Tales From the Boom and Bust

Home values always go up.

It’s hard to believe—now that we know better—how widely that assumption shaped the last decade.

It informed the decisions of everyone from top-level policymakers and Wall Street bankers to real-estate agents, mortgage brokers, and homebuyers.

Housing was safe. It was stable. We had seen the stock market soar and plummet, but the United States hadn’t experienced a nationwide housing crash since the Great Depression. The country binged on credit and got drunk off of rising home prices. When the party was over, we woke up to a real-estate mess that threatened to take down the nation’s entire economy.

In many ways, this has been a national—even global—story. The young couple buying their first home in Gaithersburg with a no-money-down loan or the investors flipping condos in Arlington may not have realized it, but they were at the tail end of a chain that stretched all the way to investors on the other side of the world.

But it’s also a Washington story. Many of the big players—housing lobbyists, Fannie Mae and Freddie Mac, regulators, Congress, the Federal Reserve—were here. And the forces that drove prices through the roof in Miami and Phoenix and Las Vegas reshaped our region in distinct ways.

Corn fields in Loudoun County are now lined with six-bedroom custom homes. Suburban downtowns have sprouted in places like Shirlington. New developments such as Largo Town Center have sprung up around new Metro stops. Modest houses in Bethesda and Arlington have been torn down and replaced with mini-mansions. On 14th Street near DC’s Logan Circle, million-dollar condos have replaced vacant lots and crack houses.

Commercially, the region exploded. Andrew Florance, CEO of the CoStar Group, a real-estate research firm in Bethesda, explains it this way: “Washington added 77 million square feet of office space in the last decade—that’s the equivalent of every commercial structure in Cincinnati.”

The second half of this decade has been a different story. While the recession hasn’t hit Washington as hard as it has many other cities—and some neighborhoods have escaped almost unscathed—we haven’t been immune.

The condo market, once booming, has been decimated. Some homeowners found that their houses were now worth far less than they owed. In some areas, formerly middle-class people began turning up at homeless shelters. Nearly everywhere in the region, development has ground to a halt.

As the decade came to a close, we dispatched a team of reporters to better understand the real-estate boom and bust of the last ten years. We asked agents, developers, builders, and lenders to tell us their most memorable stories. In all, we interviewed more than 100 people.

Every neighborhood, homeowner, and real-estate agent has a different story. What follows are snippets from those conversations. One thing is clear: We leave this decade a different region than when we entered it.

The Frenzy Begins

The story of this bubble starts with the bursting of another. When dot-com stocks plunged at the beginning of the decade and the economy entered a recession, the Federal Reserve lowered interest rates to prevent deflation. Foreign investors were another factor; they were buying lots of US bonds, flooding the market with credit.

At the same time, the local economy was strong and—after staying flat through the 1990s—housing here was more affordable relative to incomes. Prices began to go up.

Diana Hart, vice president with TTR Sotheby’s International Realty: “Everything was selling. A house that you had had on the market five years earlier, where you held it open every Sunday for months at a time and people didn’t even come to look at it, and then five years later it sells in three days.”

David Howell, managing broker with McEnearney Associates: “Sometimes when a property went into the computer or a sign went on the yard, the agent barely had time to get back to the office before offers were coming in.”

Nancy Taylor Bubes, an agent with Washington Fine Properties: “We would be shocked when a customer would pay $10,000 or $20,000 over the asking price. Then it got to be a year or two into it and it was $50,000 or $100,000 and then $200,000.”

Roby Thompson, agent with Long & Foster: “There was one house in Bethesda I’ll never forget. I put it on the market for $250,000. It was an ugly, beat-up little townhouse, but it was in a good location. I got 27 offers, and it went for $475,000.”

Quick and Easy Loans

Lenders loosened their standards, offering home loans that required little or no money down and little or no documentation of the buyer’s income and assets. Adjustable-rate mortgages, or ARMs, were popular; they offered low initial payments. Many buyers counted on being able to sell or refinance before the higher payments kicked in.

Lyle E. Gramley, former Federal Reserve Board governor: “In part because of the Internet, the mortgage markets became nationwide. Competition became fierce. If you were a mortgage lender, when standards became relaxed by someone somewhere, you had one of two choices: follow the crowd or get out of the business.” 

A mortgage broker who worked for American Home Mortgage until it shut down in 2007: “Lenders had to be the most aggressive out there. Where originally we would ask for a 5-percent down payment, the borrower would say, ‘Well, that’s ridiculous. This other guy only requires a 3-percent down payment.’ Then it became you’re out of business if you don’t do zero down.”

Marian Siegel, executive director of Housing Counseling Services, an affordable-housing nonprofit in the District: “You might be earning $17,000 a year, and you could easily find a lender willing to lend you $250,000 to refinance a mortgage you were behind on.”

Mike Kelly, loan officer with Presidential Bank in Beltsville: “Anybody could go out and sign up with a correspondent lender as a broker with no training. You didn’t even have to know how to count to two. There was just no oversight. There were people who worked as grocery-store clerks. Now all of a sudden you can make $150,000 a year as a loan officer.”

A former broker with American Home Mortgage: “The market was moving so quickly that you were pressured to give an opinion on whether people could buy a house in minutes. People called you on the phone, you asked them a few simple questions, and you gave them a letter that said they were qualified.”

