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Surviving the Housing Market Shift

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June Fletcher
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Friday, November 11, 2005; 12:00 PM

It's the question every homeowner and prospective homebuyer has: Is this the right time to act?

June Fletcher, based in the heart of the housing bubble in Northern Virginia, writes the Wall Street Journal's "Home Front" feature. Her new book, "House Poor: Pumped-Up Prices, Rising Rates and Mortgages on Steroids," offers evidence that the bubble may be ready to burst, as well as advice on how to survive when it does.

Fletcher was online Friday, Nov. 11, at noon ET to discuss the future of the housing market.

A transcript follows.

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Arlington, Va.: Finally, someone who is willing to take a stand on this issue. Thanks for taking my question. House prices have way outpaced incomes and something has to give. The common rejoinder of the boosters is that this area has supply constraints and tons of job growth, however this was true 4 years ago as well and prices seemed much more reasonable then. And these jobs do not pay huge wall street salaries to make these houses affordable. What am I missing? What is your outlook for Northern Virginia housing over the next few years?

June Fletcher: That's a trenchant observation. As a rule of thumb, you can take on a mortgage that's roughly three times your income--but with median prices here in the $400,000 to $500,000 range, many first-time buyers who haven't had a chance to build up equity have been priced out of the market. There's very little inventory in the lower price ranges--only 20% of the housing in the metro area is under $300,000. As today's front page story in the Washington Post shows, something has already started to give. Sales are slowing, inventories are up and prices are flattening or falling. We're in a different world now, one that we haven't seen in some 15 years. And that's why I wrote House Poor--to give some practical tips and advice to people who may have never experienced a bad real estate market, or may have forgotten what one is like.

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washingtonpost.com: Housing Market Cooling, Data Say

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Fairfax, Va.: What happened to the historical rule of qualifying - purchasing a home for 3 or 3.5 times your annual salary? By that rule my $90K salary historically only qualifies for a $270K to $315K home. The market (selling prices) seem insane. - And, I don't consider a home to be a one bedroom condo. A home, to me, is a 1500 to 2000 s.f. house with a garage. Why don't they offer reasonable homes like that in this area?

June Fletcher: Builders would like to build more affordable housing, but often they simply can't make the numbers work. Land prices are very high, especially in an area like this that is mostly built-out within a reasonable commuting distance of the city. About the only way builders can create cheap housing is to build multifamily units...but most residents don't want high-rises in their neighborhoods, and fight to keep them out. So builders have to factor in the cost of fighting to get zoning approvals, a process that can take months or even years. For them, time is money, so they factor in these carrying costs into the price of the home. They also have to pay "impact fees" that ostensibly are used for infrastructure improvements. Since all of these things eat into builders' profits, many find it easier and more lucrative simply to build upper-end homes on cheaper outlying land.

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Leesburg, Va.: Hi Fletcher, If a builder lowered the price of a home that you have purchased, can you force the builder to lower the price to the price at the time you close on the house?

June Fletcher: No, you can't, because you signed a contract at a specific price. Conversely, a builder can't ask for a share of your profit should new versions of your model rise in price (which is the situation most buyers enjoyed over the last four years). Real estate is a gamble for both sellers and buyers.

However, builders just hate to have early buyers in their developments mad at them. It's bad publicity. So I've heard of instances in the past where some builders have thrown in free upgrades, like a finished basement, just to keep early buyers in their communities happy. It's worth asking.

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Washington, DC: Dear June,

My wife and I are planning to buy a house, probably in American University, Friendship Heights area of DC. We've sold a house in London, UK, so have about $700K to put down and are looking up to $950K. Job and visa considerations mean we may need to move back to Europe in 3 or 6 years time.

We're a little wary of buying because of this imminent bubble-bursting everyone talks of. Yet others say that DC is its "own market" or insulated from price falls because of demand, the peculiarities of the local labor market, etc.

Is this true? Are prices in the premium areas of DC likely to fall as well? Should we wait to buy?

many thanks in anticipation,

Michael

June Fletcher: It's not true that Washington is insulated from the economic stresses that effect other places. In fact, real prices (adjusted for inflation) have fallen here before, most recently in the early '90s. Nor is the upper end of the market immune to declines.

