Rules for a Slowdown
It's a new housing market. Here's how to deal with it
Chevy Chase is one of those Washington, D.C., neighborhoods where lots of folks want to live. Its tree-lined streets boast a patchwork of neatly kept colonials, Tudors, and bungalows. There's a top-rated elementary school, a big park, and gardens lovingly tended by the neighbors. Groceries and restaurants are just blocks away, and best of all in a region known for horrendous traffic jams, it's an easy commute downtown.
During the recent housing boom, the neighborhood became so sought after that it was nearly impossible to buy in. "If a house went on the market, they'd get half a dozen bids right away," says real-estate agent Tom Williams. "And it was almost always for more than the asking price."
Waiting game. Today, however, that's all changed. Although prices have softened only slightly so far, bidding wars are now a thing of the past as buyers mull over an inventory of unsold homes that has tripled since the same time last year. "We just don't know if it's the right time to buy anymore," says Ruth Zitner, who has been shopping for a home in the neighborhood for the past year. "So we've decided to just wait and see."
That attitude is fast turning the housing market on its head, not just in Chevy Chase but also in once hot neighborhoods from South Florida to San Francisco. The nation's largest home builders are reporting rising cancellations of orders for new homes. Meanwhile, nationwide sales of existing homes fell by 8.9 percent in June, compared with a year earlier, and by as much as twice that in places like Boston.
With sellers increasingly anxious to unload their properties, inventories of unsold homes have swelled to more than a six-month supply, an increase of over
50 percent in a year. That's considered a key threshold signaling the transition to a buyer's market that is finally beginning to drive prices down. "Sellers have tried to hang in there and get their price," says David Wyss, chief economist at Standard & Poor's. "But there comes a point where they'll have to give in."
All local. Whether that means the nation's housing boom will end with a loud bang or a slow "pfttt" depends largely on where you live. To be sure, some parts of the country--like Texas and much of the Midwest--hardly participated in the decade-long run-up at all, limiting the downside or even bucking it. But in markets where home prices have more than doubled in the past five years, "you could see some ugly declines," housing analyst Jack McCabe says. That includes places like Miami's overbuilt condo market and the formerly sizzling San Diego area, which in June saw the first drop in the median home price in a decade.
So what's a homeowner--or a home buyer--to do? That, too, depends on where and how you live. If you own a house you like, have a fixed-rate mortgage, and don't plan to relocate anytime soon, there's no reason to lose sleep. And if you're a renter who missed out on the real-estate run-up, experts like McCabe say the coming year or two could actually present the buying opportunity you've daydreamed about.
But if you own a house and need to sell soon or, heaven forbid, you recently bought a condo with plans to flip it for a fast buck, you could be in for a rude awakening. So, too, could anyone financing a home with an adjustable-rate or interest-only mortgage, which could see monthly payments surge just at the time it could be most difficult to sell. It's a scenario that could crimp consumer demand and drive home prices even lower.
No matter what your situation, housing experts say that almost everyone needs to dial back expectations for appreciation in the future. Most say real estate should remain the solid investment it has been over the past 30 years, with values rising just a bit above inflation--hardly the get-rich-quick formula many have recently followed.
"We're entering a period where people need to follow the sort of old-fashioned rules their grandparents lived by," says Christopher Cagan, research director at information provider First American Real Estate Solutions. "Buy a house when you plan to settle down for a while, and don't think of it so much as a financial investment as a place to invest in your life."
This story appears in the August 7, 2006 print edition of U.S. News & World Report.