Mike Kelly, Presidential Bank: “I remember sitting down with two loan officers, interviewing them. They were basically ridiculing me, saying, ‘You’re missing the boat here, Pops.’ There was a loan at the time called a stated-income loan. The premise was that the borrower stated the income and you wrote that down.”

Mike Christofaro, loan officer and vice president with Presidential Bank in Beltsville: “One time I was out to lunch. I had my back to a guy who was obviously a loan officer. He was talking on the phone. He goes, ‘Oh, don’t worry about qualifying. I’ll just make up the income. We’ll go stated income.’ ”

Gregg Busch, vice president with First Savings Mortgage: “In the middle of 2003, we started seeing no-income, no-asset loans, which means that the borrower wouldn’t have to put anything on the application.”

A former broker with American Home Mortgage: “Now people look at loan officers and say, ‘Didn’t you know you were putting people at risk?’ At the time, there were so many people who were buying and selling houses and making money. You thought: Who am I to tell this guy he can’t do this when two of his best friends just did it successfully?”

“A Circus Atmosphere”

Bidding wars became the norm. If a house didn’t get multiple offers within a week, something had gone wrong. A new invention—the escalation clause—allowed bidders to up their offers automatically until they reached a preset ceiling. Between 2002 and the middle of 2005, the median home price in Washington rose by more than 75 percent.

Diana Hart, TTR Sotheby’s International Realty: “Open houses had a circus-like atmosphere—wall-to-wall people, potential buyers describing properties to their spouses on their cell phones as they walked through. It became like the most crowded cocktail party you can imagine.”

Robert Jenets, vice president with Stuart & Maury Realtors: “Agents were just directing traffic. You were a gatekeeper—contracts showed up that night, and then off you went. But we weren’t complaining.”

David Hawkins, executive vice president and managing broker with McEnearney Associates: “Agents would come in and say, ‘We won the house,’ not ‘We bought a house.’ It was like a contest. There was almost no fear on the part of the buyers of overpaying for a house, because they figured it would be worth more later.”

Elizabeth Blakeslee, associate broker with Coldwell Banker: “There were a lot of tears. I had buyers who went through this many, many times. It got to where I would show up at the property with the paperwork prepared and we would stand outside and sign everything on the hood of my car. They knew the drill, so I didn’t have to explain every paragraph.

“People thought: You agents must be loving this. Well, no, we weren’t. It was nice when you were the winner. And it was nice if you were the listing agent. But if you were the buyers’ agent, it was like tiptoeing through a minefield.”

“The Magic Investment”

Banks were willing to loosen their lending standards because they weren’t keeping loans on their books. Instead the loans were packaged as mortgage-backed securities and sold as a low-risk investment. By 2006, subprime loans accounted for 20 percent of the mortgage market and 40 percent of first-time buyers were using no-money-down loans.

Bill Gross, who manages the world’s largest mutual fund at PIMCO: “Wall Street was looking for ways to make money, so they securitized what are known as ‘non-agency mortgages,’ which are mortgages that Fannie and Freddie wouldn’t take—they didn’t meet their standards. They were the poor sisters that no one else wanted.”

James Grant, editor of Grant’s Interest Rate Observer: Mortgage-backed securities bore the imprimatur of the ratings agencies—Moody’s, Standard & Poor’s, and Fitch. They stamped their seal of approval on these things, having run very sophisticated mathematical tests.

“In almost all cases, the thought never entered the mind of the mathematical modelers that prices might go down from coast to coast simultaneously.”

Bill Gross, PIMCO: “Investors thought they found the magic investment that couldn’t lose money and was providing a yield higher than Fannie and Freddie or Ginnie Mae.”

Brad Hintz, an analyst with Sanford C. Bernstein & Co. who was chief financial officer of Lehman Brothers in the 1990s: “If you were that tough credit guy who said, ‘Oh, no, we can’t do that’—well, the first year you would probably say that, and the second year maybe. The third year you would probably be fired. Because other people are doing it and you are not and it looks like an opportunity lost.”

Fannie and Freddie Get in on the Act

Historically, Fannie Mae and Freddie Mac purchased and guaranteed mortgages that met strict lending standards. But as the boom in risky subprime and Alt-A mortgage-backed securities cut into their once-dominant market share, the two companies turned to investing heavily in securities backed by these products. Fannie and Freddie ended up being the largest investors in these non-prime mortgage securities created by private issuers.

Armando Falcon, the top regulator of Fannie Mae and Freddie Mac from 1999 to 2005: “Fannie Mae and Freddie Mac could not accept their new diminished role in the market. They had to get their market share back. One way to both get market share back and drive up profits was to start buying high-risk mortgages.”

Bill Maloni, Fannie Mae’s chief lobbyist from 1983 to 2004: “What [former Fannie Mae CEO] Daniel Mudd should have done was convey to shareholders that this was a unique time and you may not get your single-digit or double-digit returns because the availability of good loans was not there. It takes a special kind of leader to do that. It wouldn’t have been the easiest thing to do, but it would have been the right thing, the smart thing, and ultimately they would be building statues to the guy if he had done that.”

Lyle E. Gramley, former Federal Reserve Board governor: “There wasn’t anybody looking over the situation at the governmental level who was worried about it enough to do something. I think you could point to almost anybody in government who had responsibility for maintaining financial responsibility and say, ‘Why didn’t you do more?’ ”

“You Couldn’t Get Homes Up Fast Enough”

Developers scrambled to keep up with the demand for new homes. Many buildings and communities sold out before they were completed; some had waiting lists with hundreds of would-be buyers.

