It's no secret that property values have appreciated nicely in most parts of the country over the last few years. It's quite evident. Home sales have been brisk and homeowners have been refinancing to cash in on their new-found equity in record numbers. But there are some signs here in Metropolitan Washington, D.C. that can only be described as a feeding frenzy -- and that makes me nervous.

Consider the following:

• A home in Silver Spring, Maryland comes on the market and sells in one day. That's no big deal. But the real estate agent received forty-one offers. I'll repeat: Forty-one offers in only a few hours.

• A home in the city of Alexandria sells in one day at a price $100,000 over the asking price. I'll repeat: The house sold for $100,000 more than the seller's asking price.

• More than 30 people camped out for 7 days in order purchase units in a new urban townhouse development. I'll repeat: Thirty people living on the streets with sleeping bags and tents in order to buy in a new townhouse development.

This ain't right, folks. I know I'm just a mortgage guy and I haven't studied any statistics or numbers. But it seems to me that the scenarios described above surely support my prediction that the D.C. area real estate market is in for a rude awakening.

Bill Barnes, President of Barnes Real Estate, Inc. in Alexandria, Virginia, has been in the business for 25 years and has never seen such a market that is so lopsided with low supply and high demand. "You'll get periods of hot demand for houses every few years," Barnes says, but "nothing's ever come close" to today's feeding frenzy.

"It's off the charts," says Barnes. "It's hard for people in my business to comprehend what's happening. First-time homebuyers are waiving financing contingencies and home inspections just to have a seller consider their offer. It's insane."

Barnes says the demand is likely to continue throughout the year because the demand for homes is so far out in front supply. But eventually, he says, "home values will have to flatten out because fewer and fewer people will be able to afford the skyrocketing prices."

What about the talk of a bursting bubble? Federal Reserve Chairman Alan Greenspan has said that a dramatic fall in home prices similar to the fall of the stock market in 2000-2001 is unlikely because homes cannot be bought and sold as quickly as stocks.

Greenspan is surely correct when he says you can't compare the real estate market with the stock market, but I think we're headed for a fall here in Washington. Here's my take:

The real estate market cannot possibly sustain such a pace because income isn't increasing along with house prices. The housing market will eventually meet price resistance and demand will fall. Sellers will start to receive offers that are less than their asking price, and instead of reducing the price, they'll hold out and wait for a better offer. This will generate more inventory on the market, which will in turn create a more balanced supply and demand curve.

But there will be some sellers who will be unable or unwilling to hold out for their asking price. They will need to sell quickly for one reason or another. The only way to do that is to drop the price.

Do you see the pattern? As home prices increase, demand will decrease because fewer people will be able to afford to buy. As demand drops, inventory will rise because sales will slow down. Home prices will then start to fall.

Let's add interest rates to the equation. A rapid rise in interest rates would, in my opinion, spell disaster for the housing market. A two percent increase in interest rates will increase the cost to buy a home by almost 25 percent, forcing a prospective home buyer to reduce his purchase price range. For example, a $1,700 principal and interest (P&I) payment at 5.50 percent will make a loan of $300,000. If rates rise by two percent, the same $1,700 P&I payment will borrow only about $240,000.

Add such a scenario to a market where house prices have increased by 20 percent or more per year and the demand for homes will come to a sobering halt.

I hate to sound like a pessimist, but I believe the saying, "the bigger the boom, the bigger the bust." History tells us that irrational exuberance in any market will lead to a bad hangover. Things have gotten out of control when folks are camping out to buy a home. When the axe comes down, I hope interest rates don't rise to exacerbate what is sure to be a difficult market turn around.

Published: March 25, 2004

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.