In June, the median sale price in the D.C. metro region tied the record high of $440,000 in June 2007, a 10 percent increase from June 2012. The median days on the market in June was nine, down from 19 the year before and 47 in June 2008. (MOLLY RILEY/REUTERS)

by Sheree R. Curry

and V. Dion Haynes

Five years after the housing market collapsed, sending the economy tumbling with it, here’s what recovery in the Washington area looks like: Inventory is tight, home sellers are receiving multiple offers and buyers are competing with investors and their all-cash offers for prime properties.

In some ways, it’s like 2006 all over again: Winning offers often come in thousands above list price, without inspection contingencies and, in some cases, without even a mortgage contingency.

Because of a series of government regulations aimed at addressing the easy credit/no-doc policies that led to the meltdown, analysts say, the current local market isn’t in bubble territory. The boom results largely from job growth — more people want to live close to work in the city and Metro stations — rather than an influx of unqualified borrowers.

Home prices have mostly recovered and construction starts are 85 percent of where they should be, both surpassing the national average, says Jed Kolko, chief economist at San Francisco-based online real estate site Trulia.

Kolko says the national housing market is 64 percent recovered. But whether the entire D.C. area market is considered 60 percent, 75 percent or 90 percent recovered is an open question.

Local housing experts, agreeing that they would not like to see a return to the bubble days when the metrics were based on artificially inflated conditions, are determining a new definition of what a normal, fully recovered market should be.

“The peak is not necessarily a healthy market,” said Jeannette Chapman, research associate at the Center for Regional Analysis at George Mason University.

Researchers are looking at whether the housing market can accommodate the region’s projected population growth and job growth, she added. “There is no magic scale from the past to look at for all this.”

There’s no question that the market is roaring back.

Just ask Ali Niroo. The 35-year-old telecom executive and his wife, Darya, made an offer $20,000 above list price on a 1930s Colonial in Battery Park within hours of it being listed. Their offer on the three-bedroom house a short walk to downtown Bethesda was not the highest one. But the Niroos, who were married last summer, won out because they made an offer with a free rent-back clause that better accommodated the divorced owner, who needed to stay a couple of extra months.

“When you find a property in Bethesda, you have to jump on it,” Ali Niroo said.

Still, pockets of the region are struggling to regain the ground lost during the past five years.

Home values are rising slowly in communities that are farther out, making it more difficult to reduce the higher-than-average share of underwater properties. For instance, last month, 22 percent of active listings in Prince George’s County and 16.2 percent in Charles County were potential short sales, according to RealEstate Business Intelligence, a subsidiary of Rockville-based multiple listing service MRIS.

Both are well above the 8.2 percent average for the region.

Supply vs. demand

Even though most experts recognize 2008 as the year that began the housing market crash, telltale signs existed before then. In September 2006, a National Association of Realtors report on existing home sales showed that the median U.S. home price in August 2006 was $225,000, down 1.7 percent from a year earlier.

It was the first year-over-year decline in median prices that had occurred in 11 years. A drop in prices had not happened since April 1995. That 1.7 percent decline in August 2006 was the biggest year-over-year drop since the record 2.1 percent decrease recorded in November 1990, when the United States went into a recession.

Although 2006 ended with the highest overall median home price this nation had ever seen ($221,000), it went downhill from there. By the end of 2008, median U.S. prices had fallen to $198,100. They dropped to $166,200 in 2011.

The Washington area was experiencing similar losses.

By January 2010, the median home price in the region reached $290,000, down from $438,000 in July 2005, according to RBI.

Nationwide, the market was flooded with unqualified buyers lured by subprime loans, zero-down-payment loans, adjustable-rate mortgages, low underwriting standards and the prospect of seeing their homes quickly surge in value. Then the market was flooded with homeowners eager to cash in.

A balanced market has a near-equal ratio of buyers to sellers.

In the Washington area, that balance was evident in the early 2000s. In October 2004, 6,347 properties were sold compared with 6,975 active listings, according to RBI. By September 2005, though, 5,937 properties were sold compared with 12,658 active listings, indicating that the number of buyers was dropping but that the number of sellers was rising dramatically.

