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Housing Economics

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Neil Irwin
Washington Post Staff Writer
Wednesday, April 5, 2006; 12:00 PM

Washington Post Staff Writer Neil Irwin was online Wednesday, April 5 at Noon ET to discuss the U.S. economy's dependence on housing and the real estate industry.

Read his story: Is Reliance on Real Estate a Crack in the Foundation?

A transcript follows.

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Neil Irwin: Welcome, and thanks for joining us for a discussion of the housing market. Here we go . . .

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Northeast, D.C.: Neil,

Your article is very interesting. However, with this region insulated from various factors unlike other parts of the country what does your article mean to the 6 million or so residents in the D.C. Metro Area and our housing market? To take national data with regards to our national economy and try and throw a blanket over our market doesn't paint the whole picture. Everyone knows this region is an anomaly.

In short, what will change our housing market and local economy? That's the real question.

washingtonpost.com: Is Reliance on Real Estate a Crack in the Foundation?

Neil Irwin: There are two different ways to view the impact of the housing slowdown on the broader regional economy. This region has been less reliant on housing to support job growth than the US economy, because we've had strong job growth in other sectors (especially professional and business services). On the other hand, mortgage equity extraction, such as mortgage refinancings, has been higher here relative to incomes than elsewhere, which suggests we could be more vulnerable here than elsewhere to a slowdown in consumer spending.

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Norwalk, Ohio: My wife accepted a job offer in Arlington. If we buy a house, we will be looking in the $500K range. Like everybody, we read stories of increased inventory,overvalued houses, and stalemates in buyer-seller price negotiations. Given these, should we buy in the current market or rent? If you advise rent, how long should we hold off from buying?

Neil Irwin: This is the fundamental question a lot of people are facing. I hate to disappoint, but I can't offer a solid answer. The future is unknowable even if, like me, you spend a lot of time looking at economic data.

That being the case, a lot of financial advisers would tell you this: Buy when it makes sense to buy. Buy when you expect to be in one place for five years or more, when you can afford a mortgage on a place you'll be happy with for a while, when you're prepared to ride out whatever ups and downs the real estate market has in the years ahead, then buy. Don't buy for the wrong reasons--because all your friends are, or because you expect 20 percent a year appreciation, which is unsustainable.

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Dale City (Northern Va.): I just seperated from the military and me and my wife are now looking for a house. We are terrified that we will dump our life savings in a house and it will lose value. In your opinion what are the realistic odds prices will go down and how much. I know it's impossible to know what will happen, but if you had to guess.

Neil Irwin: I'm reluctant to suggest odds. Following what I wrote to the last questioner, think of it this way: If housing prices decline somewhat, or it becomes challenging to sell (as was the case in the 1990s) will I be financially wiped out? If so, it's probably a bad idea to buy now. If, based on your income and mortgage you can ride out the market whether it's up, down, or sideways, then most financial advisers would say that buying is a long-term sound decision.

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Arlington (Waverly Hills), Va.: I've been noticing that the doom and glommers are out in full force now that the housing market is starting to slow. I'd love to see an article in the Post that tracks some of the more prominent economic forecasts. Some economists/prognosticators continually predict a recession year after year. Then when one finally ocurrs, they say take credit for predicting it. What they don't take credit for is missing wildly on their forecast in the previous 10 years.

Neil Irwin: You're right that there are perma-bears out there in the economic analysis game. But I would argue that the same exists on the other side of the optimism/pessimism scale. There are a ton of analysts out there who have a rosy view of the future at all times. I most value the economists who are genuinely unpredictable and offer fresh analysis, and don't get locked into one prism through which to view the economy.

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Richmond, Va.: My son (who graduates from college this year) has accepted a job in the DC area. In looking at rent, he would have to hand 60% of his take-home pay to a landlord. Buying doesn't seem to be an option -- even the cheapest condos are more than what he can afford.

To me, rent is his only option. But he counters that if he rents, he won't be able to save money for the downpayment on a home. I'm at a loss for advising him. Any thoughts?

Neil Irwin: Thank you for the comments. This is indeed an awfully expensive place to live, and right now renting an apartment is usually cheaper than buying a comparable condo.

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Falls Church, Va.: I currently own a condo in Tysons that has appreciated nicely but it is a double edged sword. Although the appreciation is nice with a combined income of 165k a year and a 75k down payment we cannot afford much more then a modest townhouse with regular financing (not interest only). If we used an interest only loan we could actually qualify for a decent home but we don't want to do this. Have prices of homes been pushed up even higher due to these interest only loans? And if everyone is doing it how can one get a home without using an interest only loan? Is this the longest and highest run up of prices ever or have there been other time periods? If there has what happened after those run up periods?

