2005 Real Estate Annual Housing Outlook

Washington Post real estate editor Maryann Haggerty will be online to discuss the 2005 Real Estate Housing Outlook.

She'll be taking your questions on the local housing market -- including tax assessments, price fluctuations, home values, and current trends.

Maryann has been real estate editor for the Washington Post for over five years, and has worked in various editorial capacities at the paper since 1987. She currently oversees the Saturday real estate section and coverage of related residential issues.

The transcript follows below.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Maryann Haggerty: Hello, folks. I hope you had a chance to see the special Real Estate section today, which reviewed changes in house prices around the region last year. For the most part, they were up, up, up--the median price for a house in this region is now $329,920. The Web folks had some technical problems posting the section this morning, but now it's all there electronically. Still, the paper section is quite convenient--if you haven't seen it, look in your recycling bin. It's behind the food section...
Now, onto as many of your questions as I can answer in an hour

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Fairfax, Va.:

Do you think the housing price will continue to rise or is this a housing bubble that could bust any minute?

Maryann Haggerty: The bubble, of course, is The Big Question. On the one hand, some economists say that in areas such as this one, with continued job growth and housing demand, there's no bubble. On the other hand (there's an old economist joke there somewhere), other economists point to some classic bubble signs: too many investor-buyers, growing disparities between rental & ownership costs, and of course the huge year-after-year price gains. My colleague Steve Pearlstein talked about this in his Business section column today, & a chat this morning. He believes we're in a bubble, but won't predict when it will pop.

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Washington, D.C.: Hi! Isn't it ironic that your section came out on the day that Steven Perlstein wrote an article on asset bubbles? Today's chat with him focused on the housing bubble. Care to comment?

washingtonpost.com: Bubbles Abound In a World of Ready Cash (Post, Mar. 23, 2005)

Maryann Haggerty: Steve, a colleague of mine for almost two decades, may be the only person in this building who is more pessimistic re: housing bubbles than I am. We're both experienced enough to know about business cycles. And he at least once sold a house at the top of a bubble, something I have never managed...

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Annandale, Va.: Based on your observations of local rising prices in the real estate market, particularly in Northern Virginia, what do you think the odds are that either local or state legislators will act to reduce the real estate tax burden these price increases have created? In NoVa, unlike Montgomery County, there are no percentile limits to annual property tax increases. Fairfax is averaging roughly 25% increases annually for the past several years, which is killing retirees. (and those of us who are tired of seeing our cost-of-living salary increases eaten up by increased property taxes).

Maryann Haggerty: Elected representatives listen to the people who elect them. If county council members feel pressure from constituents, they may act to reduce the rate; that reduces your actual tax bill. As I understand it -- I may be wrong here -- Va. state law doesn't allow caps. Whether downstate Va. legislators would bow to a NoVa move toward caps, I don't know. Caps have their own problems--they can hobble local spending for things that really are needed.

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University Park, Md.: Thanks for the informative articles. We bought a home at $515,000 two years ago in College Heights Estates, between University Park and College Park in the 20782 zip code. We've made some nice improvements and enjoyed the house, but now we're ready to move and are considering a selling price -- and we'd like to do FSBO. If I consider a 20% increase per year from $515,000 over two years, that leads me to a sales price of around $740,000. Does that seem about right to you? It's very difficult to get comparables for this neighborhood, especially recent ones. Thanks!

Maryann Haggerty: Without comparables, you might as well go into this whole thing wearing a blindfold, or a sign that says, "kick me." Your buyers all know the comps, & they all know that back-of-the-envelope computations of how much the market went up are nonsense. Try this: Contact a few real estate agents. Be very up front with them: You think you want to sell your house FSBO, but you're willing to sit through their presentation. Then do so. They will all give you comps. And they will do so because it is an article of faith with many of them that in a few weeks, you'll be back & willing to sign a listing.

