Bubble, Bubble -- Then Trouble

Is the chill in once-red-hot Loudoun County, Va., a portent of what's ahead?

Psssssfffffft. That's the sound of the air finally leaking from the real estate bubble in Loudoun County, Va. Since 2000 it's been the nation's fastest-growing county, where eager homebuyers always seemed to outnumber happy sellers. Until now.

Bob Semmens, a 60-year-old retired pressman, has heard that sound. After he offered up his 3,000-square-foot colonial, with three acres and a swimming pool, in early July for $759,000, he sat back to wait for the frenzied offers. A year before, houses had remained on the market for just 20 days and were snapped up in bidding wars. But "very few people were even coming out to look," Semmens recalls. After four months, he was about to take the house off the market until next spring. But then he struck a deal -- for $620,000, an 18% price cut. Semmens rues his bad timing: "Just at the time I was getting the house on the market, everything really started to slow down."

By October, agents had 2,908 existing Loudoun houses on the market, an increase of 127% over a year earlier. The average time on the market had climbed 62%, to 42 days, since the fall of '04. And in just two months, from August to October, the median sales price for houses dropped from $506,100 to $480,000. In kitchens and coffee shops from Purcellville to Leesburg, anxious homeowners swap stories about a market rapidly going soft: The real estate agent who gets 10 to 15 e-mails a day from developers now offering price cuts of $10,000 or more to move new houses. The sign installer who's putting up three "For Sale" signs for every two that he takes down.

What's happening in Loudoun is a rapid shift in psychology -- a classic sign of a market turn. The buoyant optimism that fueled speculation and expectations of ever-rising prices is now succumbing to the fear of being left standing when the music stops. Real estate, the hottest play of the century in Loudoun, is rapidly cooling.

The same signs of a slowing market can be seen in hot spots across the country, from Boston and Miami to Phoenix, Las Vegas, and San Diego. Nationwide, a leading indicator for housing -- sales that are pending but not completed -- declined 3.2% in October from September, the National Association of Realtors reported on Dec. 6. Mortgage rates, while still low, have edged up almost half a percentage point from a year ago, to 6.26%, according to Freddie Mac's weekly survey.

Many other overheated areas could suffer even larger price drops than Loudoun County. Some, like Boston, lack the rapid growth in jobs to support rising prices. In Phoenix, high prices and cheap land have sparked a construction boom that's beginning to deflate the bubble. Other areas, such as Las Vegas and Florida cities like Miami, have seen rampant speculation. Such buying not only drives demand but "feeds the expectations of households that are not speculating," says David Stiff, chief economist of Fiserv CSW Inc., a housing data company. "If a significant portion of demand is speculative, that can evaporate very quickly."


Speculation is swinging the market in Loudoun as well. Underlying demand is strong, with families flocking in for jobs and well-regarded schools. But the recent froth was churned up by investors convinced that housing supply can't keep up with demand. Easy financing fueled the buying boom: County officials say up to 40% of new mortgages this year were interest-only loans, with low payments enabling borrowers to finance higher bids.

Jim Williams, executive vice-president of the Northern Virginia Building Industry Assn., knew the "feeding frenzy" had gotten out of hand when a waiter in a restaurant he frequents confided that he had bought four houses on spec. "I'm sitting looking at him and thinking even with tips...he must be dying on the vine." Now, investors' scramble for the exits is creating problems for owners like Omar Singh, 29, owner of a trucking company in Herndon. His townhouse in Sterling has been on the market for $525,000 since October. He's hoping to hold out without cutting his asking price until April. But, he says, "I might not be able to."

That Loudoun could continue to balloon through the 2001 stock collapse, September 11, and 12 Fed rate hikes is a testament to its resilience. Located in the shadow of the Blue Ridge Mountains some 50 miles from Washington, Loudoun has accommodated tract houses and mansions alike without turning into a crowded suburban grid.

Now, the stock of houses on the market is at a four-year high. At Metropolitan Title Insurance Agency in Leesburg, closings dropped from 30 in October, 2004, to just 10 in the corresponding month in 2005.

Letty Mallery decided to put her historic four-bedroom house in quaint downtown Leesburg on the market in June for $1 million after a nearby home drew a megaprice in April. "The market was very hot," she says. But by the time she and her husband, John, had spruced up the home for sale, "things had cooled off," she said. They dropped the price to $950,000, then to $895,000. The Mallerys already have bought a smaller house near their grandchildren in nearby Berryville. Whatever price the stately 104-year-old house fetches, the couple can console themselves that they bought it for just $76,000 in 1976 as a fixer-upper.

Loudoun homeowners who arrived later can take comfort in the area's economic fundamentals. The county is pinning high hopes on the Howard Hughes Medical Institute, which next year will open a research facility that could attract other bioscience organizations. New hotels and transportation services tied to nearby Dulles International Airport will let more Loudoun residents live near their work. With 10% of the county's workers employed in construction -- vs. 5.3% nationally -- local officials say Loudoun must develop jobs that aren't dependent on homebuilding.

Loudoun's real estate community insists the market is merely reverting to a more normal state. "We're coming back to more of a balance," says Karen Overheu, a Long & Foster Realtor with listings in Loudoun County. "You don't have to make up your mind [about buying a house] in an hour or risk losing it to someone else. It's a little insane to have it the other way."

There's another explanation, says insurance agent Joe Kelly over lunch downtown at the Leesburg Restaurant. "They ran out of stupid people."

By Paul Magnusson and Stan Crock, with Peter Coy in New York

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