No Magical Answers

An issue of particular concern in the high-cost Washington area is the recent decision by federal banking regulators to cut back on so-called "exotic loans," such as interest-only loans and mortgages that allow borrowers to make partial payments on their loans. In 2000, only 1 percent of Americans who got new loans selected the interest-only variety, but by mid-year 2005, about 23 percent of borrowers were using them, according to LoanPerformance Inc., a real estate lending information service. About a third of Washington area residents opted for these loans in the past year.

Many borrowers did so because that was the only way they could afford to purchase homes as prices climbed out of reach.

Both kinds of loans -- interest only, and the pick-a-payment variety known as "option ARMs" -- can cause mortgage balances to rise, in what is called negative amortization. That can leave borrowers at financial risk if home values fall. Regulators fear these loans could pose risk to banks if borrowers default on their mortgages. The Office of the Comptroller of the Currency last week told lenders to be more cautious about who gets these loans.

Seiders said he applauded the move to restrict these so-called "exotic" loans, adding that he believed that regulators were correct in "drawing attention to the risk."

"I hope it cools it down," he said, referring to the riskier versions of the loans.

If, however, the number of these loans is reduced substantially, fewer people may be able to buy homes in the Washington area, which would affect demand and prices.

Well, now, if the multitude of factors at play here makes it difficult to foretell the future, what can we learn from what we know about the past?

Over the past 40 years, ever since the Commerce Department has been tracking new-home sales, prices have risen, usually at a steady upward pace that exceeds the rate of inflation. The median-priced new home in 1963 cost $18,000, according to Commerce Department statistics, which is equivalent to about $109,944 in inflation-adjusted dollars. The median priced home in 2004, however, was more than double that amount, costing $221,000.

But values don't continually rise. According to the same statistics, the cost of a new median-priced home dropped 9 percent in the recession of 1970, falling from $25,600 in 1969 to $23,400 in 1970. And in 1991, during the savings and loan crisis, the median price of a new home dropped 2.4 percent, from $122,900 in 1990 to $120,000 in 1991.

So what does the future hold? Your guess is as good as mine.