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Alexandria, Va.: I am interested in buying a condo in Alexandria, VA but I don't have any money saved up for a down payment or closing costs. Would you recommend renting for another year to save money or buying a condo with a loan that rolls in closing costs and doesn't require a down payment?

Maryann Haggerty: Do the numbers. Can you afford monthly payments on a loan that includes the costs? If so, consider that seriously. I can't predict whether you can save enough to cover increased costs--if indeed purchase costs continue to soar.

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D.C.: Any suggestions on finding affordable homes near metro stations? My spouse doesn't drive, so being metro-accessible is our highest priority.

We are having trouble even finding listings near metro stations (except for expensive condos and rehabs). Do you have any ideas about metro station areas that aren't being actively developed, and might have more traditional homes for sale?

Maryann Haggerty: Look in Prince George's County, which continues to have the lowest prices in the region. And examine how close to a Metro station is close, from your perspective. Are you willing to walk a bit further each day? It's healthy... And if none of those work, you may want to consider metro bus routes.

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Falls Church, Va.: I recently purchased a condo with a 30-year loan, 5-year fixed after that variable. Although it is my primary residence I still live at my parent's house free of charge (who live overseas and are never here.) Although I believe I made a good choice, I feel like I don't want to live in a condo and would rather stay home. Basically my question is ... is it better to rent it out or keep it as my primary residence then sell it 2 years or later without getting hit by capital gains tax?

Maryann Haggerty: I would say rent it out. At least you'll have the cash flow. Leaving a condo empty because maybe just maybe that will save capital gains tax seems to me putting the cart before the horse. Who knows what will happen in the next few years? Who knows how much if anything the value of the condo will rise--or for that matter what the capital gains tax rate will be? It seems you have the beginning of your own little real estate empire. And if mom & dad move back home--which they could--then you can move to the condo.

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Arlington, Va.: Ms. Haggerty,

My wife and I live in N. Arlington and are considering tearing down our current home and building a new one for the following reasons: (i) location is great (4 blocks from the metro and 5 miles from DC); (ii) we can't afford a new home; (iii) what we can afford if we sell the current home and "upgrade" (for a home in the same area) would still require us to do some renovations (i.e., $800K and up)

Our thinking is as follows ... the purchase price of our property was $410. Based on a recent article in the Washington Post Homes Section (RE: the building of a house with a "universal design") the average per sq. ft. building price is less than $180. So, we could build an approx. 2,250 sq. ft. home for under $400K, meaning we would have a brand new home for approx. $750-800K, which is about $500K less than new homes in N. Arlington, and about the same as anything we could upgrade to upon selling.

Your thoughts, or thoughts of others on this chat line? Are we missing some critical information or is our logic at least sound?

Regards.

Maryann Haggerty: If you really can build the new house for that price, consider it seriously. But you may want to talk to some architects & builders to see if what you want to do can be done within your budget--then add maybe 10% to what they estimate, & see if it can still be done. Classically, in this situation, I should also advise you not to improve your home too much for the neighborhood. But in N. Arlington these days, this seems to be impossible, as tiny places all over are replaced by big ones. You may instead want to ponder whether your neighbors will hate you for "mansionizing" the block ...

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Washington, D.C.: Hi Maryann! What's your opinion on the real estate market in Trinidad area (New York & Florida metro)?

Maryann Haggerty: Now, on to the question of economic microclimates. If you want to zero in on a particular neighborhood, get to know that neighborhood, its strengths & weaknesses. What is the housing stock there? What outside influences -- i.e., Metro -- specifically affect it? The District faces particular challenges. For years, neighborhoods such as Trinidad have seen families flee to suburbs with better schools & less crime. Will the current residents make enough noise to improve safety & schools? Is there hope the schools will improve & lure back the families? Or are there enough childless households clamoring for short commutes who are willing to gentrify? Those of us who bought a dozen or so years ago, when the city was on the edge of bankruptcy, have watched our investments skyrocket as our neighborhoods have become safer. But we haven't seen the school problem resolved.