Neil Irwin: It's hard to prove, but I think there's pretty good evidence that the availability of interest only, negative amortization, and other unconventional loan products have contributed to the housing appreciation in the past three years. Housing prices have been rising so rapidly that people have wanted to buy at any cost, and have done so by taking out mortgages that are riskier than conventional fixed-rate or even adjustable rate loans.

There was a pretty remarkable boom in housing prices in the late 1980s, but this one, by many measures, is larger (it has lasted longer and included higher total appreciation). After that boom, housing prices declined in the early 1990s, leveled in the mid-90s, and didn't really start rising much until 1997 or 98. While it is possible that something similar will happen this time, real estate bulls note that in the early 90s, the Washington area was experiencing a decline in defense related jobs tied to the end of the cold war and there was a banking crisis that made mortgage loans difficult to get, two major factors in the decline in prices.

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Arlington, Va.: For Richmond, VA-- the best option for saving in the D.C. area is to find a group house-- or at least a roommate. It's an option that's often overlooked by people who are worried about real estate expenses. It's a bit of a hardship, but less so if, like your son, you're just graduating college and have been living with your peers already. As a young professional I had a lot of fun living in group houses in Arlington-- and was able to save enough to buy a house as a young single female (though I still had roommates).

Neil Irwin: Here's an option for Richmond.

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Falls Church, Va.: I am preparing to sell my condo, but everyone tells me the market is in a serious downturn and so perhaps I should wait. How likely is it, do you think, that the present downturn is simply a blip on the sceen, like a brief downturn of the stock market, and will soon recover and resume its upward trend? Thanks.

Neil Irwin: Real estate historically moves in much longer cycles than stocks. As I mentioned a moment ago, in the 1990s there was a down cycle that lasted 7 or 8 years. That's because people are slower to sell condos when demand softens than they are stocks; every day, buyers and sellers on the New York Stock Exchange find a market-clearing price and transactions happen. In real estate, owners decide, as you are considering, just not to sell rather than take a lower price. All of this is a long way to say: Don't count on only a brief downturn. It's possible, of course, but it's not the way real estate markets have behaved in the past.

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RE: Richmond: A lot of young professionals share housing with several others their age and find a way to save money on small saleries. You might suggest this to your son. This is what i did when I first arrived, and saved enough for 20% down on a condo (it also helps to save in other areas - like not going to happy hour every night).

Neil Irwin: More advice for Richmond . . .

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Bowie, Md.: I know this isn't Maryanne Haggerty's chat, but I'll still chime in because I'm sure you'll get a lot of questions to which this may help answer --

There have been only two true housing booms in this country in the last 100 years -- one right now and another after WWII. (Booms means housing increasing significantly over inflation.)

Making a real estate "round trip" is very expensive -- about 10-15% of the purchase price. Buying a house for short-term return is idiotic unless houses are in slump, which is clearly not the case today.

The principal investment value of a home is to protect your housing costs from inflation. Get a thirty year mortgage and in thirty years everything else will cost double what it does today, but you'll still be paying exactly the same mortgage.

Hence -- buy a house at payments you'll be happy with. Don't over-pay on the assumption you'll get some sort of break.

washingtonpost.com: Real Estate Discussions Archive

Neil Irwin: Thank you for sharing your views. This is has indeed been a housing boom with few precedents.

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Leesburg, Va: I sold a townhome this past winter at a 12-15% reduced price since summer of 2005. The home sat on the market for about 6 months and we had a second mortgage, so we just had to sell and move on with our life. My comment is, I would have spent most of that 12-15% on for services/things for my new home, but now we've halted most purchases, except for necessities. I don't know how much of an impact, but since I do believe there are others out there in similar shoes, if enough of this scenario occurs where income lags behind the rising costs of everything (I see inflation everywhere I go), I think there must be a cause effect resulting in the near future.

Neil Irwin: Your scenario is the type that presents risks for the broader economy as housing slows. Consumer spending is vulnerable. The problem is, no one knows just how vulnerable. That's what will find out in the next couple of years.

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Silver Spring, Md.: Check out this image of 47 lockboxes attached to a bench at the Halstead at Dunn Loring. This is a new condo building with 220 units. This place is infested with speculators and flippers trying to sell. http://bubblemeter.blogspot.com/2006/03/bubblicious-bench-flippers.html

Don't you think that prices for condos in the DC area will fall significantly given all the speculators trying to sell?

Neil Irwin: This is a pretty remarkable photo. It is a rather vivid illustration of just how much the market has shifted from a year or two ago, when you read of people lining up by the hundreds for chances to buy.

There is clearly immense supply of condos out there now. Whether this means condo prices will actually decline depends primarily on whether individual owners and developers drop their prices to a market-clearing price, or hold out indefinitely waiting for buyers. I have a colleague who bought a well-located D.C. condo in 1988, I believe, and sold it in 1998 for $10,000 less than she paid. Many buyers in recent years have done so without understanding that there can be long down or flat cycles in real estate, in addition to periods of extraordinary appreciation.

