Buyers and Sellers Cash in with Patience

Washington Post, May 9, 2008
By Michele Lerner

'Patience is the best remedy for every trouble," wrote Roman playwright Titus Maccius Plautus sometime between 254 and 184 B.C. He clearly had no inkling of the tribulations of the modern-day real estate market.

Yet his advice, centuries later, is just what local real estate experts are urging for frustrated buyers and sellers.

Real estate agents with 20 to 30 years of experience with the local real estate market may be a bit more sanguine than newcomers to the real estate market, mostly because they have seen home values drop and sales slow in the past and witnessed the ensuing market comeback.

Some local agents report a lively spring market, with open houses attracting plenty of potential buyers and contracts on the rise.

The Washington-area real estate market is extremely local, with many areas within the District and in close-in suburbs feeling very little effect from the national real estate slowdown.

Other areas, particularly Prince William, Loudoun and Prince George's County, have been hit harder, with slower sales and dropping prices.

Evelyn Lugo, a Realtor with Long & Foster Real Estate in District, with more than 20 years in the real estate business, says that this current real estate cycle is different from the 1990s.

"In the 1990s, we had this huge real estate boom and then a terrible crash," Ms. Lugo says. "This time, especially inside the Beltway, it didn't happen that way. This has been more of an adjustment, which just had to take place since housing prices were increasing so fast. But, at least inside the Beltway, I think the real estate market is recession-proof because of the strong employment with government jobs and government contractors. Now consumers can feel confident that because of this employment infrastructure, there won't be a huge drop in home values."

Ms. Lugo acknowledges that this holds true inside the Beltway, with different scenarios in more distant suburbs.

Barbara Miles, associate broker with Coldwell Banker Residential Brokerage in Bethesda, has been in the real estate business for 25 years. She says this is the third slow market she has experienced.

"People have been saying the same things today that they have said in previous markets, such as that this is the end of the real estate world, but it always comes back," Ms. Miles says. "Recently at a company, we were read quotes from the 1940s that could have been media quotes about today's real estate market. Historically, real estate always goes up, and people need to understand this."

Ms. Miles says she never recommends buying a home for consumers staying in the Washington area for only two years or less, suggesting instead that they rent. She says buying and selling a home costs about 10 percent of the value of the home, which can be hard to make up in just two years.

"If you are not intending to move for at least three or four years, though, it just makes sense to buy a home," Ms. Miles says. "By buying, you have the pride of ownership, a tax write-off, a roof over your head, and, eventually, the value will go up."

Ms. Miles says home values dropped 20 percent overnight in 1992, but then rose in double digits every year between 1999 and 2005.

Dee Rosenberg, associate broker with RE/MAX Realty Group in Gaithersburg with 29 years in the real estate business, says that buyers and sellers need to be patient in this particular market. Sellers may find it takes a long time for their home to go under contract, and buyers may find it hard to choose the right home and obtain financing.

"This real estate market is different because I have never seen so many foreclosures before," Ms. Rosenberg says. "Foreclosures are a big part of the competition for sellers, but they are not always in as good condition, either."

Don Noll, associate broker with RE/MAX Select Properties in Sterling, has been in the real estate business for 25 years.

"The slow market is a lot different this time around because of what I call the 'funny money' loans," Mr. Noll says. "So many of the homes on the market right now are foreclosures and short sales, and not all of them are coming from subprime loans. Some of them are because people went in with these no-documentation loans and 100 percent financing, and they just didn't have a vested interest in the property. It has been easier for them to walk away from the responsibility of owning a home. Other people were just using their home equity as an ATM machine so they could take trips to Hawaii, and now they can't sell their homes because they owe more than it's worth."

On the positive side, Mr. Noll says that while the upturn in home values took place from 1995 to 2005, the Washington area has not seen home values drop all the way down to 1995 prices.

"The people that are hardest hit are those who bought in 2004 and 2005 when prices peaked," Mr. Noll says. "The market won't recover until some of the inventory is absorbed. In Northern Virginia, we have about one year's worth of inventory available. The farther out you are from the city, the longer it will take because now residents are also hurt by rising gas prices that make commuting so expensive."