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Washington, D.C.: What's a single, low-level govt. employee supposed to do, besides relocate to the South or Midwest? On my $40,000 annual salary, I can't even afford a crappy studio condo.

Maryann Haggerty: It's tough. It's very tough. You are facing compromises. And those may be less than palatable... Maybe you need roommates. Maybe you need to ask your parents for money. Or maybe you need to look at that crappy studio in other neighborhoods. I wish I could tell you it was all a nightmare & everything will be better in the morning, but that wouldn't be right.

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Bethesda, Md.: What is it about the Washington area that's causing prices to rise so much more than in other cities?

Maryann Haggerty: More & more jobs are created, meaning more & more people want to live here. And if you think it's bad here, pity the poor folks in California.

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Eldersburg, Md.: We all know the housing prices in D.C. and surrounding areas are high. What do you think about the opportunities for growth in more Northern Maryland counties, such as Carroll?

Maryann Haggerty: Basically, it depends on job creation. Are jobs being created up there? Or are people willing to commute from all the way down here, where the jobs are? My brother, bless his redneck soul, commutes from Carroll County to Greenbelt--& swears it's worth it to him. To me, that would be the definition of a hellish life.

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Vienna, Va.: I'm a year and a half out of college and struggling with apartment life. Many people have told me that the only way to make money around here is to get into real estate. How can I do that when my low 40's salary prevents me from even buying a condo? I would LOVE to own my own place but I just dont see how it is possible. The government assistance programs I have seen dont see to apply to me! Help!

Maryann Haggerty: This may be tough for you to believe, but very few people can afford to buy when they're just out of school. These are your rent-and-save years. You don't know where your career is taking you yet, or where your life path leads. The trick is to save (& to build a sterling credit rating). Pay off ALL your credit cards EVERY month. Put money away until it hurts. Drink cheap beer. You can't be rich until you're stable...

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Bethesda, Md.: If you want to see recent Maryland sales, it's all in an online database at the Maryland Department of Assessment and Taxation --

http://sdatcert3.resiusa.org/rp_rewrite/

Maryann Haggerty: Yes, they are. But for purposes of comparable sales -- i.e., for setting a sales price -- there is a lag. Trust me on this. (That's why today's section comes out in March, not January.) Real estate agents, working off the multiple listings service, can give you more recent comps. (However, those prices aren't as complete as the state database. That's why we use the state numbers for our section.)

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Washington, D.C.: What are your thoughts on purchasing in the Shaw/Chinatown area?

Maryann Haggerty: Seven years ago, that would have been speculative. Now, you're rewarding the people who took the risk & did the speculating. These days: If you like it & can afford it, why not live there?

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Arlington, Va.: How do people afford to pay these outrageously high prices? Who are the people buying these $750K and $1 million homes?

Maryann Haggerty: First-time buyers aren't buying $1 million houses. Those are trade up houses. The secret is appreciation. If the place that I have been living in for 20 years has appreciated $500k, I take that tax-free $500k & buy, say, a $750k house with a $250k mortgage. The monthly principal & interest payment on that mortgage is less than $1,500 -- i.e., less than the rent my kids are paying on a one-bedroom apartment. Or I buy that $1 million house, with twice as big a mortgage. By this point in my life--this isn't something 23 year olds are doing--between my spouse & me; maybe we can even afford that payment.

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Fairfax, Va.: Great section today. Question about financing. We are selling/buying this summer and I am wondering about financing. Our last two home purchases, we did the 30-year fixed loan. What do you think about ARMs and no interest loans. Advantages/disadvantages? We have about $240,000 to put down and looking for homes around $650,000.

Maryann Haggerty: The advantage of ARM/no interest: Lower monthly payments, obviously. The disadvantage, also obvious: Risk of rising interest rates. And while economists may disagree over the bubble thing, you'd be hard pressed to find one who thinks interest rates aren't heading up. If you absolutely know that this is a one-or-two year purchase, then the attraction of the lower monthly payment may be greater than the risk. But if it's long term? How much risk are YOU comfortable with?

