As in Florida, Speculators Fueled Boom in Washington, D.C., Real Estate Markets

Much like we have seen in the Florida condo market, Washington, D.C., area investors who sought quick profits buying and selling them in the capital region are in full retreat as demand is dampening, reports a story in the Washington Post.

As with Florida real estate, it is becoming clear how speculators played such huge roles in the region’s recent boom — not just condominiums, but townhouses and single-family homes. Investors using no down payment types of financing and non-traditional loans snapped them up, sending the area’s median prices soaring. Now many are trying to rent at a loss, or unload properties at low prices, which weighs down values for everyone.

“We think the softness of the market is largely due to the pulling out of investors,” said Gopal Ahluwalia, vice president of research for the National Association of Home Builders. “They have not only pulled back, they are canceling purchases.”

Sales of new condos fell 43 percent in the first quarter of 2006, compared with a year ago, with almost four times as many existing condos for sale than last year. Case in point: David Bath, a retired dentist in Reston, Va., who bought a condo for $97,000, only to flip it for $250,000 in just one day. Now he wants out, after having no luck finding buyers for his Florida real estate investments — two houses and a four-unit apartment building. He’s stuck with mortgage payments on vacant properties.

“It’s a lot of work and I don’t see the returns anymore,” he said. “I’m going to the table to cash my chips in,” Bath said.

While condominiums have often been the product of choice as far as real estate investments go, luxury neighborhoods also fell prey to real estate speculation, leading to the prospect of price drops even in the area’s affluent subdivisions. Robert Toll, CEO of Toll Brothers Inc., a luxury home builder, told analysts that the D.C. market was the nation’s hardest hit by investors looking to flip and who are not putting homes up for sale.

“We can feel the impact of speculative play coming back into the market,” Toll said.

It’s hard to quantify exactly how much of the real estate boom was driven by investment and speculation. Experts say between 15 and 30 percent of all purchases were made by investors, rather than by people who bought homes intending to live in them. Some bought the properties with cash, others with home equity, meaning there is no loan on record. Others pretended they would live in the homes, so that they could qualify for better home loan terms on applications or circumvent rules imposed on investor buyers.

Some projects became particularly big magnets, and recently, real estate blogs such as Bubble Meter have started criticizing what they believe is speculative excess. The prevalence of investors, and their disappearance, is causing problems for owner-occupants who want to sell, sometimes going up competition willing to cut prices substantially because of profits they made in 2003 or 2004. Delta Associates, an Alexandria real estate research firm, said there are about 25,853 new condos on the market, but only about 1,996 new condos were sold from January to March.

The area’s multiple listing service, which lists mostly previously owned properties, showed about 5,500 condos for sale in March in Washington and the nearby suburbs. In March 2005, only about 1,400 were listed with the service, according to Metropolitan Regional Information Systems. Some developers are struggling with this trend as well. A survey of builders last year found that:

• 52 percent tried to sell exclusively to owner-occupants.
• 33 percent prohibited renting the unit out during the first year.
• 29 percent declined to make multiple sales to people with the same last name.
• 28 percent reserved the right to buy back the unit at the same price if the owner sold in the first year.

Despite the good intentions, many failed to weed out investors, or could not resist a fast sale when speculators came knocking. As a result, housing markets everywhere are in a state of flux. Speculative buyers at the hottest part of the market were able to put down a $20,000 deposit on an uncompleted unit, then close on the transaction and sell it to another buyer the next day, pocketing $60,000 or $70,000. That spawned a get-rich-quick mentality, according to real estate agent Frank Borges Llosa, of FranklyRealty.com. People who got in earliest made the most money, while those who came later are at greater risk.

That’s the difference between stocks and real estate as investments. You can simply sell stocks or bonds, but with a house, you have to find a willing buyer or renter, because regardless of the asset’s value, a home loan obligates the owner. As sellers hold out for high prices they aren’t going to get, what we see are conditions such as the South Florida housing market were inventory rises and home sales level off. Especially with the rise in Florida home loan costs, this pattern is likely to continue for the rest of 2006 and possibly beyond. As for the overall economic impact on our region, only time will tell.