Speaking of builders, I have two anecdotes to share:
In South Riding, Toll is undercutting townhome sellers, asking $379K (plus incentives) for their Amberlea model. Owners of the same model that Toll built in another section in 2004 are asking between $350-$415K. 12 places fall in that range, and the 13th homeowner is asking $460K- he apparently didn't get the memo.
Last month, Pulte dropped the asking price on their 2400-sq-ft. townhomes in the Hamlets at Red Cedar (Evergreen Rd.) from $535K to $450K.
As a potential buyer you can bet I will use that information to my advantage.

This has become quite a comment marathon! Let me see if I can give you some anecdotal evidence.

1) Builders in Loudoun are giving up approved lots because of the downturn in the market. (Craftmark as an example)
2) Small, boutique builders are going bankrupt. Not unusual in a downturn. (G&M Homes)
3) Van Metre's President personally told me they are rolling prices back to early 2005 levels and still not selling briskly.
4) All the news is reporting new starts are significantly down.
5) Big builder stocks are taking a hit as they lower revenue and earnings forecasts.
6) Builders are offering huge incentives to attract buyers.
7) The feedback I get from agents that show our listings claim their buyers are writing on new construction because of the deals they get.

I have an article almost ready to publish that will show the anatomy of this market (in Loudoun below $500,000) based on research I have been doing the last several days. It will be interesting to see where asking vs. selling prices are going locally.

I wish I were smarter about economics so I could add more informed comments on this debate. My gut, and that is all I have right now, is that prices might decline about 10-20% before stabilizing. We are pretty close to 10% right now. Lets take a deep breath and just keep watching the numbers. I'll continue to dig out what I can.

Alby, Another thought -
Builders don't have any compunction to wait to "get their price". If they've had land options for a while, they'll build away and undercut resellers. Right now I am sure I could get a much better deal on a brand-new house. That's where I'd go first if I wanted to buy.
Do you think that's true, Merv? Or are you seeing better pricing on resales?
Setting a particular point at which you'll sell sounds a bit pie-in-the-sky to me. The market sets the price, not some illusion of what the house would have been worth in 2005.

Although I believe the market is not headed for a crash, the wait for a market "that restores itself" is a pipedream in NOVA. We are entering the new normal (and going lower) for a while. Waiting for property values to rise to the boom levels of the last few years means depending on a few factors to come to fruition besides the already debunked strong economic growth factor: 1) a severe inventory shortage, 2) low/lower real interest rates, and 3) restricted development and transportation routes.

For factor number 1, you might call this the OPEC theory of homebuilders. The idea is that builders won't take a chance by building lots of unsold, "spec" units that could clog the market in this downturn. They have supposedly absorbed hard-won discipline from their excessive building in past downturns.

Well, it hasn't turned out that way. Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. "Buyers" are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount. I should know, I just talked to a couple that were in the resale market for the last 6 months, but just bought a new place (Dec 06 delivery) originally listed for near $600K for a discounted price of just short of $460K with all the bells and whistles in a very nice community. That builder can't survive on huge discounts you say...guess again, they are still building and offering even more discounts for the next round of houses and haven't even put one stake in the ground yet. They will make their money, trust me...

The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do. And right now the margins are still killer and come at the expense of the resale market.

For factor 2, what really matters for all assets, whether it's houses, stocks or bonds, is real interest rates - in other words, nominal rates after subtracting inflation. And real rates fell sharply starting in 2001. That caused a legitimate, one-time increase in housing prices.

The rub is that prices rose far more than could ever be justified by declining mortgage rates. That's where the bubble kicked in. Today's relatively low rates are not, and never were, a reason why prices would keep rising. Once real rates drop and stabilize, the impetus goes away - again, the gain is a one-time, not a recurring, phenomenon.

Today, real 10-year rates are still extremely low. They have nowhere to go but up (despite some downs here and there). When the one-time gain of 2001-2004 reverses, housing prices could take a further hit.

By the way, a decline in rates due to a fall in inflation isn't the boom to real estate it's advertised to be. Sure, rates go down, but workers also receive lower raises. So the fall in rates turns out to be a wash. As for what matters - real rates - what goes down later goes up, and housing prices go in the other direction, namely south.