Bill Denny, Long & Foster: “People would sit in lines overnight to take part in lotteries [for the chance to buy new homes]. Sometimes there would be lines of 50 or 100 people. On the morning of the sales, they would draw four numbers. If your number was drawn, it was like striking oil. The next month, they’d bump prices up maybe $10,000 and sell four more.”

William Lange, partner and general manager at Lawrence Doll Homes: “The timeline for builders was: Do it as quickly as you could. You couldn’t get homes up fast enough.”

Mark Schacknies, former director of acquisitions at Walnut Street Development: “We developed 1021 Clarendon in late 2005. We planned a preview party at Clarendon Ballroom when we were about ten months away from delivering.

“It started raining. I said, ‘Oh, great—no one is going to show up.’ But people started coming and they didn’t stop. We had to block off the entrance. The line just kept backing up like an overflowing pipe. The total count ended up at about 4,000. Two-thirds of them never even made it into the building. They just stood outside in the rain. We sold out 420 condos in ten weeks.”

Carole Sherman, owner of Bethesda Too, a real-estate development company that specializes in tear-downs: “I’d look for little split-levels or two-story small Colonials. I did a lot of houses behind Suburban Hospital. An agent would call and say, ‘This property is going to go on the market this weekend.’ You’d drive over there to see it and there’d be ten other builders sniffing around.”

Hot Deals

Flipping homes—buying only to resell for a quick profit—became an almost sure-fire way to make money.

Kenneth Wenhold, Metrostudy: “So many people were flipping houses. They would put $5,000 down, then six to nine months later when their house was nearing completion, they would flip it and pocket $75,000. It was a $5,000 risk for a $75,000 reward. Where do you get that kind of return in the normal world?”

Mary Chieppa, an agent with Coldwell Banker who teaches real-estate-licensing classes in Maryland: “The classrooms really were the fullest I had ever seen them. But a lot of people were just doing it for their own purposes as an investor.

“I would say, ‘What brought you to my classroom?’ For the majority of my career, people always said, ‘I’d be good at it. I love houses. I walk though open houses for no good reason.’ All of a sudden I started hearing, ‘I want to buy homes and fix them up. I want to be an investor.’ ”

Craig Fuhr, a real-estate investor: “I did my first rehab in Columbia about seven years ago. I found a smoking-hot deal. I did the project with my father-in-law, and we split the profits. It took 90 days, and we made $100,000.

“I later got out of being a rehabber and became a wholesaler—someone who goes out and gets a house under contract and then flips the contract to a rehabber. It was not unusual for me to make $25,000 to $30,000 just by selling a contract to a rehabber.

“There’s one level below a wholesaler. That person is called a bird dog. All they do is ride up and down streets and find deals. But they don’t have the money to put a property under contract. I had bird dogs who would bring me deals. I would put the property under contract and pay them $500, and then I would sell it to an investor for thousands more.

“The real-estate-investing club in my area went from 25 or 30 people per meeting to almost 500 overnight.”

Developer Mark Schacknies: “Everybody was investing in condos. Syndicates out of Florida and New York would call and say, ‘Sell me—right now on the phone—50 units in your building. I represent a bunch of retirees, and I’ve got their Social Security numbers and their checks.’ ”

Andrew Florance, CEO of the CoStar Group: “In 2007, I started noticing people building office buildings not with an eye to who would occupy it. They were building with an eye to who they would sell it to. That’s the same phenomenon that happened in residential—‘I’m only buying this condo to flip it.’ ”

Please Sell Me Your House!

Desperate buyers wrote letters to sellers pleading their cases or even sent flowers or a cake along with their offer. They waived inspections and contingencies and put down big deposits. Some wrote escalation clauses with no ceiling or offered to let sellers stay in the house as long as they needed for free.

Dana Marlowe, Silver Spring homeowner: “Our home search took 14 months in 2003 and 2004. We put in 21 offers. The first few were really exciting. We would walk through the homes saying, ‘We could paint this wall green, and we could put the couch here.’ Then our agent would get back to us. After a while, we became immune to the rejection sting.

“There was one house—it was in a great location, but it was just a little Cape Cod and there were holes in the walls with wires coming out. It went for $100,000 over asking, the contingencies were waived, and the buyer threw in a trip to Hawaii.”

Dave Singleton, homeowner in DC’s Cathedral Heights: “I got knocked out of bidding wars constantly. I was putting all these escalation clauses in, and I felt like I was in Las Vegas. The agent calls you and says the price is about to go up again—you’ve got three minutes to decide.

“I made 11 offers. In one case, I went $30,000 over the asking price and I had to go get drunk afterwards. I was willing to waive a lot of contingencies. It’s amazing, when you’re caught up in it, what you’re willing to let go.”

Robert Jenets, Stuart & Maury: “I remember one buyer who had sold his home in another state. When we identified the property he wanted, we knew that we were in for a bidding war with probably 10 to 12 offers. I suggested a big deposit, and I was happy for him to do 10 percent. He said, ‘I can actually do more than that.’ I think the house was on the market for around $1.25 million. His dad was advising him, and because he had sold his former house for a huge profit, the dad said to me, ‘What if our deposit was $500,000?’ It just blew everybody out of the water.”

