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Time to Get off the Fence?
Prices are down, but psychological factors may still keep buyers waiting.

By Alejandro Lazo
Washington Post Staff Writer
Saturday, March 7, 2009

It took four years and an unprecedented real estate downturn for Christopher Hertz to get off the fence and buy a house.

In the interim, the 32-year-old's search for the right property at the right price became nothing short of an obsession. He visited at least one open house a month. He researched the local market diligently, using an Excel spreadsheet to track the homes that interested him. He saw hundreds of places and made some offers, but all of them were rejected as too low.

So Hertz held on to the lease of his Dupont Circle apartment, a month-to-month deal he had signed in 2005 with the intention of staying for a few months.

Then, Hertz said, as the economic news grew increasingly dire last year and he expanded his search out of the District into the suburbs, he began seeing more opportunities. He got engaged. And last month, he and his fiancee, Colleen Fahey, made an offer on a three-bedroom, three-bath red-brick rambler in Bethesda. The owner, who received several offers, accepted the couple's bid. The two plan to move in April.

The overriding factor for making the commitment after such a long hunt? Price. The house was listed at $739,000, and Hertz's successful offer was $725,000. That was a good deal for a home so close to Metro and downtown Bethesda and for its size and condition, Hertz said.

"I did not feel comfortable buying, and I still had the opportunity that prices were going to keep falling," Hertz said, explaining why he spent so many years looking. "Well, I have been vindicated."

As home values continue their historic descent, understanding the psychology of home shoppers such as Hertz has become increasingly important for economists and housing analysts searching for a bottom. Buying a home has gotten much cheaper than during the years of the boom.

But just as speculative mania and a fear of losing out seemed to grip buyers during the housing bubble, the opposite appears to be occurring now amid the bust. Many would-be buyers fear getting caught in the downdraft and are waiting out the market in hopes of the best possible deal.

"People keep calling a bottom: for the stock market, for the housing market, it seems like every month there is a new bottom," said Rom Brafman, a behavioral psychologist and co-author of the book "Sway: The Irresistible Pull of Irrational Behavior."

Potential buyers think: "Why don't I just wait? Because maybe this house looks like a good deal, but maybe in a couple of months the nicer home down the street will be even cheaper."

The deteriorating economy has only complicated matters. Many potential buyers are concerned about making a purchase as big as a home when job uncertainty remains so great. For those like Hertz, who are willing to make a commitment, a psychological barrier must still be breached: the possibility that a home's value may decline. Housing experts said that an important factor for a turnaround will come when shoppers shift to viewing a property more as a dwelling and less as an investment.

"There is, in part, a redefinition of what a home is," said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. "What we may be starting to see happening is people are weighing more heavily the use value of a particular home. And they are beginning to think, 'Okay, is this the place that I want -- not so much to buy and sell -- but is this the sort of place close to the things that I find important?' "

Retsinas said he does not think this shift in attitudes has yet occurred on a wide scale.

"We still have a legacy of buying a home as an investment, and in this environment, who would buy a home as an investment?" Retsinas said.

As time passed and his life changed, such considerations of money, love and living for the long term came into play for Hertz. A native of the Washington area, he returned to the region in 2005 after finishing business school at the Massachusetts Institute of Technology to start an information technology consulting firm in the District.

As a young bachelor enamored with city life, his heart was set at first on finding a condominium in Dupont Circle. He yearned for a well-lit place with plenty of space, in a boutique building of no more than four stories and fewer than 15 units. He wanted it for less than $550,000, he said in a 2007 Post article about his search.

Months became years, and Hertz settled in. When he turned 30, he began thinking about finding a townhouse in the District, a place with more room, where he might one day raise a family. He found a two-unit town house in Logan Circle that he figured he could afford if he rented out half. He made an offer. On another occasion, he bid on a Dupont Circle townhouse in need of repairs.

In both instances, the seller refused to budge, Hertz said. In general, finding sellers who were willing to negotiate on price was difficult in the District, particularly in downtown locations, as renters remained plentiful despite the downturn, Hertz said. He began looking outside the city.

"Over my four years, my life has changed, and I actually started to shift," Hertz said. "I felt the prices were softer the further you got out of the District."

Still, he did not want to go too far. He cherished his morning commute: a 20-minute walk downtown or a two-station Metro ride. Life in the far suburbs scared him. He did not own a car. The search expanded to include Bethesda and Arlington.

His search spanned a period in which rising prices seemed to put homeownership out of reach for conservative buyers until a time when the equilibrium shifts toward owning. The National Association of Realtors said this week that the relationship between home prices and mortgage interest rates and family income is the most favorable since it began tracking affordability in 1970. Nevertheless, sales of new homes and existing homes, as well as pending home sales, declined in January. Economists blamed the dismal state of the economy as the overriding factor but said buyer psychology also comes into play.

A recent report by the real estate research firm Green Street Advisors in Newport Beach, Calif., found that the gap between the after-tax cost of a monthly mortgage payment and the cost of renting narrowed to below an 18-year average in 2008. That swings the relative cost of owning compared with renting back in favor of homeownership in some markets. In the District, Northern Virginia and the Maryland suburbs, that ratio is below its 18-year average, according to the study.

"A purchase the size of buying a house is the biggest investment most of us will ever go into," said Michael D. Larson, a real estate and interest rate analyst at Weiss Research. "If you are worried about losing your job or if you are going to buy a house for 20 percent down . . . and then house prices continue to depreciate, then it is not going to be long before you lose your money."

Amol Singla, 32, a government contractor who rents in the District's U Street area, shares those concerns. While he feels secure in his job, the layoffs caused by the recession have unnerved him. He recently abandoned a year-and-a-half-long home hunt in the District after he could not find the right price in the U Street and Shaw neighborhoods and after looking at several Petworth properties that he thought might lose their value in the coming decade or so. Singla said he might resume his search if prices fall an additional 10 percent.

Hertz and Fahey, in contrast, are comfortable with their decision. She became part of the search in November, once they were engaged.

The place they are buying can easily house a family of four. It sits within the boundaries for Walt Whitman High School, which he hopes his children will one day attend. It has been "incredibly well" maintained, with well-functioning appliances and a landscaped yard. Large trees give the suburban street a sort of majesty, he said. And the couple is just a walk or bike ride away from downtown Bethesda. It's no Dupont Circle, but it has restaurants and nightlife, and both said they are ready to move on.

"It was my idea to put a bid on this particular house; I really liked that one," Fahey said. "You kind of just get a feeling when you get into a place and it has a good vibe to it."

Nonetheless, they will both miss the thrill of the hunt.

"I actually just find it an interesting hobby at this point," he said. "I am a little addicted."

"You get into search mode, and it's kind of hard to stop," she said.

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