“Consider the following observations about the Washington, DC metropolitan housing market:
- A house in Silver Spring, Maryland goes on the market and sells in one day. That’s not a big deal. But the real estate agent received forty-one offers. I will repeat: Forty-one deals in just a few hours.
- A house in the city of Alexandria sells in one day at a price of $ 100,000 above the sale price. I will repeat: The home sold for $ 100,000 more than the seller’s asking price.
- More than 30 people camped out for 7 days to purchase units in a new urban home development. I will repeat: Thirty people living on the streets with sleeping bags and tents 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.
Nearly five years ago, Mr. Savage described a thriving seller’s market that had gained so much momentum that home buyers were forgoing financing and home inspections to make their offers more attractive to home sellers. As we have all witnessed, any market, be it stocks or real estate, cannot sustain this level of exuberance before something has to give.
Home prices that increase 20% per year eventually result in fewer buyers for these overvalued homes. Add to this mix, greedy lenders offering low introductory interest rates (only to increase in a few years), resulting in too many people owning homes they can’t afford. Demand for real estate begins to decline, inventory increases, and eventually home prices fall. Sounds familiar?
Rising interest rates would also have a devastating effect on all those buyers who purchased homes with little or no deposit and are facing attractive introductory rates coming due. Foreclosures and home overhangs would be a natural result of this market.
Mr. Savage predicted this result in his article; stating “the bigger the boom, the bigger the fall”. The real estate sector, like all markets, runs in cycles. The difficult situation in our current market is the fall of the golden age of real estate that we experienced a few years ago.
Currently, in the Metro DC market, the median sale price is just under $ 550; a 12% increase over the same period last year. It is not 20%, but it is definitely a more realistic increase than one would expect. Perhaps we are entering a new cycle in the real estate sector; one that reflects tight home prices, sensible lending practices, and smarter buyers.