David Howell, McEnearney Associates: “There were buyers literally going door to door or sending letters to entire neighborhoods, begging people to sell. If you have a buyer willing to pay more for your house than it’s worth, at some point you say, ‘Okay, I surrender.’ ”

A New Gilded Age

Rising home values and plentiful credit made it easy for owners to finance renovations with home-equity loans. New houses got bigger and fancier. The HGTV culture was born as home improvement became almost an obsession.

William Lange, Lawrence Doll Homes: “When I started with the company, there was clear differentiation between large custom homes, upper-middle-class homes, and starter homes. But as the boom set in, builders just started putting out a big product. You ended up with these big houses that filled up the lots. They blew up like a balloon.”

Developer Monty Hoffman, CEO of PN Hoffman: “The market continued to heat up and heat up. And the market is our boss; that’s who we build for. The market wanted larger condos—more drama, more glitz. I look back at those designs and call them the ‘big hair’ units—like if you look at a 1984 picture and everybody has big hair.

“They were filled with drama: two-story living rooms, large lofts, commercial kitchens. It’s much like how we look back at the fancy apartments built during the Gilded Age.”

Kevin Gilday, president of Gilday Design Renovations: “Customers started asking, ‘When can you do it?’ rather than ‘How much will it cost?’

“In the ’90s, most of our countertops were plastic laminate with a Corian or wood edge. You’d use granite or concrete maybe once or twice a year. Then it started happening once or twice a month.

“A GE refrigerator had always been fine, but all of a sudden appliance packages started going from $5,000 or $6,000 to $10,000 or $20,000. I remember almost apologizing for the first one I did in the early 2000s. It was in McLean, and it came to something like $19,000. The homeowners said, ‘Don’t worry. We knew it was going to cost that much.’ ”

Growth in the Suburbs

In the close-in suburbs, modest homes were replaced by mini-mansions and high-rise condos sprung up around Metro stations and town centers. Farther out, bedroom communities appeared in areas that hadn’t been considered part of the metropolitan area.

Developer Carole Sherman: “If you go over near Walt Whitman High School, to see one of the smaller houses is sort of unusual now. I don’t think there’s any area in Bethesda that hasn’t been touched. It’s hard to drive around Bethesda and not see something new.

“Think of the money the county makes from young couples coming in, filling up the schools, paying the taxes. The houses go from $5,000 a year in property taxes to $18,000. And it supports all those restaurants in downtown Bethesda. Those are the people who are going out to eat all the time.”

Bonnie Swanson, co-owner of Crisfield Restaurant, which opened in Silver Spring in 1945: “When I was growing up, downtown Silver Spring had stores like Jelleff’s and JC Penney and the Hecht Company. But from about 1978 to 1988, there was nothing. It was awful. For a lot of years there were only three or four restaurants in town. Now as you drive down Georgia Avenue, the old storefronts that were vacant are full again. Silver Spring no longer feels like a suburb. It’s just an extension of the city.”

Bill Denny, Long & Foster: “We saw folks from Arlington, Alexandria, Falls Church move out to Prince William. Those folks were doing well on the sales of their homes, netting hundreds of thousands of dollars, and they would just roll it into their new homes out here. Their new house would be twice the size.”

Kenneth Wenhold, Metrostudy: “Prices were going up so fast in the core that it pushed people to the fringe. Manassas in 2000 was an outlying area where you didn’t see much growth. But throughout the decade it got bigger and bigger. Then all of a sudden Haymarket, which is even farther west, became a viable suburb. And then Warrenton in Fauquier County. The next thing you know, you have Culpeper—which is way out there—becoming a viable residential submarket where homebuilders are going in and putting up homes.”

Bob Marbourg, traffic reporter for WTOP radio: “When we started out, we’d fly to Dale City to the south and as far north as Shady Grove. What used to be on the edge of development 30 to 35 years ago is not even in the middle. We are talking to people on a regular basis who are in Hagerstown and are taking I-81. We’re talking to long-haul drivers between Richmond and Fredericksburg. The congestion almost never ends.”

DC’s Comeback

The 1998 election of Anthony Williams as DC mayor, replacing Marion Barry, and growing interest in city living helped spur the revitalization of DC neighborhoods that had been long neglected. But the changes didn’t come without growing pains.

Monty Hoffman, PN Hoffman: “When we first started out, it was so quiet, like a little Southern town. We could go in and buy property with hardly any competition.

“In the early stages, we were selling mostly to recycled city dwellers, people who already lived in the city and were upgrading to a condominium that was a little swankier.

“Then we realized, wait a minute, some of these buyers are new to the city. It was almost like a secret. We would have empty-nesters who had come in from Rockville. They had lived on a quiet cul-de-sac and were going to buy a condo in Adams Morgan.”

Developer Jim Abdo: “We went to the block between 14th and 15th—before the Whole Foods was there—to an area that was a lot of vacant, burned-out lots, crack houses, flophouses.

“I bought up half a block and created upscale housing. It sold as quickly as I built it.

“People took note that you could go beyond what was perceived to be a line in the sand, 16th Street. Once that happened, it opened the floodgates.”

Former DC mayor Anthony Williams: “Every year I went to the convention center in Las Vegas to woo developers and retailers and investors to come to this city. The first time we went, we had a couple Xeroxed pages stapled together. That was our marketing material. We didn’t have a booth. We begged people to talk to us. We’d meet with them in a lobby or hallway. But that’s when we had the initial discussions with Home Depot and Target.

“Now you go to Las Vegas and the District has one of the nicest booths in the place and people are lining up to come in.”