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Upper Marlboro, Md.: Maryann,
P.G. County remains a bargain as a beautiful close in location. We're even starting to see more retail, restaurants, etc. A two-acre home site w/home in my neighborhood can be had for $900K. Besides the obvious race issue, I can't figure out why home values continue to lag. What are your thoughts?

Maryann Haggerty: Race has historically been a factor. Additionally, schools are a factor.

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Silver Spring, Md.: Maryann --
Is there a specific time of year/season that you think is the best for first time home buyers to begin looking? My husband and I are looking for something in the $225-$275K range. We are a little intimidated by the process and have not started anything yet. We have heard maybe winter is the best time to get a "deal" (as much as that might exist in this market, anyhow). I know many say to jump right in and start, but we're skiddish, so in the meantime, we have been living well below our means to build up a respectable down payment. What do you think?

Maryann Haggerty: Oh, just jump in. Find out what's out there. Going to an open house doesn't commit you to a darn thing, & it's a nice way to spend a spring Sunday afternoon. Maybe a desperate winter seller equals a deal. Maybe a desperate late-summer seller equals a bargain, too. But maybe your dream house will go up for sale in the spring, when traditionally inventory is highest.

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Upper Marlboro, Md.: Greetings Maryann,

I keep thinking that the price of houses will drop later, but that is true the people that brought houses in the last year will lose out, is this true -- will the house prices finally go back down, and if I would have known this was going to happen I would have brought a single family home about 2 years ago now I am stuck in a town house.

Maryann Haggerty: IF prices drop--big IF--then indeed people who buy at the top of the bubble will be the losers. If they have to sell. If they can sit tight for a couple years & wait it out, then it's not so big a deal. The last time around, some sellers ended up having to bring money to the table to close the deal. This is why homeownership, traditionally, has been seen as a long-term investment, i.e., you shouldn't buy if you won't be able to stay put for 5 years. But, as you know, no one can predict what will happen--if anyone had known two years ago how prices would claim, then EVERYONE would have bought. And then, of course, prices would have risen even more sharply.

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Columbia, Md.: Hi Maryann. What would say is the forecast for property value growth percentage in the Columbia, Md. area?

Maryann Haggerty: The forecast for home price growth, everywhere, is roughly the same as inflation. HOWEVER, while that forecast accurately summarizes history, it is so broad as to be useless. The flip side of that is that it is impossible to make a forecast for an area as small as a town.

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Puebla, Mexico: The Economist has recently questioned the wisdom of owning vs. renting, stating that housing prices have quickly outstripped household incomes, thus creating the conditions for a precipitous drop in the market. They often site the D.C. metro area as an example. Any thoughts?

Maryann Haggerty: OK, here's my problem: That's true. And it has been true for a few years now. We just don't know when or if there will be a crash, and if so, how big it will be. There have always been crashes in the past, some of them very painful. (Raise your hand if you have ever sold a house at a loss. What, am I the only one here?) Economists & column writers can predict as much as they want. It's going to be my job, when the day comes, to notice it, & to tell people about it.

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Arlington, Va.: For affordable, try River Place in Arlington by the Rosslyn metro station. It's a co-op, so you're not really purchasing a unit but rather shares in a corporation. The lease on the land expires around 2050. However, beggars can't be choosers -- studios run about 130k and you can get 1 bedroom's at about $200-225K.

Maryann Haggerty: A suggestion for bargain hunters. (Especially those bargain hunters who don't mind living in a tenant-heavy building.)

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Alexandria, Va.: Hello, thank you for the wonderful section today. My husband and I got married last year; we're in our early thirties (30 and 33). We have 60k in the bank combined, and intend to use 2/3 as a down payment. With our combined income of $100K, do you think we should buy a condo/town home this summer when our lease expires, or wait another year? The cost of moving will prohibit us from moving to another rental, so we'd stay put - but our rent is outrageous - $1700 for a one bedroom in a fantastic location, not including any utilities. I feel we are wasting our money away, but am worried that if we buy now, we won't make money if we move in a year or two (as our jobs may require). Thank you for your insight.