Ms. Lugo says the biggest hit on the market right now is coming from mortgage lenders.

"Most lenders now want buyers to put 10 to 20 percent down, but consumers have become accustomed to needing little or no money down," says Ms. Lugo. "Single-family homes in this area often cost $600,000, so you are asking people to come up with $60,000 to $120,000 in cash."

Ms. Lugo thinks the recent change in FHA loan limits to $729,750 in the Washington area is already having a big impact on the local market.

"Raising the loan limits on FHA loans has opened up the market to people who want to buy a home with just 3 percent down," Ms. Lugo says. "That down payment can be a gift, too, and they can accept seller contributions towards closing costs of up to 6 percent."

FHA loans typically have easier qualification standards that allow consumers with lower credit scores to be approved.

Barbara Haardt, a senior loan officer with Prosperity Mortgage in the District, says that FHA loans, like other mortgage programs, qualify consumers based on income, assets and credit scores, and require full documentation through tax returns and bank statements.

"The difference is that for FHA loans of $392,900 and below, no minimum credit score is required," Ms. Haardt says. "For higher loan amounts, a minimum score of 600 to 620 is required."

Ms. Haardt says lenders in today's real estate market carefully analyze a variety of factors to determine whether each individual county is considered a stable or declining market, which can impact the approval of mortgage loans in that area.

"Lenders look at the number of units on the market, the values of homes in that market and the number of units on the market for more than 180 days to determine market status," Ms. Haardt says. "Currently, the D.C. market, including Northern Virginia and Prince George's County, is considered a declining or distressed market. Montgomery County has already improved to a soft market."

Ms. Haardt says in a declining or distressed market, most lenders require a minimum down payment of 10 percent for conventional loans. FHA loans are not impacted by this designation.

"Some lenders will automatically insist in lowering appraisals on homes in declining markets by 5 percent," Ms. Haardt says.

Two key pieces of advice that each real estate agent offered are these: Buyers should think conservatively when it comes to determining how much they can afford, and sellers should recognize that while they may sell low, they are also buying low.

"Sellers need to realize that if their home value is down by 10 percent from its peak, so is the value of the home you want to buy," Ms. Miles says. "You may have lost $30,000 by not selling your home in 2005, but you are gaining $60,000 on what the owner of your next house thought he would get. You just need to keep it all in perspective."

Ms. Miles says buyers need to compromise and not overextend themselves when purchasing a home. Plus, they need to make sure they understand their loan program, she says.

"You can always sell and move up later," Ms. Miles says.

Ms. Lugo says potential first-time buyers are "crazy" if they are not buying a home right now, since interest rates are low, financing is available and plenty of homes are available.

Ms. Rosenberg suggests that buyers be patient, since it may take more than one attempt to arrange appropriate financing and find the home they want. She says buyers should expect to make a down payment of at least 3 percent (with an FHA loan) or more, and they need to make sure they have a good credit score.

"Buyers need to be very specific with their buyer agent to make sure the agent understands exactly what they are looking for," Ms. Rosenberg says. "The most important thing is to make sure you are comfortable with the payment and your income. Do not push yourself into a more expensive home until you become uncomfortable with the payments."

Mr. Noll says that when he started in the real estate business, buyers had to make at least a 5 percent down payment, if not more.

"Now lenders are returning to that pattern and cracking down," Mr. Noll says. "They want buyers to have a vested interest in the home. So buyers may need some patience while they fix their credit and save money for a down payment."

Both Ms. Rosenberg and Mr. Noll suggest that sellers who do not have to sell their home now wait out the market.

"If you do have to sell, you need to be patient and understand that you are in it for the long haul," Ms. Rosenberg says. "You have to stage your home to make sure it looks the best it can, and you need to assume you will have to adjust your price."

Mr. Noll preaches patience, as well. "Buyers and sellers need to have realistic expectations in this market," he says. "They need a lot of patience until the market turns around again."