Given the fact that you probably won't stay in this market very long and might have to sell it from the other side of the pond, if I were you, I would look into renting. There are some bargains in the rental market now.

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Rockville, Md.: Why are all you media people calling it "Surviving the Crisis"? This is simply a normal market correction. We all knew that as rates rose prices would start to stabilize and maybe drop. I've been in the mortgage industry for over 17 years and have seen many, many ups and downs. Besides, stop scaring people - the DC area has always been atypical from the rest of the country

June Fletcher: Maybe you, as a mortgage professional, always knew that as rates rose prices would drop. But did you tell that to your customers when prices were rising at a double-digit pace? Did you explain to them that interest-only loans and payment-option loans were inherently risky, and that someday interest rates too were bound to rise?

Over the past few years, many buyers have told me that they were scared into buying houses that they could barely afford, financed by payment-optional loans that they can only afford at today's historically-low rates. When prices drop and rates rise, they will be the ones who suffer. Again, that's why I wrote House Poor--not to scare people, but to give them realistic options to pursue once the market turns.

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Re: Fairfax, Va.: "About the only way builders can create cheap housing is to build multifamily units...but most residents don't want high-rises in their neighborhoods"

The high-rises that they're building are no better. When a one-bedroom condo starts at $400,000, there's nothing cheap about it.

I honestly don't believe the builders and developers are hurting for money, anyway. It seems to me that they can build affordable housing -- REALLY affordable, not what they consider affordable -- and ask for any concessions they want. Things like waivers of demands for better roads and schools, and huge tax breaks, among other things. And the local politicans will roll over and give it to them.

June Fletcher: You're right that $400,000 doesn't seem cheap when you look at the median single-family home price, which is only $208,000.

But I don't agree that builders can build anything they want. I spent a decade as the features editor of BUILDER magazine, and listened to a lot of builders who really did want to build affordable housing--not necessarily out of the goodness of their hearts, but simply because they saw the demand was there. But the profit margins were just too small, and public opposition to the projects too formidible.

If you want more affordable housing in your neighborhood, fight for it! Contact your public officials, go to town meetings and demand it. You may have to face a lot of Not-In-My-Back-Yard (NIMBY) opposition from your neighbors, but your voice counts as much as theirs. Don't just assume that there's some big collusion between developers and public officials--from covering this industry for more than 20 years, I can assure you it's a lot more complicated than that--and public opinion plays a huge roll in what gets built.

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Washington, D.C.: June,

Wouldn't the most prudent strategy be to sell your home now, even if it entails a price reduction? If prices decline significantly, a recent owner could find themselves paying a premium for a signifcantly devalued asset for.. well.. the rest of their lives..

Thanks!

June Fletcher: That really depends on when you bought it, and how long you plan to live in it. Real estate gains and losses are just paper until you decide to sell.

Ccycles generally last five to seven years, so if you can hang on for a complete cycle, you'll eventually come out okay, even if you bought recently.

However, I would advise that homeowners who plan to stay in their homes for a few years lock in a fixed mortgage rate, if possible. Rates are still close to historic lows; I don't think they will stay this way for much longer.

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Leesburg, Va.: I have to agree with the person from Rockville, the media is making it sound so over negative (and I am not surprise of it) but what media is creating is a panic zone where people will stop buying homes out of fear and that will have a big impact on many people including hard working people in the building industry. I think that reporters work should be to create news that inform people of choices that can go wrong like the kind of loans that June have mention to the Rockville person, not to create panic zones to sell papers.

June Fletcher: In today's front-page Washington Post story, statistics showing declines in our area's sales and increases in listings all came from Metropolitan Regional Information Systems, the region's multiple listing service. In other words, they came from the real estate industry itself.

Would you rather not know the facts about what's going on in your market? Truth is truth, and it's a newspaper's job to tell it. Don't shoot the messenger.

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washingtonpost.com: Our thanks to June Fletcher for joining up in this discussion.

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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.


© 2005 The Washington Post Company

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