LoCo in MocCo! How to handle the plunging real estate market in Montgomery County, MD

03 Mar
March 3, 2009

Since 2007, many areas of Montgomery County, MD experienced a drop in prices. As of the last quarter of 2008, the only area (according to MRIS numbers) to not experience a decline was Derwood, MD (a small enclave of homes nestled between Rockville, Olney and North Gaithersburg. Zip Code 20855). This can put a huge damper on home buying, with everyone thinking “Why buy today when the price will go down tomorrow?” It also makes it difficult for a knowledgeable real estate agent to give honest answers, such as telling a prospective listing that they may only get 80-90% of the asking price (again based on MRIS averages), or that it may take 4-6 months to sell a home. Here are some tips to weathering the storm and motivating people to act now.

The “chicken or the egg” dilemma. Which will come first? Economic recovery and stable home prices or more of the decline? Deflation is not so bad for buyers because they end up spending less. The question is will they ever spend the money, or always believe they paid too much because they acted too soon? Inflationary trends on housing prices force too many good home buyers out of the market. Buyers need to find something they like and be willing (or encouraged) to act. Negotiation was an art sorely lost in the past few years. Investigate the average cost of living in an area, review demographics, collect information about the property condition, and compare the cost of the home to local rental prices. At the end of the day, does this buyer want to live here or not? What do you expect (realistically) of the seller to make this a viable purchase? The worst that could happen is that the seller rejects the offer.

There are always people looking to buy homes. Just not droves of buyers, but you get the idea. Sellers need to face reality. If they want to sell their homes, then it needs to be attractive to the few available buyers out there. Along with staging the home, making improvements, and the ever popular “fresh paint and new carpet,” nothing says “I love you” like a good price point. You may impress a buyer with your gorgeous home, but they will walk away thinking, “Let them sit with it, because the they will drop the price tomorrow.” Take a tip from Walmart- their motto is: “Always low prices” i.e. there is a good deal in everything you buy there. It’s the same stuff you see everywhere else, but here it’s better because the price is better.

Don’t go LoCo in MoCo.: A quick run-down of where to buy. There are three general rules of real estate: location, location, location! As redundant as it seems, location will determine, in my opinion, where housing prices will go in the future- especially with the growth of public sector jobs that will occur in our area. Couple that with wild gas prices having more ups, downs, and loops than a roller coaster ride, and you have a recipe for my number one choice for location: Metro Stations! The county has been very benevolent with redevelopment near Metro Stations (specifically White Flint, Rockville, Twinbrook, Silver Spring and Wheaton) that offer nothing more than condos and apartments a hop and a skip from the Metro train itself. Buying up single family homes nearby is a great, long-term investment because the apartment/condo dwellers may eventually want to upgrade within their own neighborhood, along with the normal Metro seekers that will inevitably show interest as well.

Ok, I found a Metro Station. Now What? Recognize the long term profits that can be made! Increased home values not only equal capital gains. Greater equity (meaning, more than 20% loan to value) allows home owners to help pay for children’s schooling, more exquisite vacations, that back yard deck you’ve been dreaming about, or even a vacation home in Bethany Beach, for example. Is there a recipe for success? Not a chance, but there are some things to watch. The best thing that can happen is redevelopment. Tear down the old and build something new and expensive. Think about the Walmart principle, and always remember that new construction has certain fixed costs that will set a new marker for home prices in an area. Older, existing homes in these areas will see a boost in interest, but are still going to have to compete with the new, fancy high-density homes. This is partially speculative, but has shown positive results: take out some equity, fix up your home with new kitchens, bathrooms, and hardwood floors (which are all the rage now) and go up against the new kids on the block. Make buyers think about value: Oooh, a big home with a yard and a garage for only slightly more than a new condo…

Ok, smart guy, where should I be looking exactly? Make your decisions based on what you can afford. Why buy a condo in North Bethesda when you can buy a single family home in Wheaton? Conversely, why buy a smaller home in Silver Spring when I can buy a larger home in Rockville? Also keep in mind functional obsolescence: someone thought that putting the kitchen in the basement was a cool thing in the sixties and built a ton of homes in that model. In the fifties, it was en vogue to tantalize so many new buyers with a full bathroom in their house (a trend that began in 1929, with indoor plumbing rising 350% until 1954). The homes reflect the trends of the years they were built. If you like an area with older homes, make it a goal to renovate your home to reflect current trends (something as simple as a visit to HGTV.com for more information).

What else am I looking for? Keep an eye out on the commercial market. That means watching to see how often stores turn over, how often giant “For Lease” signs pop up in front of office buildings or shopping malls, and how many windows are empty. Rockville and North Bethesda is experiencing significant redevelopment along Rockville Pike. A new mixed use facility is being built across from White Flint, and Mid-Pike Plaza is slated for redevelopment very soon. Downtown Silver Spring has “sprung” and Wheaton is still being improved.

Nothing beats Potomac, Bethesda, and Chevy Chase. These are the most solid neighborhoods in the county. While MRIS had their values trending downwards, most of the downward pressure comes from seven figure homes. The average cost of homes in these neighborhoods is generally above $600,000 and have very few foreclosures. Bethesda and Friendship Heights also offer tremendous proximity to Metro, greatest variety of stores and restaurants, and are always on the path to improvement (Friendship Heights more so than Bethesda).

Most importantly, you have to like where you live. Ignoring all other considerations, this is key. You won’t be satisfied raking in capital gains when you are miserable in a neighborhood. I am just offering some guidelines to success, and tips on where to buy while the market is still soft. Don’t wait for prices to fall- they may not go much lower. Find an affordable area and act quickly to seize the opportunity.

Justin Walls is a Realtor with Avery Hess Realtors. You can learn more about him on his website http://walls4homes.com

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