Finally for factor 3, this argument ignores that the tough zoning laws and anti-development fervor have been a feature of America's tony towns since the early 1970s, not just a new phenomenon in latter day Loudoun County. The "not in my town" feeling is nothing new. But, new transportation routes are on the horizon and the Silver Line for the metro will be going in over the next 10 years or so along with more houses.

Sure, it's still difficult to get new building permits in the NOVA suburbs, but the local housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses. People in their 50s and 60s cash out early in NOVA and buy a bigger house for half the money in Texas or South Carolina (so these folks don't necessarily need to have their price met...they can go go lower, putting pressure on those that say they can't.)

A year ago, the reigning cliché was that real estate had entered a new world of "no supply." Now, a record 3.9 million homes are up for sale, buyers are getting scarce, and builders are not. 40-60% price drop, I don't see it...but a rise back to a sustained annual 6% price growth, don't plan on seeing that either. If you bought in the last few years and are waiting on the market to meet a price point comensurate with what you paid, you are likely looking at a 5-10 year wait minimum (close to 20% drop by next summer with small 2-3% incremental gains thereafter) and are really counting on some factors to fall your way that will likely not materialize.

Alby said, "For prices (on average) to take such a hit like that, would likely be the result of a major regional economic impact that sent people running."

What was the major regional economic impact that sent people buying in the last five years? Job growth explains some of it, but have jobs grown commensurate with prices? The increase in government workers and rapacious defense contractors has certainly raised the average income in this area, but has is raised it 100%?

The answer to both questions is no.

The transition from dot-com bust to housing boom was seamless. If most of the recent home sales had been regular folks planning to live in the home, I'd have more confidence in the real estate market. But a lot of speculators bought homes in the last few years--maybe Merv can help us out on a rough percentage--and they have pushed prices to the limit.
Now they're all pulling out. One might correctly argue that homes are not stocks, and I would agree. When a stock bubble bursts it's immediately apparent: 2-3 months and it's over. When a home bubble bursts it takes longer to show. Look at all the new construction around here--much of which was built under the assumption that home values would magically increase 10-20% every year forever--and tell me 5% annual job growth will fill them all.

Whatever the macro stuff suggests, I am a potential buyer and there is no way in hell I am paying $350 grand for a townhouse and the right to take 45 minutes to drive ten miles, whether I can afford it (doubtful) or not. I cannot speak for everyone, but "Quality of Life" plays a large part in my decision, and every day I lean more and more toward a job transfer to a less congested, more affordable area. In terms of the cost of housing, taking a 25% pay cut to transfer from NOVA to, say, Raleigh, N.C. is breaking even. Someone might buy your house, "but it ain't me, babe."
As John said, it would have been hard to imagine 100% increases five years ago- an excellent point.

I would find it hard to believe that prices will fall 40%-60%. For prices (on average) to take such a hit like that, would likely be the result of a major regional economic impact that sent people running. If the federal government decided to relocate the Nation's Capital to San Francisco, then yes, prices might decline 50% or more. You have to look at the position a seller is in. Most sellers aren't selling because they cannot pay their mortgage and have to get out at any price. If the majority were in that situation, then yes, 50% declines might be a reality. But more sellers just want to move for personal or business reasons. Since the real estate market is the way it is, the majority of sellers will more than likely hold firm on their asking price, with no more than a 10% decline from the all time highs. The sellers will hold out until the market restores itself and they obtain the asking price they want. As since most sellers don't have mandatory requirement to sell, they can wait. And while they wait, the existing inventory declines. Making the second hand on the clock tick faster for all the buyers waiting on the sidelines. Buyers have every right to rent and wait. But time is a buyer's enemy in a regional economy that is strong. Rents will rise as supply and demand forces rental prices higher. Sellers who have no pressure to sell are waiting for their price point to be met. Two camps waiting for the other to blink. With the economy strong, it is most likely, the sellers will win this standoff. Without a recession or some major economic force to push sellers over the edge, time is working against the waiting buyer. And if the Fed reduces interest rates going into 2007, you can count the victory celebrations for the Sellers with an egg timer (ding).