Jacqueline Dupree, Capitol Hill resident and neighborhood blogger (JDLand.com): “I had heard there were plans for the Anacostia riverfront [near the Navy Yard]. One day in 2000, I made my husband drive me around so I could take pictures.

“You had blocks and blocks of boarded-up buildings where nobody lived. Out of the 21 acres that the ballpark was built on, it displaced five residences, only one of which was owner-occupied. I would go down there on the weekends and I would be the only person. Then for a year or so it was just me and construction workers.

“My demolished-building photo gallery has 156 pictures now. It’s an entirely different neighborhood.”

Developer Jim Abdo: “I went down to N and 13th streets in 2001 or 2002. This building—1220 N Street—had been vacant and off the power grid for so long that when I bought it I called Pepco and they said, ‘I’m sorry, there is no building there.’ I said, ‘Trust me, I just paid $1 million for it.’ Click, click, click. ‘Nope, there’s no building.’

“It was all cinder-blocked over and spray-painted. It was a 30-some-unit apartment building that had been vacant for 25 years. Finally they sent someone from Pepco to meet me there. They brought it back online and gave us temporary power.

“The units I designed were featured on HGTV. We created these really dramatic 20-foot-tall penthouses. Every unit in the upper levels had private elevators. It sold out immediately.”

Steve Moore, president and CEO of the DC Economic Partnership and former deputy executive director of the Downtown Business Improvement District: “I remember being at the Downtown BID around 2004. We realized we had opened a restaurant a month for 30 months straight. That’s the dream of anybody in downtowns or neighborhood revitalizations anywhere.”

Blogger Dan Silverman, a.k.a. the Prince of Petworth, who moved to his neighborhood in 2003: “I bought my house from a DC cop. He said, ‘I suggest you get a dog, and not for companionship.’ But I’ve never been to a place where people are so nice, where people look out for you.

“The really interesting thing for me was going to the Metro. That’s how you could see the change in the city. In 2002 at the Petworth station, I was a very unique rider. Then you go to Columbia Heights and you’d see a smattering of new faces. You go to U Street, you see even more. Now it is completely diverse, a total mixture.”

Tania Jackson, a developer, who grew up in DC’s Columbia Heights and still lives there: “When I was growing up, you pretty much knew everybody on the block. They used to jokingly call our block the Huxtable block. Everybody decorated for Christmas.

“Almost all of the families from my block cashed out. People were getting offered a ridiculous amount of money for their houses.

“I grew up in a city where everybody spoke to each other. You would say hello to people on your block, even if you don’t know them. The newcomers don’t.

“I would go to neighborhood meetings and I would hear these different groups of people who would be talking past each other. You’d hear newcomers saying, ‘This is bad, this is bad, this is bad . . .’ and the people who had lived here for a really long time and had been vigilant about neighborhood cleanups and plans to revitalize the neighborhood—instead of hearing newcomers saying, ‘I appreciate all that you’ve been doing,’ they heard: ‘You let this neighborhood go to hell.’ That’s been painful to watch.”

“Agents Made a Lot of Money”

Real-estate companies typically ask for 6 percent of each sale, and many were selling a house a week. The number of licensed agents in Maryland, Virginia, and DC doubled in the first half of the decade.

Bill Denny, Long & Foster: “I had a dog-walking business before I became a real-estate agent. I jumped in in April 2002, and within 30 days I was working on two contracts. It was gangbusters from day one. You had your cell phone ringing from 7 in the morning until 10 or 11 at night.”

Diana Hart, TTR Sotheby’s International Realty: “On a Sunday morning you would call your buyers and say, ‘Here is where you’re going today.’ They would fan out—maybe five or six different sets of buyers. Then in the course of that three-hour period—1 to 4 o’clock—they would call you and say, ‘We found the house.’ So you would drop whatever you were doing with one set of buyers to rush and see the house they liked. And figure out how you were going to fashion an offer that would be competitive with the ten other people who were also there looking at it with their agents.”

Nancy Taylor Bubes, Washington Fine Properties: “I would schedule a listing a week. I would get it ready, have it on the market by Friday, open on Sunday, sold by Tuesday.

“In the height, there was a year when I did $100 million.”

Diana Hart, TTR Sotheby’s International Realty: “Agents made a lot of money, but it was exhausting. You would show a house to a buyer and say, ‘You have five minutes to make one of life’s most important decisions.’ You weren’t in a position to properly address buyers’ concerns.”

Joseph Himali, Best Address Real Estate: “Agents ate out a lot. They went on a lot of trips. The status symbol was having an assistant. The other agents would know you’re too busy to handle the small stuff.”

“I Knew There Was a Problem When . . .”

As the market overheated, some people saw signs that the bubble would burst.

Mark Schacknies, on the Clarendon condo building his company quickly sold out: “We noticed that no one was moving in. You would look down these long hallways and every single door had a lockbox on it. Craigslist was flooded with ‘for sale by owner’ listings.

“Around that time, the Washington Post wrote an article about the high amount of investors buying condos. They thought it was somewhere around 20 to 30 percent, and they were saying that’s such a huge number. By our estimates, it was three times that much.”

Developer Monty Hoffman: “Every plumber and attorney thought they were developers, and it was slopping up the market. We would continue to churn our diligence on sites because we wanted to keep doing what we were doing. We looked at the math and would say, ‘That didn’t make sense. Okay, we pass.’ All of a sudden, a whole year goes by and we realize we’ve passed on all of it. We probably looked very closely at 20 deals. None of them made sense to us anymore. People were betting on futures.”

