The Wisdom of Hindsight in the Real Estate Market

“Consider the following observations about the Metropolitan Washington, D.C. real estate market:

  • A home in Silver Spring, Maryland comes on the market and sells in one day. That’s no big deal. But the real estate agent received forty-one offers. I’ll repeat: Forty-one offers in only a few hours.
  • A home in the city of Alexandria sells in one day at a price $100,000 over the asking price. I’ll repeat: The house sold for $100,000 more than the seller’s asking price.
  • More than 30 people camped out for 7 days in order purchase units in a new urban townhouse development. I’ll repeat: Thirty people living on the streets with sleeping bags and tents in order to buy in a new townhouse development.

A dream come true you say? These are excerpts from the article “One Word For Metro Washington Real Estate: Insane, written by Henry Savage for RealtyTimes.com…in March 2004.

Almost five years ago Mr. Savage painted a picture of a thriving sellers market that had gained so much momentum that home buyers were waiving financing and home inspections to make their offers more attractive to home sellers. As we have all witnessed, any market, whether stocks or real estate, cannot sustain this level of exuberance before something has to give.

Home prices increasing 20% per year eventually results in fewer buyers for these over priced homes. Add to this mix, greedy money lenders offering low introductory interest rates (only to spike in a few years), and resulting in too many people owning homes they can’t afford. The demand for real estate begins to decrease, inventory rises, and eventually home prices drop. Sound familiar?

The increase in interest rates, would also have a devastating effect on all of those buyers who purchased homes with little or no deposit and are faced with the expiration of the attractive introductory rates. Foreclosures and housing gluts would be a natural result of this market.

Mr. Savage predicted this outcome in his article; stating “the bigger the boom, the bigger the bust”. Real estate, as do all markets, runs in cycles. The plight of our current market is the fall out from the golden age of real estate we experienced a few years ago.

Currently, in the Metro D.C. market, the average Sold price is just under $550; a 12% increase from the same time last year. It’s not 20%, but definitely a more realistic increase one would expect. Perhaps we are entering a new cycle in real estate; one that reflects adjusted home prices, sensible lending practices, and smarter buyers.