Alby, I respect your convictions. I hope you are right. Many are very pessimistic (doh!). This seems like the perfect storm. No one knows who is going to be destroyed or saved from disaster. Let's sit back and watch. We need to have the same discussion April of 2007.

Alby, The biggest fault in your logic is your assertion that home prices can't fall substantially because sellers can't afford the losses that would result. This reasoning makes absolutely no sense. Under this reasoing, no one would ever be foreclosed on because 'who can afford foreclosure.' No one would ever lose money in the stock market because they'd say 'I can't afford to take a loss on my stocks, so I'll just refuse to sell them.'

Sellers' abilities to afford losses is completely irrelevant to whether home prices can or will fall.

Home prices, in the long term, will be based on fundamentals. When only 20% of the population can afford the median priced home, fundamentals are out of whack. When homes rent for half the cost of buying, fundamentals are out of whack. When over 50% of buyers have to resort to toxic mortgages to qualify for a house, fundamentals are out of whack. This cannot be sustained, and therefore, it won't.

Look for prices to fall 40 to 60% from their peaks, with outlying areas falling the most and condos falling the most within that range. This will put home prices back in line with rents. The long term historic price to rent ratio for the DC metro area is 100 to 150 times monthly rent. To compute where prices will settle for a subject property, figure out its current monthly rent and multiply it by 100 and then 150. I suspect that many will be surprised to see just how far prices have left to drop.

Alby, I will guess in advance that you think its 'crazy' to predict such a large price decline. Just think about it this way - If someone had told you five years ago that prices would more than double in five years you would have thought they were a certified nutcase. Now that prices have doubled, people think its crazy to predict prices would go back to pre-bubble levels. So, are we crazy now or were we crazy back then?

For those reading and/or commenting on this article: I added a new chart to the Daily Loudoun and Fairfax Market Watch. The chart will show trends of Original List Price and Sold price. I didn't go back in time to collect daily samples. I did take a sample on Aug, 1, Aug 15, Sept 1 and Sept 15. Like the other charts, new construction was included prior to Sept 1. You get to preview these first. I'll announce it on the Front Page in the next couple of days.

There are two sides of me that are conflicted. On one hand, I hope Alby is right and prices recover. I plan to put my home on the market next spring (that's the selfish side). On the other hand, many (if not most) people in our service jobs can't afford to live in Northern Virginia, and especially Loudoun County. These people have to go to Clark and Frederick Counties or West Virginia to afford to buy a home adding to the transportation woes we endure.

There seems to be an abundance of conflicting data. Our regional economy is still healthy. Two out of three buyers of my listings this year are job transfers into the area. Interest rates are still historically low. Home prices are declining but not crashing. Homes are still selling but at a much slower pace. Condos and townhouses were over built and are getting hit the hardest (this is interesting because they are usually sought after by first time home buyers, so declining prices are good for those people). Interest only financing will catch up to many of us. Many homes for sale are being turned over to auctions (I haven't ever seen this before at the magnitude that is occurring today). On and on...

I think it might be too early to call a bust or a correction. I say stay out of the market if you can until we see something turn. Right now, the market appears to be on cruise control at a moderately slow speed. Although, inventory is coming down slowly. If we don't see serious deterioration this fall and winter, the spring may be good (not great) for sellers.

I'll be happy to buy when I see things picking up and if rents rise significantly. Right now in Loudoun and Fauquier I'm seeing a glut of rentals and rents that don't nearly cover expenses for the landlord.

I also am seeing declining prices daily on dozens of properties, no increases in prices from builders at all, delayed projects from builders, extra lots for sale, and declining prices on lots and raw land.

When those things do start to firm up, I'll buy.

Until then, I'm saving money by renting. When I see a property come down by even a measly 20K, that's a year's worth of rent payments in a single drop.

I don't think rates stabilizing will help. We had skyrocketing prices at rock-bottom rates. I think they're already baked into the cake. The 10-year note has had some interesting action this past week. We'll see if it keeps up. The Fed can't do much to influence the 30-year mortgage rates.

