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DC Real Estate Sales Said to be Bleak Yet Insiders Contradict Popular View

By Michael K. Wilkinson

Part One: Background

Recent reports in the press have painted a picture of a real estate market in turmoil. Steeply adjusting mortgage payments leading homeowners to panic and bail, or foreclose. Whole neighborhoods dropping precipitously in value as more homes hit the market than can be absorbed by the demand. Mortgage companies folding under the pressure of their non-performing loans and a lack of new business. Developers dropping out of condominium projects or converting from condo to rental.

What’s confusing is that, in the District, it just doesn’t seem to be that bad. Is it true, and if so, why?

After extensive discussions with a wide range of real estate professionals, and after trying to make a bigger story out of this question, it boils down to something quite simple: supply and demand.

That Was Then: Unprecedented Demand

There is no doubt that the market has shifted quite dramatically in the recent past.

Up until about two years ago, developers routinely sold out projects before ground was even broken, and individual homeowners were showered with heartfelt letters, gift baskets, and multiple offers from desperate buyers. All of which was driven by demand.

What caused such demand? Well, that’s a more complicated question. City life was making a major comeback following decades of urban decline. Interest rates were at historic lows, making the cost of borrowing more affordable than ever. Furthermore, beginning in 1995 the city offered a $5,000 tax credit for first-time homebuyers, which lowered the barrier to entry even further for many who would otherwise be renters.

And perhaps most importantly, demand began feeding on itself: increasing property values drove more people into the market, and drove more existing owners to trade their equity for bigger digs or into an investment property (or two or three). With the number of multiple-offer sales driving contract prices higher faster, appraisers could hardly keep up in assessing values for the next batch of transactions.

And with prices increasing at such a frenzied pace, lenders began to relax standards, allowing loans up to the full value of the contract price, assuming that the actual value of the property would increase rapidly. They also began to offer loan programs to buyers with lower-quality credit records, including loans with dramatically low initial payment terms, assuming that anyone could refinance or sell their home for a profit if they began to have difficulty paying their mortgage. (Lenders also frequently sold the loans off shortly after making them, further reducing their concern for the longer-term health of the loan.)

All of which had the effect of bringing a flood of new buyers into the market.

The Supply Tipping Point

With this demand picture as the backdrop, builders gobbled up undeveloped land and studied the zoning regulations carefully to maximize the number of units they could build. Underdeveloped buildings across the city transacted at a frenzied pace, with conversion to condos the main objective. Through the initial burst of development, demand continued to outstrip new and proposed projects in the pipeline, driving more and more developers into the market. Average quality two-bedroom condos in average locations routinely fetched $500,000, with some developers operating further up into the luxury market achieving the million-dollar mark on a strikingly regular basis.

In the single-family market, homeowners kept listing homes at groundbreaking prices as well, and getting to settlement at or above asking. Contingency clauses disappeared, as did the need to thoroughly clean and stage a home for sale.

Eventually, though, a saturation point was reached in the condo market where the number of condos being introduced to the market after several years of planning and construction equaled, then outstripped, the number of buyers willing and able to pay the rate that had been established during the period of peak demand. And asking prices on existing single-family homes hit a ceiling, with listings at the high end in any given category sitting on the market longer, as well as the poorly renovated or unprepared homes at any of the price points. Realtors even began to use price reductions as a marketing tool for the first time since many of them had even been in the job.

Across the board, things began to fall apart.

This Is Now: The Backlash of Excess Supply and Overpricing

With so much competition, condo builders began to offer incentives and lower prices.

Lenders began to question the aggressive values being assigned to the properties they were lending on, including both condos and single-family homes.

Investors who had put small deposits down on condo units pre-construction found themselves unable to get the financing terms that would have made their investment numbers work. Old deals started falling through just as the pool of new buyers began to dry up.

And those subprime buyers who had counted on ever-increasing equity to carry them through found themselves sitting on a commodity with a diminished market appeal, unprecedented competition, and ballooning payments. Many of them bailed, selling at panic prices or foreclosing on the properties.

A glut was born.

Part Two: Answers

So how is it that downtown neighborhoods seemingly have weathered this real estate rollercoaster in ways that the suburbs have not been able to do?

