people coming to this area.
Foster: I wish they'd take it more seriously. So many people don't want you to widen roads; they want you to use Metro, public transportation. There's always a big argument going on.
What do you think of bloggers who seem to root for an even bigger bust?
McEnearney: I'm not seeing that.
Foster: Good Lord. I'm not either. I'm hoping it's just a fringe bunch of nuts. Because, you know, I think that would be awful for the whole economy.
E-mail Elizabeth Razzi firstname.lastname@example.org.