Wages are the key. Folks using Interest-Only ARMs are simply treading water if their wages don't rise.

Ohhhh Alby...we salute you for your boundless optimism, but I'm afraid I have to agree with Mark...."and its no wonder people trust realtors about as much as used car salesmen....your "market advice" is completely self serving-(and delusional as well I might add).

A convergence of unprecedented factors is about to collide in this region, and people better get their financial houses in order quickly, before it does. I just feel very bad for all the people who bought in the last 2 years.....they are going to take a beating.
Good luck everyone!

This article in the Sun Gazzete details the points that I've been talking about. The article titled "Strong Economy Likely to Keep Home Prices Fair" mentions that we are in a slight correction, but it may be short lived. Which means waiting buyers might have their best opportunities right now. And they won't last for long. Here is the link to that article.

Merv, I agree completely. We were in our last home for six years. This is our first real stint renting and frankly I miss the sense of permanence and community that owning a home provides. I certainly don't claim to know the future, but even most agents' best case scenarios are for flat prices in the next year or so. Based on the downward trend I've been seeing anecdotally I think even that's optimistic.

Our plan is to keep tracking the market, and if things appear to have stabilized by the time our lease is coming up for renewal we'll probably jump into the market. I just can't see a really good reason to buy right now, with rents still comparatively cheap and prices still falling. There's an old saying in the stock market - never try to catch a falling knife. It's much better to buy once the market has begun its recovery than to try and call a bottom.

Jason, Welcome aboard. We sound like a bunch of economist that can't agree (because they never do). Trying to predict this market in the short term (6 to 12 months) is like trying to predict what the stock market is going to do. Corporate earnings may be good but events that trigger emotional responses can trigger a downturn. But like all free markets, they go up and they go down. Long term, real estate is not only a great investment in lifestyle but also a good long term investment (5+ years). Too many of us need instant gratification and forget what a home really is. A home.

I'm not a realtor, just an average joe. But I see all across the board of how buyers are waiting for prices to decline. Mark mentioned TH going for $450,000 that was $260,000 a few years ago. Which is 100% true. But the bit everybody is missing is how low can that person sell that TH for? If they drop their price to $260k and break even, they don't have a nickel to put down on a new place anywhere in the area. As such, they are very unlikely to drop their asking price much more. Yes, I do agree that prices will decline and all the "fluff" will be removed from the system. But I believe that process has worked its way through the system over the summer of 2006. We are now at basement pricing for Sellers. If they go any lower, they'll have no money to relocate. How can somebody sell their TH for $260k, to turn around and try to repurchase a $400k TH elsewhere, without moving 100 miles away? Because of this, I believe that sellers will just wait until the market comes around instead of selling at a 50% discount. I'm sure that old time realtors can comment on what happen when the 80s housing bubble burst. Was there a wave of bargin basement asking prices? Or did people just delist and wait until better times arrived? I'm no expert on history, but housing prices in the Washington Area have never declined by any drastic amount. Not like other regions of America where a factory closure sends property prices into the toilet. I'm sure many buyers are angry at the high prices of housing and I agree a $450k TH is nuts, but I wouldn't hold out for long that you'll see $260-$300k TH any time soon. Right now in Loudoun, I think you can count all the TH homes under $275 on one hand.

Merv, I've been reading for a while but haven't felt the need to jump in until now. Great blog, btw.

I moved to NoVA from the western US in early August as part of a relo that's been in the works since late 2005. When we started looking the asking prices for housing were absolutely ridiculous, but I was surprised to see that rents were still quite reasonable - disproportionally low compared to an equivalent mortgage. For now we're renting in Ashburn.

I've been keeping an eye on the market for close to a year now, and the drop in asking prices has been staggering. Nice SFHs in Vienna / Oakton that were asking 800+ are now in the 600s. Similar homes that were 700 or so in Herndon / Reston are in the 500s, with some very decent examples dropping below the 500k mark. Sterling is even lower - down into the mid 400s.

What I haven't seen so much - and this is surprising to me - is an equivalent drop in pricing in Ashburn / Leesburg. All I can attribute it to is the fact that the houses are generally newer, and the owner likely paid more for it and can't afford to cut as dramatically.