The Irrefutable Law of Supply and Demand in Three Parts

The Self-correcting Market. Faced with a potential market collapse, many developers and investors shifted focus from selling their product to renting. Whole buildings converted from condo to rental, taking several hundred units out of the market at a time; pre-construction buyers in the affected buildings were often directed to one or more of the developer’s remaining condo projects, instantly shoring up the market for units in those buildings. Examples include Level2 Development’s View 14 project at 14th Street and Florida Avenue, and Donatelli Development’s Highland Park project at 14th and Irving Streets, two projects The InTowner has previously reported on. (For View 14, see, “Longtime 14th St. Auto Repair Business Sells Property to Developer,” July 2005, page 1; for Highland Park, see “Explosion of New Retail Set for 14th From Thomas Circle to Columbia Hghts.,” August 2006, page 1. Both articles may be found in the Current & Back Issues Archive at http://52.202.253.253/~intowner.)

In addition, many developers, including Donatelli, have been offering to rent investor-owned units for the buyers in the interest of preserving longstanding deals that are in jeopardy due to the credit crunch and price correction, according to Barry Smith of Domus Realty, which is representing Donatelli in the sale of two large condominium projects — Kenyon Square in Columbia Heights and Park Place in Petworth.

And, many investors who had already closed and were expecting to re-sell for a profit have also taken their units off of the market. Kevin McDuffie, branch vice president at Coldwell Banker’s Dupont Circle office, noted that the absorption rate, or number of listings that were withdrawn, expired, transferred to another broker or shifted to rental held steady through the first six months of the year in the mid- to high teens, but spiked beginning in July (27 absorptions in July; 58 in September). He noted, in particular, the rate of investors withdrawing their re-sale properties from the market and either shifting them to rental or leaving them vacant in anticipation of improved market conditions.

There’s Only One Downtown. Interestingly, many of the factors that drove demand into the stratosphere in the first place have not changed. The initial push to bring people back into the city led to an explosion in cultural and shopping attractions in neighborhoods across the city, which in turn has drawn ever more people back into the city.

And it is impossible to ignore the fact that for all of the rings of suburbs fanning out along highways leading further and further away from the city center, there is only one downtown Washington DC, with a cultural and architectural character that cannot be found in a suburb. And, whereas new neighborhoods crop up seemingly every week in the outer suburbs, Washington DC has fixed boundaries and a fixed street pattern, with (nearly) fixed zoning regulations. Temporary gluts aside, growth in supply is naturally limited, assuring longer-term stability market conditions.

Real estate professionals we interviewed noted that the market in neighborhoods such as Logan Circle, Dupont Circle, Adams Morgan and Mount Pleasant have been selling. Jo Ricks of City Houses noted a particularly strong market for condos under $400,000, pointing to several recent multiple-offer sales in that category. She characterized the market as “steady, but not frantic.”

Coldwell Banker’s McDuffie, whose office holds the number one ranking in zip codes 20005, 20009 and 20036, added that downtown neighborhoods have been drawing people who have grown tired of the long commute from the suburbs, particularly as fuel prices have risen to record levels.

Back to the Old Playbook. A wide range of real estate professionals were interviewed for this article, including developer sales representatives, condo and co-op re-sale specialists, and agents concentrating on certain neighborhoods. Everything we learned seemed to boil down to a single overarching theme, one that will sound surprisingly simple: If you have a quality product and it’s priced right it will sell. Easily.

And it applies not just to the lower end of the market. In addition to the sub-400s multiple-offer condo sales, City Houses’ Jo Ricks accepted multiple offers on a single-family house in a Dupont Circle side street listed at $799,000; and she told us of another listing at $1.375 million that took less than 30 days to sell. All were ideally located, and presented in exceptional condition.

Connie Maffin of Coldwell Banker’s Georgetown office, and Chairman of the DC Board of Real Estate and a former president of the Washington DC Association of Realtors, noted that pricing has become more difficult after the market shift. Sellers looking for comparable sales prices can’t expect to set their prices at the peak levels seen in 2006, but more recent comparable sales may be harder to find. She noted that money spent on renovating baths and kitchens is always returned at sale, and will likely bring a faster sale; another key investment is obtaining a legal certificate of occupancy for a basement apartment.

Back to Normal

In the final analysis, pricing is key, location is key, features are key and condition is key. Sellers setting unrealistic prices will have difficulty. Properties that do not show well or which were poorly renovated will have difficulty. Properties located off the beaten path, including basement units, will take longer to sell.

As simple as it sounds on its face, the fact that price, location and quality are the key to selling properties represents an important shift in the market: we are back to normal.