Kenneth Wenhold, Metrostudy: “One of the owners of our company always says he knew there might be a problem when he was sitting at a restaurant talking to a client and a busboy interjected to say that he owned three rental properties. That’s when you know something might be amiss.”

David Jackson, who writes a blog called Bubble Meter: “In spring 2005, I started looking for properties in Silver Spring. After about two months, I was convinced there was a massive bubble and I wanted to spread the news.

“The online debate got nasty. Our nickname was ‘bubble heads.’ Some people referred to the other side as ‘housing heads.’

“The housing heads said there isn’t going to be a bust. Most had a lot of money at stake—they were mortgage brokers, they were real-estate agents, they had just bought an overpriced home.

“One of my readers commented on my blog about this bench outside a building, so I drove into Northern Virginia to see it. I gasped. There were 47 lockboxes on one bench. I took photos and posted them on my blog. A few weeks later, the Washington Post wrote about the bubble bench.”

Phones Stop Ringing

Prices began falling in late 2005. Some argued that the market was just leveling off after years of double-digit increases, but by 2007 it was hard to ignore the signs of a crash.

Developer Mark Schacknies: “Around February 2007, we were working on a project in DC’s Shaw—beautiful building, great little units.

“We threw a preview party in a nice boutique hotel, got some wine and cheese, a DJ. Even if you weren’t going to buy a condo, this would have been a pretty swank party to attend.

“An hour into it, we were like, ‘Did we misspell the address?’ Not a single person showed up, not even a nosy neighbor. We sat there with a couple dozen bottles of wine and just drank and talked about what had happened.”

Jennifer Miller, former homeowner in DC’s Palisades neighborhood, who now lives in California: “We put our house on the market in May 2007 for $950,000, and it sold in a day. Then a week or two later, nothing else sold. Everything was ‘days on the market: 20 to 30’ and dropping asking prices. Our friends would say, ‘I can’t believe you sold your house.’ ”

A former mortgage broker with American Home Mortgage on the day his company went under in 2007: “One day we had money. Then the people who were lending us millions of dollars every day said, ‘You know what? This might be a little too risky.’

“We had to call every client who had a moving van packed and a house ready for settlement and say, ‘I’m sorry, you can’t settle.’ They were left scrambling. I had 23 people to call. Twenty-two said, ‘God bless you—good luck.’ Only one person was a jerk.”

Kevin Gilday, Gilday Design and Remodeling: “We noticed in January 2008 that people were becoming more price-conscious. One out of 20 people would say, ‘I just can’t move ahead on this.’ If you haven’t heard that for six years, you notice it big time.

“We had layoffs around the time Treasury Secretary Henry Paulson made his announcements. What client is going to hire you when somebody announces it’s the worst economy since the Great Depression? If you were thinking of even buying a couch, you said to yourself, ‘Maybe I should leave that money in the bank.’ ”

Roby Thompson, Long & Foster: “The middle of October 2008, it completely stopped. It scared the hell out of me. I went four months without a referral—from November through almost the end of February. I almost started thinking about getting another job.

“I had been averaging about $40 million in sales a year. And then in 2008 I dropped down to about $26 million. My business is all referral, and my phone stopped completely. I went through kind of a depression for a couple of months. I was like, ‘What have I done to destroy my business?’ ”

Roby Thompson, Long & Foster: “At the height of the market, you would see 40 agents in our office regularly. Throughout 2008, it was a ghost town. You were lucky to see three agents in our office at a time.”

“Timing Is Everything”

Developers and investors who got caught when the bust hit had to adjust to the new reality.

Father and son Milton and Steven Peterson of the Peterson Companies are the developers behind National Harbor in Prince George’s County.

Milton: “When we planned this, we were in a boom. We had a tremendous reception from most everybody, but there were a few people who didn’t approve, so we got held up for 20 months. That put us in the position where we opened just as the bust hit.”

Steven: “Ann Taylor said they were going to open up one store in the country, and it was going to be here. Then all of a sudden it was no stores. We said, ‘But we’ll fit you out, we’ll pay for your merchandise.’ They wouldn’t do it. We said, ‘We’ll pay for everything.’ There was no risk to them. They wouldn’t do it. You couldn’t buy deals to get people in.”

Milton: “When you’re planning, you’re always trying to be the optimist. Naturally, the boom affected our perspective of how high we could go. For example, the quality of the buildings. The promenade is granite—that’s not concrete. Just on public spaces, we probably spent an extra $15 million on things like finishes and public art.”

Steven: “Our biggest leap of faith was that we could sell high-end condos in Prince George’s County. We sold out 430 units in three months. That’s unheard of. But we had some kick-outs when the bust came. We have another 115 left to sell. If we hadn’t been delayed 20 months, we would have been sold out and settled. We would have been full-up in retail leasing. But timing is everything.”

A homeowner in Montgomery County: “When we moved here, there was a little rambler across the street. The owner tore it down and built a 10,500-square-foot house. Then he bought the house next door, leveled it, and built an even bigger home.

“He was forced to put both houses on the market. He was asking something like $2.5 million and $2.7 million in a neighborhood where the average home is $800,000 to $900,000. The houses were on the market for at least 18 months, and then they were foreclosed on in the fall. Now we have these two enormous houses on the street—they’re empty and they’re dark.”