Maryann Haggerty: Housing is not a short-term investment. If you truly think you may move in a year or two, you should probably stay put. (If you think moving costs are high, wait till you figure in real estate commissions.)

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Fairfax, Va.: Have I missed the real estate boat? For the past 4 years I've thought prices were so high that it would be foolish to buy. How can so many people afford to pay such outrageous prices for a house or even a condo?

Maryann Haggerty: Whether you've missed the boat or not, we don't know -- that, after all, is today's theme. As far as how people can afford to buy, the answer is simple: Low interest rates, high salaries. To do the math in your head: Each $100k of mortgage is roughly equivalent to $600 per month principal & interest, at current 30-year, 6% rates. Twenty-plus years ago, I had a mortgage at 18% (yes, really, boys and girls). That meant $1,500 per $100k per month.

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Arlington, Va.: Ms. Haggerty,

As a follow-up to my earlier question concerning tearing down and building anew in N. Arlington. You seem concerned about over-improving in the neighborhood. But it appears that improvements and new homes being built by various developers are springing up throughout Ashton Heights and Lyon Park. Many open houses we've attended are of homes well beyond 3,000 sq. ft., which is not the size we are considering if we build.

Would you mind elaborating if you have any concerns?

Thank you.

Maryann Haggerty: I didn't say I had concerns. I said, traditionally, you're not supposed to over improve, because people don't want to buy mansions in bungalow neighborhoods. But then I said that seems to be changing, because everyone is making bigger-bigger-bigger places; there don't seem to be many modest neighborhoods left out your way. If the whole neighborhood is up scaled, then you are no longer over-improving. But if you're the first mansion on your block, your neighbors might not like that.

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Charles County, Md.: I live in Charles County, having recently moved from Alexandria. Trust me when I say this, the quality of life here is SOOOOO much better. Everything is less expensive, yet Washington and NoVa are still within easy reach. I still commute to work in downtown D.C. every morning, and back to Charles County in the evenings, and the trips take about an hour during rush hours. Without rush hour, you're looking at 30 minutes into downtown D.C. Not bad for an "outer fringe" suburb!!! Check it out! I wouldn't trade my colonial on 4 acres of woods backing up to a state forest for anything ... and this can still be had for under $450,000!!!! Schools are great, plenty of retail in Waldorf to satisfy any shopper, and the feel of a small town ... all right here.

Maryann Haggerty: Another suggestion on an affordable location. A few weeks back, the Post had a story about a survey of local commuters that found that many people actually enjoy the alone-time that a long drive gives them...

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Alexandria, Va.:
I too would love to buy a place, but am totally priced out of the market, esp. when you toss rising home/condo fees into the mix. I actually know of a few people who have sold their condos because they can't afford the fees (over $700 and rising) but even with appreciation, can't afford a SFH. So they are back to renting. And yes, there is the argument that you can find cheaper places farther out. But what if you don't want to live far out? I like having a shorter commute, I like taking the metro and or bus (and it's a mile walk to the metro for me), I like being only a walk or drive to my friends house. Yes I know I should buy a place, but if my quality of life (as I see it, and when it comes to this, it is all about me), suffers greatly, it just doesn't make any sense.

Maryann Haggerty: If you have the lifestyle you want while renting, THERE IS NOTHING WRONG WITH THAT. Ownership vs. renting is not a moral choice. It is a financial choice. Historically, home ownership has been the best way to build wealth. It is also an excellent, excellent hedge against inflation. But it is not required.

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RE: Rental home/condo, Hilton Head Island: Do you know if this is still a good area to invest in? Sounds like prices are going up so maybe I should have bought a year ago versus now?

