My advice is to rent. After five years of double-digit growth, the metro area housing market is currently experiencing a correction, which could well continue into the coming years. I think you would be taking on a significant financial risk by buying a home now.
If you stay in your home for 10+ years as you plan, then perhaps it doesn't matter so much. But imagine you buy a home now for 300K without downpayment and a year later you are moving to California or have to sell for some other reason, and it turns out the market price of your home has declined by 10%. Out of nowhere, you'd be 30K in debt (ignoring closing costs and the little principal you would have paid off in the first year on a 30-year mortgage).
You have probably read this article that appeared in the Post back in July, but here it is again:
After 5 Years of Growth, Home Prices Drop
Inventories Swell in Parts of D.C. Region
By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, July 26, 2006; A01
In what may be the most telling sign yet that the real estate market here has shifted downward, median prices of homes in several parts of the Washington area have declined when compared with the same time last year.
In Loudoun County, for example, the median price of homes sold dropped 1.2 percent last month, compared with June 2005, according to Metropolitan Regional Information Systems Inc., the area's multiple listing service. In Fairfax County, prices fell by half a percent in May and a tenth of a percent in June. And in the District, the decrease was 0.8 percent in March and 1.2 percent in May, compared with the same months last year, even though prices in the District in June were higher than the year before. The median is the point at which half of the houses cost less and the rest more.
The declines are small, and certainly not universal. Prices continue to rise in some areas, most notably Prince George's County, where houses are still relatively inexpensive. But the drops are significant because they mark the first time in half a decade that home prices have fallen in a 12-month span, illustrating just how much the real estate landscape has changed after five years of double-digit growth in home prices.
The areas with declines have some things in common: swelling numbers of houses for sale, slowing sales and lots of new houses on the market. In Loudoun, where developers have put up acres of new subdivisions in recent years, nearly 5,000 properties are for sale via the multiple listing service, which includes mostly resale homes. That compares with 1,800 a year ago. Homes there now take an average of 75 days to sell, compared with 21 days a year ago. In the District and Fairfax County, the number of unsold homes and time on the market has also increased, boosted by a large supply of condominiums.
What's happening is part of a national trend in which regional markets that led the country during the boom are seeing prices flatten or decline as the number of unsold homes on the market mushrooms. Yesterday, the National Association of Realtors reported that the inventory was up last month, to a 6.8-month supply, based on a seasonally adjusted annual sales rate of 6.62 million units. In June of 2005, the inventory was 4.4 months, the sales pace 7.27 million. The median price of existing U.S. homes was up 0.9 percent in June, compared with the same time last year.
The question for many local buyers and sellers is whether the small declines foreshadow big price reductions in the months ahead.
Economists are split. One view is that any declines will be insignificant or temporary because of job growth and the strength of the local economy.
"Could it be a 5 percent drop in prices? Could it be 10 percent? Whatever it is, it will be short-lived, because demand is right there on the sidelines," said David A. Lereah, chief economist of the National Association of Realtors.
But others see a steeper, prolonged downturn in prices because of overbuilding in some areas, speculative buying and a run-up in prices that has outpaced affordability. Prices, they added, have actually declined more than the multiple-listing service statistics indicate because sellers have been offering such incentives as help with closing costs.
Peter Morici, an economist at the University of Maryland, said prices could drop 10 percent by the end of the year, and perhaps by 20 percent "by the time it's all over."
The market will take months to shake out, because too many sellers have not accepted that their houses are not worth as much as they had thought, said Mark Zandi of Moody's Economy.com. "The market can't complete its correction until that happens."
Zandi sees Washington area home prices declining over the next six to 12 months by an average of 10 percent, with the condo market experiencing larger price drops. The good economy, he said, is "not enough to save the market from this housing correction."
The possibility of falling prices seems to have made many home-shoppers hold off on buying, despite rising interest rates. After all, even a minor correction could mean that houses cost tens of thousands less. For home sellers, that means much hand-wringing as they start to slash prices below what neighbors got just a year ago.
Scott and Shirley Porter of Ashburn had no choice but to cut the asking price for their townhouse -- there are just too many others for sale nearby. From their back yard, they can see three for-sale signs across the street. Out front, more neighbors are selling. Around the corner, there are four more.
"The townhouse right next to us sold for $462,000, and it was on the market for three days," Scott Porter said last week.
But that was last year. The Porters put their end-unit on the market last month for $458,000. That was right at the middle of other townhouses for sale in the neighborhood, he said.
But in no time, the Porters, who both work in the District and want to reduce their commutes, found that their place had ended up at the top of the price scale after neighbors reduced their prices. So they lowered theirs, too, to $435,000.
"It's amazing how much the prices have come down," said Scott Porter, 45. "You feel like you've missed the bus."
Neighbors Sheila and Chris Boyce, who are moving to Arizona, put their three-bedroom, 2 1/2 -bath unit up for sale in March for what they thought was a competitive $445,000. They have since reduced it to $437,000 -- still $42,000 more than the $395,000 they paid two years ago. After costs, they would not be making nearly as much profit as they had imagined, even if they get their new price.
"We weren't trying to get rich on it or anything," said Sheila Boyce, 32. "We thought it would be a lot more. Not hundreds of thousands, but at least something to put away."
Even in areas where the prices haven't gone below 2005 levels -- at least on paper -- they are clearly moving at a different speed. Prince William County, for example, last month posted a 1.8 percent increase in median home price, compared with the same time last year. That compares with a 31 percent jump from June 2004 to June 2005.
For George and Susan Garrigan of Woodbridge, simply cutting the price on their home of 28 years no longer seemed enough. There are 112 detached houses for sale in their Lake Ridge neighborhood. Forty have been on the market for more than 100 days; 114 townhouses are also for sale.
Never mind that two similar nearby houses -- split-level, built in the early 1970s on quarter-acre lots -- sold for $50,000 more last summer. Or that they pulled their house off the market after two price reductions this spring brought no bidders.
Yesterday afternoon, the Garrigans came back with a new lure: the brand-new Toyota Corolla sitting in the driveway, free with the purchase of their house.
"I feel it's a wonderful deal for a family not to have that car payment," said Susan Garrigan, 66.
"We think we'll be more visible," said George Garrigan, 70, when asked why he did not simply cut the asking price by $17,000. "Everybody's dropping the price. So you're still in the same pool of houses. There's nothing that says, 'Hey, look at my house twice.' Or 'Look at my house once.' "
Because of the slowing market, their retirement home in Front Royal will not feature the "dream furniture" that she had hoped for, nor the rooftop observatory that he wanted. But that's okay, they said.
"We're realistic and we're moving forward," Susan Garrigan said. "We have to take our knocks. We can't change reality."
© 2006 The Washington Post Company