Given my taste of the miserable toll road traffic so far, give me a 20 yr old Herndon 2 story for $480 (yes, they're out there) over a 2 year old Belmont Greene crackerbox for $550 any day.

-Jason

Alby is trying to sell his house. I don't fault him for being hopeful.

I checked current listings in Loudoun County, and example of a house like Alby's for sale is 550K -- complete with a picture of a dinky kitchen and not even a built-in microwave. It's a small thing, of course, but to a potential buyer like me it screams "overpriced". I paid 500K in 2003 and the kitchen has a double oven, a gas range, an enormous amount of cabinetry, a huge island, and a built-in microwave. Also the house was 5000+ square feet and had a .75-acre yard.

I assumed Alby was a realtor because he sounds like one (present company excluded, of course): buy, buy, buy, not making any more land, etc. Too much realty and too little reality.

The most egregious example of realtor spin coming out of Alby is "As long as... the population grows along with the median income levels, I don't see housing prices declining." Excuse me: did home prices grow in line with jobs and population over the past 2 or 3 years? I don't think so. What force suddenly pegged home values to job/population growth? Was it the same force that made townhomes worth half a million dollars? if so I definitely don't trust that force.

I will sit tight and buy a home when I can reasonably afford one with my sub-median family income. Otherwise I will rent or find a job elsewhere- which is more likely since I don't think we'll be at the bottom yet in mid-2007 when I'll be ready to buy.

Merv, I found your insights extremely interesting. I did not realize the last asking price was the one used to calculate the "sale-to-ask" ratio. While some buyers are waking up, many more are delusional: thus the huge spread of asking prices for similar homes. It seems worst in the condo/townhome market due to the abundant supply of new construction.

They aren't making any more land, 'tis true, but they are subdividing that land and putting 100 townhomes and 200 condo units where there used to be 5-10 houses.

Hmmmmm...I didn't think Alby was (or is a Realtor). Are you?

I'm anxious to see Stephen Fuller's (George Mason University) next economic forecast for the region.

Alby, not deep at all. I have pointed out many times the MLS data can be misleading if one does not understand the intricacies of data calculations. The Official Reports from the MLS provide the sold price as a percentage of the last list price, not the original list price. And when a home is withdrawn and re-listed with a new MLS, the original-original list price gets lost in a separate record. The last list price in my example below was $589,000. So the negotiated ratio would be $575,000/$589,000 = 97.6% and would be reported in the MLS as such. Also not taken into account is the seller subsidy of $17,250. That never gets reported!

Here are some more tidbits: Hmmm...I'm going to write an article about this.

Quoth Alby: And that buyer looking to move into South Riding better jump on that $360-$430k townhome before the market shifts back to 50/50 or worse, a sellers market. Because Inflation and a strong regional economy are all working against the wait-and-sell buyers.

Okay: 74 townhomes under $450,000. 2 years ago the average price was $260,000. I'll be sure to "jump" since there is abundant supply and prices are dropping.
Alby, your opinions are too tied to your livelihood for me to take them seriously. Realtors have been saying "buyer's market" for a year, and at this point even your own trade association is saying prices will fall in the DC area.
And you wonder why "people trust realtors less than used car salesmen"...

I think Alby is referring to one of the great myths of real estate: As long as job growth is strong, prices can't go down.

In actuality, a recent Fortune magazine (Aug 25, 06) article points out:

"You can almost forgive the bulls for stumbling over this one (myth). In past housing recessions, prices fell sharply in markets with severe job losses, like Texas in the mid-80s and Boston in the early 90s.

But the argument that prices can't fall in a good job market doesn't make economic sense: To be sure, a strong employment picture helps demand. But if far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.

That's precisely what's happening now in good job markets such as San Diego and Northern Virginia. In this boom, prices soared to such extraordinary levels that builders kept churning out new homes, and owners of existing houses threw a record number of units on the market to cash out. The supply grew so fast that demand, even in strong job markets, simply couldn't keep up.

As usual, for the believers, it's always easier to fall back on a cliché than read the warning signs."