Maryann Haggerty: You are talking about investing as a landlord, not to put a roof over your head. If you were at all concerned about a slowdown in appreciation, the conservative thing to do would be to evaluate your investment on a cash-flow basis, rather than an appreciation basis. Do the numbers work, or come anywhere close to working? Again, a bit of history: Resort communities are traditionally the most susceptible to price collapses.

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Oakton, Va.: 6 months out of college, living with my parents, and torn between the money I'm saving, and the privacy I'm lacking. I really want to buy my own place in a year or so, but some people keep telling me just to rent. I'm saving up nicely on my engineer salary and by living with my parents, but I just moved back home from Southwest Va. and having been spoiled can't fathom paying $600-700 a month on rent. Wouldn't that just be throwing money away? P.S., My parents love me but want me out as much as I want out.

Maryann Haggerty: Whether to live with your parents or not is a personal decision. If the only concern were saving money, of course you would stay. But that's not the only concern. Another one of my brothers (I am part of a big family) was eventually lovingly kicked out of mom's house, grumbling all the way. In the laundry room of his new apartment building--mom also refused to do his laundry--he met a beautiful young fellow tenant. They have been married for several years now, and have a nice house that they have slowly been remodeling.

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Washington, D.C.: China Money; Georgetown Prices. Maryann, an acquaintance said that one of the reasons mortgage interests are so low is because Chinese investors are buying U.S. mortgages (which, at some levels, are as safe as U.S. T Bonds) in the secondary markets. Any word on that? Also, friends who have lived in Washington for a long time have told me: prices in Georgetown have never gone down; they either stay the same or go up. Any truth to that? Thank you.

Maryann Haggerty: I have read some interesting stuff about the international flow of money & how it is affecting prices/rates/value of the dollar. Short answer: yes, the Chinese have something to do with it. As far as Georgetown--I sure did see some prices drop there the last time around, late '80s/early '90s. But again, it only matters if you actually sell.

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Rockville, Md.: You mentioned earlier "the rent and save years." I am in my late 20s and a government employee with a 40K salary. With the rental costs within the immediate metro area rent is difficult and saving is nearly impossible which spells debt disaster! Where does one start? There is no such thing as a starter home anywhere around here. How do you begin to build equity? Is there any hope for help from the government to save young middle class citizens or will only the rich and fortunate (middle class who moved here before the boom) be blowing the housing market out of control!

Maryann Haggerty: Here I'm afraid I have to recommend you read & believe my friend Michelle Singletary. It is possible to save, & a $40k salary allows room, as long as you aren't supporting a large family. It's not easy, and perhaps we are headed down the same road as the San Francisco Bay area, where it truly does seem impossible. But I can't believe that will be the case in the long run. And if it is, we will lose young people to other places. It's that simple.

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RE: Higher rental prices?: Are you finding that rentals are charging even more money than before due to rising housing prices? Like they're trying to cash in on the market? I'm looking at moving and finding that renting somewhere new is now outrageously ridiculous. I thought the rental market was hurting due to housing, but all I can see are high prices everywhere. And people that thought they had a stable rate are facing problems; a number of my friends are having their leases end and the landlords charging 10-15% more for a new lease!

Maryann Haggerty: Rental rates slackened for a couple years there, because of too much construction, but now they seem to be heading up in parts of this area, particularly Virginia. As long as the market will bear it, of course landlords will try to make money. That's the way it works. That's why homeownership is, indeed, a hedge against rising housing costs.
And my producer is now nagging at me to finish up already. I wish I could have answered all your questions ... many of those remaining seem to be about future price appreciation in particular neighborhoods. I can answer all those with a blanket statement: I don't know. I can't know. So I hope you can do what's possible & what will make you happy. In the meantime, go home tonight, & if you have a roof over your head, say a little thank you. It could always be worse.

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washingtonpost.com: There are tons of questions left, but not enough time to get to them all ... thank you to Maryann Haggerty for taking time out to join us today. Stay tuned to the Live Online weekly schedule for more special edition Real Estate discussions.

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