Basically, renting requires me to bet that the price will increase, or at least hold, over time. Selling allows me to get a fixed--and large--profit and reinvest it in the main house.

We put down 500k for the down payment and borrowed a 300k loan.
Our combine income is 230k/year so getting a 300k loan was not
a problem for us. I believe the median income in Fairfax county,
last time I check, is 95k, I think my wife and I are doing
very well.

Having said that, I just sold that same house in Mclean
in May 2005 for 900k. I am making a 100k profit after living
in the house for less than a year. I didn't not put a lot
of money (about $12k) into renovating the house. We were ready
to purchase a 1 mil home in Mclean; however, after carefully
analyzing the situation, I am going to "rent" instead of purchasing
a new home. I am convinced that real-estate in Northern Virginia
will drop based on the followings:

1) I don't know about anyone else salary but both my wife and my
salary are the same today as they were five years ago. I work as
an Network/Security Engineer (government contractor) while my wife
is also a government contractor for a big local company in this area.
My salary stuck at 120k while my wife salary is also stuck at 110k.
In 2000, we bought a townhouse in the Herndon area for 190k. We sold
the townhouse in June 2004, prior to purchasing the home in Mclean,
for 440k. Salary can not keep up with real-estate price appreciation,
something has to give.

2) I am renting a very nice house in the Mclean area for $4000/month.
Had I purchased the same house, with an ARM five year mortgage, I would
have to pay about about $7000/month. You can add another $1000/month
in Property taxes. Somehow, there is a big gap between renting and
buying. Another situation, my sister rented an two bedrooms condo in
Falls Church (utility & condo fee included) for $1300/month. That same
condo goes for $350k. What this is telling me is that there are too many
people buying real-estate and renting them out, even at a loss, with
the assumption that the property value will continue to go up that it has
been for the past four years (18%/year). After two years, they can flip
it for a profit. I think I read in the Washington Post that about 30% of
homes in Northern Virginia are purchased for investment purposes.

3) I read an article in Washington Post a few weeks back that about 54%
of all new loans in 2005 are in the form of "interest-only". This tells
me that a lot of people can not afford to buy a home with a conventional
15 years or 30 years fix interest rate or you just have a lot of
"investors" jumping into the real-estate market. The only way for them
to afford a home is with "interest-only" loans. If there is a slight downturn
in the economy, look out. I think Allan Greenpan addressed this issue and
warned the bank about creating "exotic" loans to consumer.

4) There are a lot of people in the Northern Virginia who spend more than
50% of their income for the mortgage. This is not a good sign. The
conventional wisdom is that no more than 1/3 of your income should be spent
on home mortgage.

5) I read in the Washingtonpost a few weeks ago that a female model
is giving up her modeling career and start her new gig as an real-estate
investor. This reminded me of back in 1999, at the height of the
Internet boom, that you have cab driver and housewife bought and sold
stocks over the Internet. In 2005, instead of trading stocks, people
trade houses. When this happens, it tells me that the end is almost near.
History always repeats itself.

6) I have a lot of my colleagues at work who talk about purchasing new
real-estate as an investment. Almost all of them all at least two houses.
Furthermore, a lot of the houses that they purchased required little or
no down payment and almost all of those house are financed with
"interest-only" loans. They are willing to take a lot when renting these
house with the assumption that the properties will go up in value in
the next few years. Did we not have the same problem with stocks in
term of "options"? How many of us managed to make money with our company
stock options?

7) Every time the Fed increases short-term interest rate, mortgage interest
rate does the opposite. It goes down. Should it be the other way around?

I think the real-estate market in Northern Virginia will burst in the next
24 months. It is more psychological than anything else. If enough people
convince that it will happen, investors will start unloading the properties,
it will then create a panic in the generation population of Northern
Virginia.

By the way, the couple who purchased my home, the husband drives school bus
for Fairfax county. I don't know what his wife does but they took out a 800k
mortgage to purchase my home. They are hoping that they can turn around
and sell it in two years for 1.3 mil. This is, as Allan Greenspan puts it,
irrational exuberant

Tony

However, there are only 2 factors in my mind that can cause a major sea change in the market, and cause a significant period of stagnation or correction: That is either
1) significant rise of interest rate, something beyond 8%, anything below 8% is not enough. Or
2) significant loss of local employment.

Until either of these 2 can happen, market direction is hard to change. Despite the higher home price, people do have money to buy. Why are these 2 factors important? because they are the most fundamental measures of source of money. There are hundreds and thousands of web articles predicting the market to crash, but I am only interested in those that discuss the above 2 fundamental factors. So far, there are no tangible evidences and not any reasonable reasonings presented by these so called "expert" economists to suggest they would happen. I just wonder how could the bubble be pricked without either of these sources of money being taken away? Most probably, we would have to wait for some kind of significant job loss in the DC region to take away people's source of money. Could that be a long wait if not forever?

However, Fairfax County website on Economic and Demographic Information is pretty clear that the Median Family Income has fallen in the 2 previous years in which information is available, namely 2003. Falling from a high of 99,100 to 94,000. Quite a drop considering housing prices rising at such a brisk pace.

Note that these 2 years with a drop in income (graph only goes back to 1979).

Interesting to see if the downward slope is an anomaly or a trend.

The Fed has promised to keep on raising interest rates at a "measured pace." I just prefer
they'd measure their pace a little more slowly.

Prices are on the high-side, with more investors than residents due to a lot of factors, including Europeans with a Euro working in their favor.

I live in SW Florida, in a county where house prices went up 39% last year. Nearly all of it was investment by non-residents. One new development opened and had 1,200 homes sold out within two weeks of the announcement, long before any ground was broken. Those places--the investors hope--can be flipped once or twice before anyone actually moves in. If that happens, the investors win, big time. If not, then prices will start downward again.

I'm betting on the latter, and living in a rental until then.

Summer is usually the peak real estate sale periodin DC due to military PCS cycles and government moves during the summer when school is out.

The military PCS cycle is usually in EARLY summer (late May/early June)... It being late July, I am not a bit surprised things are slowing down.

Anyone in the military who owns a home knows you don't put it on the market in mid-late summer. You've got to get it on the market late April/early May, or you miss out.