Make no mistake about it...although home builders have had to cut back on their numbers they will still build albeit at a lower level and force prices even lower to reduce their inventory, while resales sit high and dry with their wishful thinking prices....let's see a new 2006-2007 2900 sqft TH originally priced at $550K now selling for $450K or lower in a great neighborhood with tons of upgrades, or a 10 year older resale model with 2500 sqft and some upgrades for $500K? It will be an easy choice for fence sitters here in the near future.

And even when the economy picks up more steam, just wait to see what prices look like when 30,000+ new homes hit the streets over the next 10 years in western Loudoun. Whatever price you can bottom out at and sell today with will seem like a bargain.

Merv: Did you dig deep to find that 17% discount? Even according to the daily numbers on this website, the average discount is about 8% from the list price. I don't think that many 20% discounts exist. There will always be exceptions to the rule, but the average prices on home sales still do not appear to suggest the deep discounting that waiting buyers are looking to obtain. And if the Fed starts cutting interest rates because inflation appears to be in check, then all the discounting will start to vanish as more and more people are priced back into the market. I could be very wrong, but the Washington Metro area doesn't follow the typical rules... As long as the Government is discount out billions to contractors and the population grows along with the median income levels, I don't see housing prices declining.. I'd have to say that we are at the bottom and holding steady.. Everything from here is Up.. Just my opinion.

I think part of Loudoun's problems are transportation (long, expensive commutes) and affordability. Quality of life suffers when you have big mortgage payments and spend 2-3 hours a day commuting. I agree with Alby to an extent on the NOVA economy. I hope he is right. In the meantime, there is significant downward pressure on home prices.

The numbers show Fairfax is struggling too...just not quite as bad. Even though Fairfax is in a slump, prices seem to be holding up. Not sure I understand the dynamic. Maybe people are willing to pay more to be closer to their jobs.

OK, here's another one of ours...
5BR, 3.5BA, 3 finished levels, showed like a model.
Listed $669,000
Sold $575,000
Subsidy $17,250
Net $557,750 or 83% of original list.
On the market for 119 days competing with 30 homes in the same neighborhood. Lowered their price 3 times.
Sellers were highly motivated to leave the area.
I consider this a pretty deep discount to early 2005 prices for this home.

Merv,
Route 15 from Haymarket to Leesburg is a looming disaster. Adding fuel to the fire is a huge commercial development going in on Route 29 west of Gainesville where it intersects with Route 15. We live in Warrenton, and five years ago my husband commuted to Ashburn. Gilbert's Corner (50 and 15) was very bad then, and I'm sure it's worse now. If he got another job in Ashburn, we'd have to move there.

We've owned in Northern VA since '94, but we sold last year, partly because we don't want to be stuck in a bad commuting situation. (We have an upcoming job change). Our neighbors are currently trying to sell for a better commute, and no one can figure out where the bottom is in our community here in Warrenton (nothing's sold in our subdivision since March for any price).

Culpeper County is another place where poor planning and overbuilding is rampant. There are "For Sale" signs everywhere.

Merv and Harriet, those homes you mentioned, where one was $1.1/million and sold for $700k and $1.2/million for $900k are good examples. But its a tainted picture. Those examples don't represent the majority of units on the market. Where are the $600k homes that sold for $400k? Or the $400k townhomes selling for $200k? I can understand the multi-million dollar homes going up for a firesale., because of the amount of monthly money required to service that debt. But what about the average home? Where are those firesales of 40%-50%? And the few foreclosures only make up about 1% or less of the total units forsale. Without much of a firesale among the majority of sellers appearing and a strong job market, I don't see major price declines across the board. Maybe 2007 might change the numbers, but right now, I'd say prices are holding steady. And that buyer looking to move into South Riding better jump on that $360-$430k townhome before the market shifts back to 50/50 or worse, a sellers market. Because Inflation and a strong regional economy are all working against the wait-and-sell buyers.

Harriett, speaking of appraisal and sale price...I have a client that had their property appraised at $1,290,000. Listed 11/1/2005. Closed in August at $915,000. They were very motivated to get out of Northern Virginia!

