After two years in a condo in DC’s Columbia Heights, Michelle and Steven Swaney are ready for more space.

On the young couple’s wish list: three bedrooms, a backyard for their standard poodle, a nice kitchen, and walking distance to Metro.

Their price range—high $600,000s to low $700,000s—has led them to neighborhoods such as American University Park in Northwest DC, Del Ray in Alexandria, and Arlington’s Clarendon. But news about the crashing real-estate market has them spooked. The couple nearly made an offer on a three-bedroom Colonial in Del Ray, but the house listed for $750,000—slightly outside their price range—and they decided they might find more for their money elsewhere.

“A house would have to be pretty close to perfect for us to buy right now,” says Michelle, 32.

Bombarded with headlines saying that the real-estate market is tanking, many potential buyers are like the Swaneys—sitting on the sidelines, worried that the house they buy today will drop in value tomorrow.

“There’s a lot of groupthink,” says Long & Foster agent Martin Signore. “The market really is psyche-driven.”

But agents and real-estate experts say the Washington market is not as bleak as it’s sometimes described, particularly inside the Beltway. According to George Mason University’s Center for Regional Analysis, prices were still climbing last year—albeit at modest rates—in the District and Alexandria as well as in Arlington, Fairfax, and Montgomery counties.

Many brand-name neighborhoods posted solid sales figures in 2007. In Bethesda’s downtown area, the average house price jumped by 10 percent, to $671,000. The area that includes three upper Northwest DC neighborhoods—Spring Valley, American University Park, and Wesley Heights—saw the 2007 average price grow by 38 percent, from $517,000 to $713,000.

Says Kimberly Cestari of W.C. & A.N. Miller Realtors: “It’s important to look at your Zip code and your actual neighborhood, not the national data.”

As the spring buying season neared, we analyzed sales numbers and talked to agents, buyers, and sellers in ten popular neighborhoods—Kalorama and American University Park in DC; Sumner, Glen Echo Heights, Garrett Park, and Potomac in Maryland; and McLean, Old Town, Country Club Hills, and Great Falls in Virginia.

A few years ago, open houses in these areas were overrun. Deals were struck within days of a house’s hitting the market. “In 2004, whoever could throw the most money at a house would get it,” says Cestari. “Houses would sell before signs even went into yards.”

After five years of dramatic growth, the market cooled in 2006, with prices growing by only 2 percent areawide. Last year they increased by less than 1 percent.

Economists and real-estate experts disagree about what slowed the go-go market. Some say the torrid pace was unsustainable and due for a self-correction. Some blame the subprime-mortgage crisis. Others say investors panicked and flooded the market with houses for sale.

The exurbs have been hit hardest. Average prices in the Hamilton area of Prince William County fell by 20 percent in 2007. Boyds, in upper Montgomery County, saw a 15-percent drop.

The slowdown hasn’t bypassed the most desirable neighborhoods. In many we looked at, sales volume is down and houses are sitting longer than they did three years ago. In Arlington’s Country Club Hills neighborhood, houses sat on the market an average of 115 days in 2007—up from 38 days in 2004.

A lot of houses are going for less than the asking price. More than 70 percent of those sold in Potomac in 2007 went for below list price; in Great Falls, the figure was 85 percent.

The median sales price in the 22066 Zip code—which includes Great Falls, one of the region’s most expensive neighborhoods—dropped by 3 percent last year, from $1.15 million in 2006 to $1.11 million in 2007.