Surreal Estate
Washington's Market Is Spinning Beyond Crazy Toward Unattainable
By Daniela Deane
Washington Post Staff Writer
Saturday, April 24, 2004; Page F01
Helen Liu thinks that she and her husband just got lucky. It was spring break. The weather hadn't broken yet; it was still cold and rainy.
So the Sunday open house in Potomac didn't have the usual bustle of buyers swarming like bees to honey.
The couple, who are moving to the Washington area from the Boston suburbs, made an offer on the five-bedroom, 2.5-bath house that day. There was just one other offer, something they had not seen before during their house hunt. And they got the house.
"There's quite a bit of work to do on it," said Liu, "but we don't care. We're just happy we got something. It's a zoo out there. Boston is nothing like this."
The Washington area's real estate market has been hot for the past few years, but now it's scalding.
Low but rising interest rates are making many would-be buyers feel they have to move quickly or miss the opportunity. On top of that, a strong local job market is keeping demand high while supply stays low. The result is a wild scramble for properties, which translates into escalating prices. Agents are even cutting their commissions to compete against each other to sign up elusive home sellers.
For instance, the house that Liu and her husband, Mark Lowenstein, have agreed to buy was the third on which they bid. The first house attracted 15 contracts and sold for $100,000 over list price. The second house also fetched multiple contracts (she's not sure exactly how many) and sold for $1.1 million, also $100,000 over the asking price.
Properties from Dulles to Damascus are selling in days -- in some areas, as much as 40 percent faster last month than a year earlier, according to data from Metropolitan Regional Information Systems Inc., the area's listing service.
Bidding wars mean soaring prices. Median prices in March rose 16 percent in Arlington and Prince George's County compared with a year earlier, 20 percent in Montgomery County and the District, and 28 percent in Loudoun County, according to MRIS data.
"Both buyers and sellers are worried about interest rates going up," said Richard Oder, an agent at Long & Foster Inc. in the District. "And then it's the traditional spring market, too. Both are hitting at the same time and causing a real frenzy."
David Lereah, chief economist for the National Association of Realtors, said that when people believe rates are going to rise, home shoppers "jump off the fence." He said because of that there has been an "extra bump in demand."
Mortgage rates have been rising steadily for five weeks, propelled by a rosier job picture. This week, rates on 30-year fixed-rate mortgages averaged 5.94 percent, up from 5.79 percent last week, according to secondary mortgage giant Freddie Mac.
But interest rates are the same all over the country, and few real estate markets are as crazy as this one.
"The Washington market is the exception, not the rule," said Van Davis, president and chief executive of Century 21 Real Estate Corp., a national brokerage. "For every market like this, there are 10 that aren't like this. In the central part of the country, it's a different story."
What sets the Washington area apart is the employment situation, according to regional economy watcher Stephen S. Fuller of George Mason University.
"The difference between here and Chicago is that we have jobs and they don't," Fuller said. "And job growth is almost a 100 percent predictor of price increases in housing."
From February 2003 through February 2004, 54,900 new jobs were created in the metropolitan area, according to the Department of Labor. Local economists predict that some 80,000 more will be created this year, and that tens of thousands of people will move here to fill them.
In contrast, most metropolitan areas are losing jobs. The Washington area's unemployment rate of 3.2 percent is one of the lowest in the country. Household income here is also 32 percent higher than the U.S. average, according to the Department of Commerce.
"Interest rates play a role, but in a secondary way," Fuller said. "The key to the housing market here is the vitality of the local economy."
That's because more jobs mean more residents who need to find a place to live. But at the same time more people are looking, there are fewer homes to look at.
"There are serious inventory problems in the Washington area," said Lereah of the Realtors association. "Inventory all over the nation is very, very tight. But Washington is among the tightest markets in the country."
In February, his group's statistics show, there was a 1.9-month supply of homes for sale in the Washington area, meaning it would take that long for everything to be sold at the current sales rate. The industry generally considers 5.5 to 6 months a healthy balance. The national supply in February was 4.6 months.
Vince Hurteau, an agent at Continental Properties in the District, compares supply and demand here to a Saturday night in busy Adams Morgan. "Everybody's circling around looking for parking," Hurteau said. "And there's a lot more people looking for parking than there are spaces."
In times past, first-time buyers have purchased houses from people who moved up the housing ladder. But agents say that move-up sellers have all but vanished because current owners can't find the bigger, better places they might want -- and couldn't afford them anyway. So they're staying put, maybe adding on if they want more room.
"There's absolutely nothing for sale in Arlington or Northern Virginia," said Bob Herring, an agent at Weichert Realtors in Arlington. "The only people who are selling are people who are dying, getting divorced or moving into nursing homes."
For instance, Herring said that in the sought-after Jamestown Elementary school district in North Arlington, just eight houses were for sale one day this week. Seven of them were new in-fill homes priced at $1.4 million and above. The eighth was a fixer-upper.
When something does come on the market, it's often snapped up in a matter of hours.
"If you have a nice property, it's nothing to have multiple offers in 24 to 36 hours," said Connie Stommel, president of the Prince George's County Association of Realtors and a real estate agent at Re/Max 100 Real Estate in Camp Springs.
Consider what happened with Dave and Ursula Schryver's one-bedroom-plus-den basement condominium near Dupont Circle.
