Homeowners Pay the Price of Overbuilding
By Dan Eggen
Just after their divorce, Al Rodenburg and his ex-wife had to sell their Woodbridge town house fast.
They paid $36,000 cash for the privilege.
"There are no guarantees in life, but nobody enters into that type of arrangement expecting to lose so much money," said Rodenburg, a contract specialist who bought the house originally for $170,000 and sold it at a painful loss. "Things are just so overbuilt out here. There's been no foresight and no planning, and too many people have lost money."
There's trouble in some of the fastest-growing suburbs of Virginia and Maryland, where budget-priced new houses are driving down the selling prices of similar houses built just a few years ago. Many owners, often young people, moved to the suburban fringe so they could afford their first house. Now they find they must either stay put or throw away tens of thousands of dollars to get out.
The phenomenon is playing a key role in an emerging anti-growth movement in the Washington area, where several counties have enacted or are considering drastic residential development limits aimed in part at raising property values in many neighborhoods.
It also underscores a new reality for housing in Washington and throughout much of the country: The era of big returns is gone, at least for now.
"It used to be you could make 10 or 15 percent a year on your house, almost guaranteed. It was better than stocks," said Tom Quattlebaum, executive vice president of the Anne Arundel Association of Realtors. "Now you'll be lucky to get your money back. . . . Housing has changed back from being an investment to being shelter."
Overall, the Washington residential market has been lackluster, with prices lagging behind inflation since 1992. The news has improved recently in some areas: Sales volume has jumped markedly in the District, Alexandria and Arlington County, and Northern Virginia reported a 5 percent increase in median sales prices last year -- twice the average for the Washington area as a whole.
But in many areas, particularly outlying suburbs, sellers still are struggling to break even.
Prince William County posted the biggest losses in both sales and prices in 1996, with the median price dropping 8.4 percent to $138,000, according to Experian, a real estate information service. Prices also fell that year in Anne Arundel and Loudoun counties while remaining flat in Howard County. Precise figures aren't yet available for 1997, but real estate agents say most of those areas again showed little price growth.
Prince George's County, which like Prince William is a hotbed of starter homes, also has been in the doldrums when it comes to price. The average sales price remained at about $139,000 in 1997, according to the Prince George's Association of Realtors.
Values in many of those areas still have not rebounded fully from the market slump of the early 1990s, analysts said, which followed a housing boom in the 1980s. Steady construction and fierce competition among home builders have helped hold down prices in the Washington area, which one economist called one of the most overbuilt markets in the country.
The problem is most evident in neighborhoods overrun with inexpensive town houses and condominiums, for which assessed values have remained stagnant or even dropped in recent years. In some areas of Prince William, units that sold for $130,000 or more less than a decade ago are now commonly let go for $90,000 or less.
Air Force Capt. Jim Gates and his wife, Gretchen, bought their three-bedroom town house four years ago in the Promontory Oaks section of Lake Ridge, nervously signing their first mortgage of $130,000. With identical neighboring units now selling for $10,000 less than that, Gates -- who faces a mandatory transfer this summer -- has decided to rent out the town house rather than sell it at a loss.
"A lot of the houses around here are rentals now," said Gates, 33, who has two young children. "Most of the people who originally bought them have moved away, and they rent them out because they can't afford to sell. . . . It's easier to take a little loss each year than one big hit all at once."
For angry homeowners, there are many things to blame. Some complain that real estate agents overstate the potential return on their investment. Others concede that they paid too much during the boom years.
But many reserve their scorn for home builders and politicians, who they say have let rapid development eat away at their investments.
Counties such as Prince William and Loudoun continue to grow at the rate of one new house every three hours, and builders are pushing aggressive discounts and money-back deals to sell them -- undercutting the value of property nearby. As a result, "upside-down sales," where the seller must bring money to the closing, continue to be common in outlying suburbs and Prince George's, according to analysts and real estate agents.
In Howard County, Ilene Kessler, of Coldwell Banker Grampler, said about one-third of her transactions require sellers to bring money to the table. She said many people who were drawn to the Columbia area at the height of the market in the 1980s find themselves losing money when forced to move by transfers or federal cutbacks.
John Tuccillo, a consulting economist with the National Association of Realtors, said the problem has been the result of too many new houses and too little demand. He said residential construction is driven more by the availability of easy credit for builders than by buyers' demand.
"Washington, D.C., right now has one of the worst, most overbuilt real estate markets in the country," Tuccillo said. "The home-building market is strong, but demand is relatively weak. . . . In other places, the two forces are more in balance."
That glut of low-end housing provides relatively little tax revenue to pay for new schools and other services required by new residents, contributing, in turn, to crowded classrooms and high taxes. The dilemma has been a key point in debates over whether to sharply limit new development.
In Prince William, recent community meetings have been full of complaints from real estate agents and homeowners alike, who say unfettered development has driven down sale prices and caused high tax rates. The county is weighing proposals to drastically cut the number of homes -- particularly smaller town houses -- that could be built during the next 20 years.
In Loudoun, supervisors slashed by 70,000 the number of units that can be built in the Dulles South area. And Prince George's has imposed a moratorium on development in areas where schools have too many students.
Stewart Schwartz, executive director of the Coalition for Smarter Growth, said he constantly hears complaints from those in the outer suburbs about depressed housing prices. He said many parents, already angry about high taxes and crowded schools, discover that they can't afford to sell their house and move.
"They feel like they're taking it both ways," said Schwartz, whose organization lobbies for growth limits and development impact fees. "They get high taxes and low property values, all to subsidize new development. . . . When you subsidize anything, you get an oversupply of it. That's what's happening here."
Builders and developers object to that line of argument. They say many homeowners are the unfortunate victims of the local housing market, which still hasn't recovered from the recession of the early 1990s. In addition, some say, many people have overextended themselves by borrowing heavily against their equity or declining to make large down payments.
"The marketplace is making an adjustment from a supply and demand point of view," said Roy Beckner, Prince William representative for the Northern Virginia Building Industry Association. "Unfortunately, we get peaks and valleys, and some people right now are in the valley."
Many also believe the region is heading for a real estate recovery, particularly given mortgage rates of 7 percent or less. In Loudoun, where the market for town houses and condominiums is still in the dumps, the sale of high-value detached houses appears to have taken off in recent months: Sales in December were more than double the number tallied in the same month a year before.
Such assurances are little consolation to homeowners such as Linda Lilly, who can see rows of new houses from the custom-built deck of her 11-year-old home in Woodbridge. The models are priced at or below what she and her husband paid in 1990, and the couple aren't sure they can afford to move.
"Unless we want to walk away giving money away, we can't do it," said Lilly, 37, whose husband has two children from a previous marriage. "What it's done for us is make us very angry at the county. It's not what we're used to, and it's not what we expected. . . . They should have some responsibility for protecting us as much as they protect the developers."
© Copyright 1998 The Washington Post Company