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.”