Mark, Thanks for the comments. Real people with real perspectives are always enlightening. I wish I could offer a crystal ball to reassure you of the soundness of your strategy. Think about this: Greenvest is very close to getting Loudoun approval to build up to 33,000 more homes in the Route 50 corridor in the next 10 or so years. I ask...where are all these potential homeowners going to come from and at what price might they be willing to pay? I don't have the answer. It will be interesting to watch.

Might be worth reading this from Jonathan Miller of Matrix:
Housing: Giving A Hard Look At A Hard Landing.
Thanks to Jim Duncan of RealCentralVA for pointing it out.

Alby,
There have definitely been some relative "bargains" out there. There was recently a sale here in Fauquier for 700K that's appraised by the County for 1.1 million, for example.
Current foreclosure activity:
Loudoun = 25 properties
Fairfax = 43 properties
Prince William = 44 properties.
If I'm not mistaken, about 6 months ago there were just about zero properties in foreclosure in these same counties.

I want to respond to your idea that folks in financial hardship will work harder to keep the house. I'm not so sure about that. Suppose I have no money in the bank, and I can't sell my house because it's worth 100K less than I paid in 2004-2005. Now my option ARM is resetting and I'm not only getting futher in the hole on that (as I've been adding interest to the principal balance), but also I'm dying trying make the huge jump in payments. I'm far better off just sending some "jingle-mail" to the bank, i.e. mailing in the keys. I could then move into a comfortable rental (likely finding an equally-desperate landlord - rental property inventory is increasing) and live very comfortably on my income for a while until I catch up and sort things out.

You said "The one big plus that a Seller has going for them, is the market will eventually come around if they wait long enough". True, eventually house prices may keep up with inflation. But at that point you've played a zero-sum game by waiting it out.

Your comment about prices "never going down" reminded me of a news article I read about the thoughts of homebuilder Robert Toll.

"The current downturn is mostly the result of a "severe overhang" in supply that Toll estimated at 15 percent to 20 percent more than the market can easily absorb. That was driven by "tremendous speculation" by home buyers who never intended to occupy seeking a quick profit from a rising market, and by builders who constructed homes before securing buyers, he said.

The current slowdown is "strange" because it cannot be explained by macroeconomic factors such as interest rates or unemployment that traditionally reduce demand for houses, Toll said. "We have an apparently decent economy," he said. Toll said this is the first time since he began in the home building business in 1967 that a market downturn cannot be explained by macroeconomic factors."

Merv, thanks for this informative site. Your straight talk is a credit to an often not-so-credible profession.
As a buyer who's currently priced out of the western Fairfax- eastern Loudon market, my plan is to sit on the fence until spring. I find it very hard to believe that a townhouse ANYWHERE is worth as much as today's asking prices. This opinion is based on common sense as well as the fact that prices are historically inflated along with the price-to-rent ratio.
My wife and I would love to move to South Riding, where there seem to be a million townhomes for sale (many of which were bought by "investors" in the past 2-3 years). I see a huge spread of asking prices in one particular part of the neighborhood, between $360K to $430K for about 20 virtually similar townhomes. If these homes haven't sold in the spring, I may do this: offer each seller enough to break even (based on the sale price in the Post). If someone wants to sell badly enough they'll take the offer and I'll have a townhome for $300K or less. If not I'll rent a place there for $1700.
I believe speculators have inflated this market, and the huge number of "never lived in" condos, townhomes, and homes currently for sale is testimony.

Frank, I see where you are coming from. Although I believe those in financial hardship, who would end up fire selling their property, would have materialized by now. Folks who took out a bad loan with an interest only loan, might be getting hit hard with higher interest payments. And those people are most likely trying to sell. I'm sure they can be identified in the listings with remarks like, "Motived Seller" or "Free Mustang with Home Sale". But when push comes to shove, I'm sure the any intelligent person who watched their mortgage rate increase will most likely start cutting back on other things in their life before they allow their ultimate investment to be foreclosed. People that situation would cut back on Food, Utilities, Entertainment, etc, to ensure they can pay the mortgage. Now it is true, some will be unable and their property will hit the firesale. But the majority will restrict their lifestyle and wait until they can escape there home at their bottom-basement price.