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Washington, D.C.: We are in our mid 20's and looking to buy our first home. We realize that we could only afford a condo and want to stay in the city. We have been approved for far more than we can afford can actually afford monthly with a rate at 6.75% and 0 points. I am noticing a huge glut in condos and fear the condo market in D.C. will bottom out sometime soon. Are we at risk for buying an expensive 1 bedroom condo in the city to only lose money on it 4 years from now?

Neil Irwin: Are you at risk? Yes. Buying real estate for a four year time horizon, especially in the particularly volatile condo market, is by definition taking a significant financial risk, particularly given the leverage involved in making the purchase. That doesn't mean you shouldn't buy, it means you should only buy if you are prepared to take that risk, and will not be financially devestated if the condo market remains soft (or gets softer).

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Baltimore, Md.: Jay Hancock, a business and finance writer for the Baltimore Sun, had a petty chilling column this morning about all the hybrid mortgages that are set to adjust--he says some will go from 4.5 per cent to 7.5 per cent. He says there are about $1 trillion dollars worth of such mortgages out there.

If you squeezed every nickel and dime to qualify for, say, a $500,000 home with one of these instruments, you are going to be in for a big financial hit. Also, for the Richmond young man moving to this area, he might want to take a look at Baltimore. The commute, using the MARC Train, is no farther than the remote suburbs of Montgomery or Prince William County. And home prices and rents are still a good 1/3 cheaper.

washingtonpost.com: "Teaser-rate mortgages to jolt poor with big bill" , by Jay Hancock, Baltimore Sun, April 5, 2006

Neil Irwin: This is indeed one of the big questions for the market going forward: How many people who took out some of the exotic loan products that mortgage brokers have been pushing lately will be in severe financial distress when they reset. It's something to watch very carefully.

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Suitland, Md.: Your last response implies that 'over the next couple of years' the region will see further housing price softness. Would you explain why you hold that view?

Neil Irwin: That's not necessarily my view. My view is that there is real risk that the region will see furhter housing price softness, based on the way previous real estate cycles have played out. There's a reason they call it a cyclical industry.

I'd turn the question around though: What examples can you find from the past of real estate prices doubling or tripling in a seven year period, then having a slump of a few months and then immediately resuming a meteoric rise? If there are historical precedents for that, I'd love to hear about them. I'm not aware of any.

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Arlington, Va.: One aspect to consider, should housing prices in the Washington, D.C. area finally be leveling off: the impact on local government tax base. In Arlington, the government has become fat and happy through soaring real estate prices. They no longer have any clue how to work within a budget (for this year, they are showing prudence by "limiting" the budget increase to 8%), and Arlington has become a socialist paradise with every interest group declaring its "right" to the taxpayers' money. If housing prices just stop appreciating, taxes sure won't, and that, in and of itself, will have a negative impact on homeowners.

Neil Irwin: This is an interesting point. One wrinkle that can help local government's finances is the very stickiness of real estate prices I mentioned earlier. If the volume of transactions falls off but prices don't really drop, then local tax assessors are justified in maintaining their current assessments on residential real estate, even if they can't increase assessments as they have in the past. I'm not sure, though, how tax assessors could get away with increasing assessments despite stable prices--seems like one could successfully appeal such an assessment.

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47 lockboxes?!: And you know what? I can see the exact same thing happening at Metro West. I've been against that project from the beginning, and I'm going to roll on the floor laughing when that happens. The only thing better would be if the developers were the ones losing their shirts instead of the flippers.

Neil Irwin: Another thought, about the controversial new development in Fairfax County.

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Sterling, Va.: This may be an impossible question without a crystal ball, but... what would you advise someone currently renting a house but interested in buying a house in the next 2-3 years in this area? Home prices are too far out of our reach right now and we feel a bit like vultures, watching and waiting for a downturn so that homes will be more affordable again. What signs would indicate that the time is right for us to make that move as buyers?

Neil Irwin: With real estate as with stocks, trying to time the market can be futile. Don't buy based on your expectations about what everybody else will do, which is unknowable. Buy based on the fundamentals of your situation: Are you confident you will be remaining where you are for several years? Can you afford a place you will be happy with? Will you receive more aggregate contentment by buying rather than renting? At that time, buy. Before that time, don't. Look at your home purchase as an avenue for finding a place to live, and the vicissitudes of the market afterward need not matter.

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Homes as Homes and Homes as Investments: Neil,

This may sound like a dumb question but at some point when will people have to view their home purchase as a place to live and survive versus a place to live and prosper?