Chris Millitello, co-owner of Arrow Bicycle, near Arts District Hyattsville, a mixed-use development still under construction: “Right after we opened, when the economy was still decent, we saw a lot of prospective business owners come down here and speak with us about opening in Hyattsville. There were a couple of restaurant owners and someone who was interested in opening a Vespa dealership. That stopped last fall; we don’t see anyone coming in anymore.”

Kim Hosen, executive director of the Prince William Conservation Alliance: “The Cherry Hill Peninsula was possibly the last large unprotected forest in Northern Virginia. It’s part of the bald-eagle habitat that you find on both sides of the Potomac River.

“Developers planned to put in something like 4,000 houses and a town center. They put in a massive road out to the 70-foot bluff that overlooks the Potomac. About 750 acres of trees were cleared. The peninsula was steeply sloped, and they flattened it. They built a golf course. And then they went bankrupt. It’s been sitting for over two years—no houses, no structures, just a road, a golf course, and dirt.

“It Wasn’t Real at First”

As prices fell, homeowners with ARMs who had counted on selling their homes or refinancing before their monthly payments increased suddenly didn’t have either option. The number of delinquent mortgages snowballed.

Kenneth Wenhold, Metrostudy: “Investors pulled out of the market and listed their homes for sale. And there were tens of thousands of investors who were doing this, so all of a sudden you had all this product hit the market. When you double the supply out there but don’t change the demand, prices are going to fall. And as you see the prices fall, more people try to jump out of the ship thinking that it’s sinking. It’s a downward spiral.”

Tisa Clark, a former Freddie Mac director: “In mid-2007, we started having people going into default at such an alarming rate. We were working 70 or 80 hours a week trying to put programs into place to keep these people in their homes. And then it spiraled out of control.”

A former broker with American Home Mortgage: “It wasn’t real at first. It was a trickle of problems at the beginning. Then the problem became the norm, where everybody was delinquent on their payments and everybody was forced to consider foreclosure.”

Gregg Busch, First Savings Mortgage: “Nobody ever expected it in Washington. A lot of people thought we were recession-proof. We were 100-percent wrong. We actually stopped lending completely in the middle of 2007. We literally shut down for two months.”

“Can I Walk Away?”

While prices remained stable in certain sought-after neighborhoods, in other parts of the region many people found themselves under water—their house was worth less than they owed on the mortgage.

Some have been able to arrange a “short sale,” in which the lender forgives the difference between the sale price and the balance of the mortgage. But banks have been slow to respond to short-sale requests; the process can take more than a year.

Others have simply stopped paying their mortgages and have left their homes. It takes seven years for their credit scores to recover.

Michael Rucker, homeowner in DC’s Brightwood neighborhood: “I bought my condo in August 2006 for $289,000. I didn’t really worry about losing my job because I thought: The market is going so great, hopefully I can refinance and get a lower mortgage.

“I’m an IT contractor, and I lost my contract. The one I have now pays much less. I don’t do any clothes shopping, can’t really travel, don’t go too many places. I’m stuck.

“I’ve been trying to get a loan modification. If you’re on hold with the bank, they hang up on you. I feel like saying forget it and walking away from the property, but I don’t want to ruin my credit.”

Marty Bryant bought a townhouse in Manassas Park Station, a new development, in late 2005, when she was 26. She lived there just over a year before moving to California for a job: “Both of my parents are in real estate. I’ve had my license since I was 18. I wanted something I could call my own.

“I bought at the peak, unfortunately. I paid $360,000, and now they’re assessing it just over $200,000. I have a tenant and he pays a portion of my mortgage, but I’m in the hole every month about $900. I was hoping to make money on it. At this point, I’d like to break even or maybe just lose $20,000.”

Joey Remondino, a broker with Stone House Realty: “Manassas Park Station was selling fast in 2005 and 2006. I had a client who paid almost $500,000 for a three-bedroom condo there.

“Later, I short-sold his house. At the time you’d have 15 doors, and eight or nine had lockboxes on them. I’d forget which one we were looking at.

“Most of the original owners are gone, which is hard to believe knowing that the community was built in 2006.”

Homeowners in Crisis

Despite programs designed to help people who are behind on their payments or under water, most banks have been slow to make adjustments to loans. Prince George’s County, Charles County, Prince William County, Manassas, and parts of DC have seen the highest rates of foreclosures.

Marian Siegel, Housing Counseling Services: “There was a period when the lenders were doing nothing to help homeowners. No matter how many times we called them, no matter how much contact we made, it was lost paperwork, phone calls not returned. That was the norm.

“Then the programs that supported temporary loan modifications began, and we started seeing lenders willing to do them last June. It was supposed to be a three-month modification. Those started coming due in August, and we could rarely if ever get a client approved for a permanent modification.”

A homeowner in DC’s Petworth: “I bought a low-income condo in Columbia Heights and lived there for about 20 years. Then five years ago, a friend of mine who works at a bank said, ‘You have so much equity. Wouldn’t you like to have a house?’ Well, who wouldn’t want to have a house?

“I bought in Petworth. I was confident I would be able to pay because my daughter was living with me, but now they cut back my hours at work and my daughter is about to move out.

“I spoke with someone who said I was qualified for a loan modification. In September they said I was on a three-month trial and they’d get back with me by the end of December.

“December 20 came, and I had not heard anything. I called and they said, ‘We haven’t come to a decision, so go ahead and send January’s mortgage at the reduced trial amount.’