The one big plus that a Seller has going for them, is the market will eventually come around if they wait long enough. Assuming the majority of sellers are not near financial collapse, they in theory can hold out for months or years. They may not like it, but they can. They already have a roof over their head and no pressure to move, only a want (excluding those forced to move for business or pending closing on another property). With that in mind, the buyer on the other hand has an opportunity during these times to wait for a better price. But it is a open window that is always going to be slowly closing.

Our region has a growing population and a strong job market. Both of those factors will, in time, will help close that window.. Reducing the current opportunity to buyers who are just waiting for unrealistic pricing declines. A 5%-10% decline in prices is realistic and is already present in the market. Aside from a slight adjustment, real estate prices never decline, unless there is a depression. In 1970 the Median home price was around $20,000. In 1980 it was $60,000. In 1990 it was $90,000. In 2000 it was $140,000. And in 2004 it was $180,000. As you can see, the average median increase is about $4,000-$5,000/yr over 30 years. This all means, Sellers who can hold out will win. Which is bad news for waiting Buyers.

Alby, I agree with your analysis up to a point. Where I differ is at this point: " The net result is home prices holding steady and Sellers deciding to just wait until the buyers come around at these prices."

Instead of sellers just waiting, I think what is going to happen is that they will wait for a while (6 mo? 10? longer?), and then the financial hardships will begin to sink in. Some will be facing foreclosure (e.g., Option Arms kicking in) or - less drastically - others will become fatigued with waiting to move, reduce the pain of uncovered monthly loan costs, or address some other mounting, motivating factor.

So eventually many of those who plan to "wait" now, will end up selling later when the pressure is even greater. At that point, the market will have declined further due to growing inventory and we'll see the firesales start.

Sure, just my opinion, but looks likely to me...

Alby, always enjoy your perspective. I am being very redundant in my advice. Average prices have rolled back to early 2005 levels. My experience is that sellers listed at prices compared to the peak. As we move through this market, sellers are becoming more realistic and are pricing at today's market levels (what buyers are willing to pay). I have only had one seller upside down. They owned their home for over 7 years, had substantial equity, purchased a bigger, more expensive home with a second to extract equity based on an appraisal. On the market 5 1/2 months. At close, they had to bring a check. So, that check was simply paying back extracted equity that was inflated. There are many that may be upside down because they refinanced, taking equity based on market values that were inflated to begin with. I call it short buying and they guessed wrong. On paper it appears as a loss. In reality, they took the equity and now must pay some of it back in today's market. Not wrong, just reality. The people really getting hurt are those that bought at inflated prices in the last 12-24 months and now "have to sell" and can't. Markets are cruel.

Funny... I see remarks all the time to Sellers, "lower your price and it will sell". It must be obvious by now, XX number of months into this market decline, that sellers aren't reducing their prices to levels that will make buyers jump. Yes, prices have already decline, and they've flatlined. Which means one of two things.. Either Sellers have somehow formed into a regionwide oligopoly to hold the price stable, or Sellers cannot reduce prices lower, otherwise the majority of them will be upside-down on their mortgage. Or if they lower the price more, they'll break even and won't have any cash left over for that new/used house. Which is the reason they are moving in the first place.

My money is on the fact that the majority of sellers cannot lower the overall price of homes on the market because they'll either break even or be short at closing because the sale price doesn't cover their mortgage payoff amount. The net result is home prices holding steady and Sellers deciding to just wait until the buyers come around at these prices. I really don't think its stubborn sellers trying to be greedy. I honestly believe its now a financial issue across the region.

And I hate to say it, but Real Estate Agents appear to be caught in the middle. On one hand, you have the Sellers who cannot lower their prices and have decided to just wait on the market to come around. Thus causing brokers to incur marketing costs. Then on the other hand, you have Buyers who just cannot afford housing at these lofty prices. $200k for a Condo? $400k for a Townhouse? 600k for a Single Family? Buyers are instead fighting over rental units who's prices are starting to skyrocket with the demand. Thus leaving Agents with a short list of buyers who are demanding everything under the sun for pennies on the dollar.

It all adds up to real estate stagnation.