From an economic standpoint everyone can't buy a home with the prospect of appreciation and selling to move up. Will we see a time where folks actually stay in their homes for 20-30 years like other generations?

Your thoughts on how this will impact our housing market and local economy.

Neil Irwin: This tracks with my instincts. If you want to invest in real estate, buy stock in a real estate investment trust. You gain access to a more diversified set of real estate, run by real pros, and you never have to mow the grass or repair the roof. If you want to find somewhere to live, buy or rent based on works for your lifestyle and your finances and your plans.

That's traditionally how people have viewed housing in the U.S., and a mindset that has dissipated over the last several years.

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Atlanta, Ga.: We did an interest only and we are SO happy - as long as you -don't- JUST pay the interest, you would build up equity. We set aside a certain amount every month that we will -at least- pay above the payments, and add more when we can. We've paid off $25k in 6 years, so it's not like we're just talk (that's in addition to a 100k HELOC). If you have the discipline, then you can get an interest only - just MAKE SURE to pay more than what they ask. Which you should be doing on a 30 year fixed, in any event.

Neil Irwin: It sounds like you are using your interest only loan responsibly. For the sake of the broader housing and economic outlook, we should hope that others with such loans are doing the same.

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Bowie, MD.: Are there any indications that high-risk loans (e.g. interest-only ARMs) are threatening any part of the banking system?

Neil Irwin: Banking regulators have drafted guidance to try to avoid that threat. One could argue they're a little late in the game. Most bankers and other analysts I have spoken to belive that banks are well capitalized and able to withstand whatever stresses the housing slowdown puts on them. The biggest difference between now and the early 1990s is that more mortgage loans, including of the exotic variety, are securitized and sold off to all sorts of investors, rather than kept on the books of the banks that originated them. So, if you believe my sources, the risks are widely distributed enough that individual banks are less likely to be hurt badly by any downturn than they were 15 years ago.

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Bethesda, Md.: According to MRIS, Total Number of Properties marked Contingent for the month of February (in Montgomery) was off by less than 1 percent. Sure, supply is way up. But demand is holding up nicely.

Neil Irwin: I don't have those numbers in front of me to confirm their accuracy, but it rings true to me. Supply has been soaring around the region, but demand has been reasonably stable.

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Arlington, Va.: Hello. You suggest investing in a real estate investment trust. But hasn't the success of these the past few years been driven by the huge increase in housing prices? What happens to these REITs once price start to slide the next 3-5 years?

Neil Irwin: I suggest investing in REITs somewhat facetiously, just to point out that there are vehicles for investing in real estate other than by buying a home. It's true that apartment REITs like Avalon Bay and Archstone Smith have benefited from the strong housing market, and have converted some of their apartment holdings to condos. But there are also lots of REITs that own office buildings, industrial buildings, medical buildings, malls, strip retail centers, and other forms of real estate that have appreciated in the last several years but not in the same remarkable way residential real estate has.

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Alexandria, Va.: I was all set to buy in Old Town at a new condo place until I started doing the math. With the price (considered LOW), the taxes, insurance, and condo fee, my cost of living would have shot up over $1100 per month. And I was being told by everyoe that I could afford it. That would mean: no cable, selling my car, ditching my gym membership, and well..no eating. Ever. I am in my 30s and make way too much money for my age. So I decided to not go forward, and was told by everyone that I was making the wrong decision. I guess my point is - that while I understand why owning is a good, I cannot fathom owning a place that puts you even more into debt. For the hope of a tax break and the POSSIBILITY of a high selling price in the future.

Neil Irwin: Thanks for sharing your thoughts . . .

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Arlington, Va.: but DC is "different".

they aren't making anymore land.

the population is growing.

babyboomers retiring and buying second homes.

real estate always goes up.

so sayeth NAR chief economist David Lareah, has anyone noticed that economists and weathermen are the only jobs where you can make completely assinine predictions and still keep your job?

Neil Irwin: Another thought from a reader . . .

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Laurel, Md.: In very simple terms, one can think of long-term investments as consisting of stocks and hard assets, which includes things like real estate, gold and commodities like oil. (In real life, investing in the hard assets often means buying stocks in companies engaged in those businesses.)

We've been in a period where stocks have done essentially nothing for about five years and all the hard asset categoies have done very well. Washington is a great place to diversify when the rest of the country isn't doing much. In the second half of the nineties we watched many of our best and brighteset prospects go work in the IT hotbeds. Then the first half of the thousands they came back. So maybe it's time for the next turn of the cycle.

Neil Irwin: And one more thought . . .

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Neil Irwin: Thanks to everyone for joining me and for some excellent, stimulating questions. So sorry I couldn't get to all of them. As you buy or sell your homes or see the housing market impacting the broader economy, drop me an e-mail (follow the link in my byline in the story).

Best, Neil

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