You can now trace the trend back to just before Labor Day. Almost imperceptible at first, by year's end it was abundantly clear. The housing market in the greater Washington, D.C., metro area, a simmering microcosm of the nation's historic housing boom, had started to cool. While it would be premature to describe the market as faltering, D.C. has, well, turned. Housing prices have slowed their meteoric ascents, properties have stayed on the market for weeks rather than days, and buyers have become discerning, no longer pressured into buy-it-now decisions.

“Since Labor Day, we have seen a 180-degree shift from where we were,” says Chuck Covell, president of Greenbelt, Md.-based Bozzuto Homes, a single-family, townhouse, and multifamily builder based in the D.C. and Baltimore markets. “Our market had been humming at such a high velocity, you had to expect some sort of alteration. You just couldn't keep that level of energy up indefinitely.”

The D.C.-area housing market had been in a dizzying state for some time. From the third quarter of 2003 to the same period in 2005, the average increase in area home prices was more than 20 percent per year, according to George Mason University's Center for Regional Analysis. In February of 2005 alone, prices jumped 28 percent from a year earlier, contributing to a cumulative leap of 143 percent in the region's housing price index since 1997. Yet by the holiday season, the market's gallop had downshifted drastically.

“Now, buyers can have a home inspection and make an offer that isn't necessarily over the asking price,” says Holly Worthington, president of the Greater Capital Area Association of Realtors, who saw the shift firsthand in neighborhoods throughout the region during the third and fourth quarters. “They can actually negotiate without having to buy something on 10 minutes' notice.”

INVESTORS EXIT What precipitated the turn? Market watchers say last summer's devastating hurricanes, coupled with escalating fuel prices, rising interest rates, and dissatisfaction over the war in Iraq combined to discourage the region's home buyers. “It was really almost overnight that people started not having the confidence to buy,” Worthington says. “When you suddenly have a number of bad things happen at once, it kind of just wipes that confidence away.”

Consumer confidence dipped to its lowest point nationally in 13 years in the wake of last summer's events, according to the University of Michigan's benchmark measure last September. Americans said they had the least confidence about buying a home since 1990. Still, the malaise particular to the D.C. area was also fueled by speculators, individual investors who bought houses for the sole purpose of cashing in on short-term gains. While “flippers” have cropped up in several markets nationally in recent years, the D.C. area seemed to draw more than its share of non-occupant buyers. In fact, D.C. area real estate executives say speculators accounted for 20 to 30 percent of sales in the last three to four years.

“We've been fighting the investor situation in the market for some time, and particularly so in the last two years or so,” says Covell. “We've generated this cottage industry of investors that isn't unlike what you see in the stock market.”

So, just as traditional home buyers began to take pause, market-sensitive investors started exiting their positions. “There had always been a concern that the speculators would move out of the market as fast as they moved in, and I think that's part of what happened,” Covell says. “Suddenly, you could walk through any community that was delivered in the last year, and see 25 percent of the doors had lock boxes on them. Investors themselves started getting worried and saying, ‘Geez, I don't think I'm the only one here who's had this brilliant idea.'”

PERKS UP The result has been a steady increase in resale inventory in Washington at the same time sales have slowed. In November, listings in D.C. and Montgomery County jumped by a startling 69 percent, compared with a year earlier. Contracts declined by 19 percent during the same period, according to a report by analyst Rick T. Murray of financial services firm Raymond James in St. Petersburg, Fla. “We suspect ‘hidden inventory' from speculators may be hitting the market,” Murray writes.

New-home builders in the market have already been feeling the effect of those converging forces, selling 7 percent fewer units during the third quarter of 2005 than a year earlier, according to Hanley Wood Market Intelligence, a Costa Mesa, Calif.-based research firm. The drop was felt particularly hard in the Virginia suburbs, where sales declined by 18 percent, and in the detached category, where sales fell 28 percent from a year earlier, according to the firm. The slowing trend has already spurred some builders to bring concessions back to the market, with perks such as finished-out basements, smaller down payments, and flexible financing terms starting to fill up local ad space.

Learn more about markets featured in this article: Washington, DC, Los Angeles, CA.