In May 2008, several months leading up to the crash, the number of properties sold had plummeted to 3,596, while the number of active listings climbed to 25,876.

By then, the housing problems were severe. The economy ratcheted down, prompting prospective buyers to exit the market in droves and housing prices to plunge. Meanwhile, adjustable-rate mortgages began resetting and many borrowers could no longer afford their homes.

“That’s when you started to see a big jump in listing activity as potential sellers started seeing the writing on the wall,” said Corey Hart, senior product manager at RBI. “But, unfortunately, the majority were a bit too late to act.”

Then and now

The government took steps to jump-start the housing market. The Federal Reserve in late 2008 dropped benchmark interest rates to about zero, and kept them low through a massive bond-buying program; the effort sent mortgage rates down to historically low levels. President Obama in 2009 signed legislation establishing a tax credit for first-time home buyers.

Both drew many buyers to the market.

The departments of Treasury and Housing and Urban Development established loan modification programs for people who fell behind on their mortgages.

At the same time, the government introduced regulations designed to rein in the abuses associated with easy credit.

Lenders began requiring more up-front money, better income-to-debt ratios, much higher credit scores — and in some cases, more reserve money in their bank accounts that would be left over after the transaction. One result has been that self-employed people — even those with high incomes — have a much harder time getting mortgages because they lack steady income.

Appraisals are now more stringent as well, in response to concerns that they were little more than rubber stamps for inflated housing prices. New federal regulations that were supposed to create a barrier between the appraiser and the lender had unintended consequences, which led to the selection of appraisers who were unfamiliar with the neighborhood. The result, some critics say, is that appraisers tend to undervalue properties, jeopardizing sales.

Some housing advocates say the policies go too far and could have a chilling effect.

“I think regulations do have an impact,” said Rob Chrane, president and founder of Down Payment Resource in Atlanta, a clearinghouse for payment assistance and home-buyer programs nationwide.

“If you’re a renter household and keep reading that credit guidelines have tightened up and credit is harder to get, a lot of people will take themselves out of the market,” Chrane added. “We refer to them as shadow buyers. These are people who are potentially eligible [to buy a house] but don’t know there are resources out there for them.”

Interest-rate effect

The market turnaround is in full swing.

In June, the median sale price in the region tied the record high of $440,000 in June 2007, a 10 percent increase from June 2012. The median days on the market in June was nine, down from 19 the year before and 47 in June 2008.

Many buyers, like the Niroos, see opportunities in this market.

The couple did not bother with an inspection contingency, because they knew it might hurt their chances with the seller. But their plan is to tear down the house, even though it is in move-in condition.

They will build a custom home because with mortgage rates still fairly low at about 4 percent — compared with the 6 percent and 7 percent loans that were common earlier this decade — the cost to build a custom house is affordable for them.

Today one might find more small investor-landlords looking to take advantage of low interest rates and rising rents. With the demand for rental housing strong, people like the Niroos, who are not selling their condo in Logan Circle when they move to Bethesda, are becoming first-time landlords. The Niroos say they expect to take in about $3,700 per month in rent.

“We hope that the condo will pay for our kids’ college,” says Ali Niroo, referring to the unit they bought in 2006 when it was under construction. “It is now appraised for $70,000 or $80,000 more than when we bought it. I’m sure the value will keep increasing.”

But with interest rates set to rise sharply after the Fed phases out its stimulus program, how long will the boom continue?

Low interest rates have served as a counter-balance to the tougher regulations, persuading tens of thousand of window shoppers to get off the sidelines.

Frank E. Nothaft, vice president and chief economist at Freddie Mac, forecasts that 30-year fixed mortgage rates will rise to about 5 percent by mid-2014.

He is projecting that home sales will spike in the short term as buyers try to sneak in before the rates increase further. Even after rates reach 5 percent, Nothaft said, sales should still rise but more slowly.

“Our projection calls for further increase in house sales over the next nine to 12 months. When we look at the market as a whole, we have to factor in job growth and income growth,” Nothaft said.

Higher interest rates may mean buyers “have to choose a home that’s lower priced, maybe one that’s either farther out from the central city or a home with less amenities,” he added. “All these factors will translate into a home that’s a little more affordable.”

Curry is a freelance writer.