The Schryvers put their condo -- which has a small outdoor deck and parking -- on the market on a recent Saturday for $349,000. More than 100 people showed up to their Sunday open house. Contracts were due by Tuesday at 3 p.m.
They received six offers. They picked the buyers who gave them a free rent-back period and were flexible on the closing date. The condo sold for $404,000, or $55,000 over the asking price.
"These prices are absurd," said Dave Schryver, who at the same time admitted it was great to be a seller in Washington these days. "Four hundred thousand for a one-bedroom condo?"
Multiple offers mean buyers are pitted against each other. So escalation clauses, which commit a buyer to increase his bid by a given increment over the next offer, are common.
Kris Feldman, a buyer's agent with Coldwell Banker Residential Brokerage in Bethesda, said escalation clauses "are getting out of hand" in this market.
"You don't know if people are telling the truth anymore," Feldman said. "We're all presenting the offers in sealed envelopes. Are people fudging? Who's fudging? Who knows?"
Feldman said jumps of $10,000 over the previous offer are necessary to snag a house nowadays. "Five thousand doesn't do it anymore," she said. "It used to be $2,500." She said buyers also need to write big deposit checks -- perhaps $50,000 -- to convince sellers the deal will go through.
Would-be buyers are also dropping contingencies from their contracts, agents say. Among clauses that are history: the home inspection contingency, which lets a buyer walk away if there are physical problems with the house; the financing contingency, which allows a buyer to pull out if he can't get a loan; and the appraisal contingency, which means a buyer can renege if the property doesn't appraise for the sales price.
In this frenzied market, some sellers have asked agents to cut their commissions.
The Schryvers, for instance, paid their agent a 5.5 percent commission -- half for the listing agent, half for the buyer's agent -- rather than the standard 6 percent. Dave Schryver said the agent offered the lower commission upfront.
Century 21 chief executive Davis said commissions were "under pressure in the Washington market," hovering at "5 percent or even less." Davis said there were two reasons for the lower commissions: significant property price appreciation, which means more dollars per sale for the agents, and the speed of sales, which means less time spent on each deal.
Buyer's agent Mary Young of Re/Max Realty Group in Gaithersburg said a 2.5 percent commission for a buyer's agent was "pretty common right now." She said a lot of listing agents have been accepting a 5 percent commission this spring because listings have been so hard to come by. She said plenty of owners are selling for themselves, too.
The new-home market is also crazy, local builders report, with prices rising up to 50 percent in the time it takes to build a subdivision or a condo building.
"Many builders are seeing people line up at their projects," said Chuck Ellison, president of the Maryland National Capital Building Industry Association and vice president of McLean-based builder Miller & Smith. "Very few people are dropping out of contracts."
Ellison said builders are having difficulty "finding land to build houses on." That means development keeps moving farther from the city.
Closer in, builders often are competing against would-be homeowners to purchase. For instance, Ellison said a builder recently paid $750,000 for a tear-down in Bethesda -- three-quarters of a million dollars for the land alone.
Jim Williams, of the Northern Virginia Building Industry Association, said that four years ago, the price of land was 20 to 25 percent of the cost of a new house. Now, the price of land is more like 35 to 40 percent of the cost.
"That's been caused by the extreme shortage of land supply," Williams said.
Builders say that the efforts by local governments to address concerns about development and overdevelopment have squeezed land supply. "I blame sprawl on local governments," Williams said. "Builders have had to go further and further because local governments have put artificial restraints on land."
The other side generally counters that developers and builders bear much of the blame for sprawl.
The big price jumps mean many buyers have been squeezed out of the single-family house market and into townhouses and condominiums.
"The condo market is on fire," said Dan Melman, an agent with W.C. & A.N. Miller Realtors in the District. "People who can't afford houses have to buy condos. And they can't afford the blue-chip neighborhoods anymore, either."
Troy Moody is afraid he can't even afford a condo.
Moody began looking for a two-bedroom condo in the city in January; he had a budget of $275,000.
When he found he couldn't afford what he wanted in the D.C. neighborhoods he preferred, he tried Arlington. And then Alexandria. And then Silver Spring. He's made three offers so far and has been out-bid on all of them; one Silver Spring condo attracted 15 offers.
"I feel like I'm up against a wall," Moody said. "I'm rethinking everything. I wanted to stay within the Beltway. But that's probably going to have to change."
With prices ratcheting up monthly, affordability has become a concern for everyone involved in real estate. Are people going to be able to afford these ever-increasing prices? If interest rates rise further, will anybody be able to afford anything in this area?
That's certainly what's on Chris Gallagher's mind.
Gallagher and his wife are looking to trade up to a single-family house from their townhouse in Oakton.
"We're looking everywhere," said Gallagher, who's in the military and has three children. "Burke, Reston, Oakton, Herndon, anywhere in Fairfax County."
"Every time we find something we think we might like, it's off the market by the time we get there," he said. "We went to an open house last Sunday. It was from 1 to 4 and we showed up at 2. They already had seven contracts, six in hand, and one being written in the basement when we walked in."
Gallagher said he and his wife are becoming discouraged -- and scared.
"Eventually, home prices will go beyond what I can afford, and we'll be forced to move out of the area," he said, "which is a shame, because we like it here."
© 2004 The Washington Post Company
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