“At the end of January, my credit-card company said, ‘You have no credit with us. You’re behind on your mortgage, so you’re high-risk.’ I called my bank and tried to explain. I was told, ‘Your loan is no longer under the modification payments. You’ve been denied since December.’

“Every time you call, it’s a different answer. I started this process in April 2009. I’m a nervous wreck.”

Homeowner Graham Marsden: “My wife and I bought a condo in Reston in 2005, right at the peak. Only one person paid more than we did for a unit in our condo building.

“We are part of the lucky few who are able to refinance under Freddie Mac’s HARP [Home Affordable Refinance Program]. Our ARM was scheduled to reset this year, and the Obama plan came just in time. We were hopelessly under water.

“It’s very strange, but we’ll celebrate having a higher monthly payment and higher interest rate on a condo that is worth less. The celebration is about eliminating a big, scary unknown—it’s better than having an adjustable-rate mortgage. We’re going to open up an ironic bottle of Champagne.”

Robert Jenets, Stuart & Maury: “Foreclosures in Bethesda are a dirty little secret. It’s a proud neighborhood. But we do have people who have gotten into bad situations. You can go through the listings and find a decent number of foreclosures and potential short sales. It’s just that you don’t necessarily see it on the sign on the property. Because it’s such a desirable area, they might be sold quietly.”

Tony Sindlinger, first sergeant with the Prince William County Sheriff’s Office: “Our evictions have almost doubled. It’s a stress on all our deputies.

“I’ve been doing this for a little over 20 years. I’ve seen a lot of changes. Fifteen years ago, almost 99.9 percent of people were already aware of the situation when you went to deliver the papers. Now we are finding tenants who are unaware they are being evicted, because they were paying rent to the landlord but the landlord wasn’t paying the mortgage.

“Several months ago, we had a murder-suicide in the town of Dumfries. I can’t speculate whether it had to do with the eviction, but the couple had absolutely no place to go. The night before we arrived to do the eviction, one shot the other and then shot themselves.”

Veronica Roth, director of SERVE, a program of Northern Virginia Family Service that runs a homeless shelter: “In 2009, we had about 160 folks who came to the shelter as a result of foreclosures. We’ve been seeing more people from higher-income types of employment. We’ve had teachers, nurses, electrical engineers, painters, construction workers, retail workers—it’s been the whole gamut. These are families used to being independent, used to making it on their own and not asking others for support. That hits a person’s self-esteem
really hard. They are grieving the loss of what they built up over the years. It’s very hard when you’ve done everything you think you’re supposed to do in life—you’ve paid your bills, worked hard—and to end up without any housing. It’s terribly frightening.”

The Aftermath

Banks have tightened their lending standards, and new construction has slowed down. Have we learned from our mistakes?

Diana Hart, TTR Sotheby’s International Realty: “We’ve gone back to the basics where buyers actually have to be qualified.”

Andrew Florance, CoStar: “Right now, Washington is at its lowest construction level since we were at war with Germany and Japan.”

Developer Jim Abdo: “There’s no new product in the pipeline. At some point, the most simple of economic rules is going to take hold, and that is supply and demand. You can’t be in a market like ours where you continue to have job growth and government spending and not build anything for years.”

Kenneth Rogoff, Harvard professor and former International Monetary Fund chief economist: “It’s hard to find a scapegoat because our collective responsibility was so great. We bought houses, we thought prices would go to the moon. We believed they would go up 15 percent a year every year forever. We believed we could spend and not save.”

Robert Jenets, Stuart & Maury: “How could we ever repeat the mistakes that caused such a fast climb and meltdown? Well, we did it in the ’80s, and then we repeated it in the 2000s. People forget. But I’d like to think it wouldn’t be for a long time.”

Where We Are Now

Many real-estate agents describe today’s housing market as healthy. Credit standards are tighter, buyers have to put more money down, bidding wars are far less common. Still, a lot of potential buyers are sitting on the sidelines wondering if we’ve hit bottom. And some potential sellers are sitting on the sidelines hoping prices will go up. The outlook depends on where you live. In certain neighborhoods—especially those inside the Beltway, close to Metro stations—prices are starting to climb again. A well-priced house in a desirable location can sell in a week.

In many neighborhoods, there’s more inventory to churn through before the market rebounds. In some hard-hit areas, a lot of people are under water or delinquent on their mortgages, and “short sales” and foreclosures are still hitting the market every day. It remains to be seen whether the most recently announced programs to help homeowners—including efforts to streamline short sales—will help the distressed areas.

Questions linger: Will sales drop off when the homebuyer tax credits end? What will happen when interest rates start going up, as they undoubtedly will when the Federal Reserve stops buying up mortgage-backed securities?

Washington’s skyline was once filled with cranes; now there are fewer. When the capital markets thaw, there are lots of interesting projects ready to go. One of the most dramatic will be along DC’s Southwest waterfront, where plans for hotels, office buildings, apartments, and condos are on the books.

In Virginia, future development includes the Metro extension to Dulles Airport and the transformation of Tysons Corner into a more vibrant urban center. In Maryland, planners aim to make the White Flint area a more pedestrian-friendly community, and the Purple Line promises to bolster eastern Montgomery County and Prince George’s. The new Homeland Security headquarters at DC’s old Saint Elizabeths Hospital could breathe more life into Anacostia.

“People now talk about Washington like they talk about New York and San Francisco,” says developer Monty Hoffman. “It’s a very exciting time.”