Subprime Lending in the Washington Area

With a current real estate market that's unpredictable, what's in store for would-be buyers or those thinking about selling? The Post's special feature, Property Values: The Market & You, helps forecast what to expect in the coming months.

Peter Tatian, a senior research associate for the Urban Institute's Metropolitan Housing and Communities Policy Center discusses the local housing market and how the fallout from subprime lending may affect local homeowners and neighborhoods.

Tatian's research covers topics in national and local housing policy, with a focus on affordable housing and subprime lending. He currently leads NeighborhoodInfo DC, a neighborhood data system and civic engagement tool for the District of Columbia.

For more on local real estate, visit washingtonpost.com's Real Estate section.

The transcript follows.

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Peter Tatian: Good afternoon, everyone! My name is Peter Tatian, and I'm a researcher at the Urban Institute specializing in housing issues, particularly those in the Washington, D.C. region. I have a strong interest in the topics of affordable housing and homeownership. Looking forward to today's discussion!

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Arlington, Va.: If property values come down, shouldn't that be a GOOD thing? Then, more people can afford to buy homes, by virtue of lower prices.

Peter Tatian: Hi, Arlington. I think this depends on your point of view. Some people would certainly agree that, given how high prices have risen in our region over the past several years, some cooling off would be helpful for affordability. But, if you recently bought a home, slower rising or even falling values may not be welcome. This is particularly true if you were hoping to refinance your way out of an adjustable rate mortgage that is about to reset to a higher rate.

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Washington, D.C. : I bought a home in 2002 and used some of the equity to make some much-needed improvements -- new roof, replacement windows, HVAC, etc. As a result I owe more than I paid for the house. Could the decline in prices drop so low that I might end upside down in my mortgage even considering I didn't buy at the top of the market?

Peter Tatian: I'm sure this is an issue many people are facing now. You didn't say where in DC you were. Many neighborhoods in the city are still seeing price growth, if not as robust as before, but some are seeing declines. It is well possible, if you've taken out the max. equity in the property, your mortgage could go upside down. I would recommend that you talk to a qualified mortgage counselor about your situation, as soon as you think you may have a problem.

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Washington, D.C.: How do you know how much of not wanting to buy in D.C. is due to high prices or the increasingly high crime rate? When Marion Barry says it's bad, it's real bad.

Peter Tatian: There is concern about crime rates going up in some places in D.C., but I'm not sure I see that as discouraging people from buying. The attitude about living in the city has changed to a more positive one in recent years, and I don't see that swinging back quite yet.

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Washington, D.C.: As the rate of unmarried female homebuyers has increased in the past decade, have they received a disproportionate share of subprime loans? What are your concerns about how the subprime fallout will impact women, especially low-income single mothers?

Peter Tatian: Single-female homebuyers do make a significant share of the homebuying market in this region, but they are not necessarily more susceptible to getting subprime loans than other male or married-couple buyers. But, we do know that African-American and Latino homebuyers are more likely to get subprime loans, so to the extent that women-headed families are represented in these two groups, they may be more likely to get a subprime loan.

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Arlington, Va.: I'm in the market for a first home. When the market is in a state of flux, how should one determine the fair market value of a residence? The traditional method is evaluating sales within the past year. Though, given the fluctuations in today's market, I wonder if looking at sales within the past year may be inaccurate.

Peter Tatian: I would certainly look at comparable sales within the past year, but also compare more recent sales to those several months ago. You are right that the market is changing a lot now, so you need to be careful about overly optimistic appraisals or those based on older sales trends. But, as the Post real estate editor pointed out, you should look at holding your home at least 3-5 years to see enough appreciation in value when you sell.

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Maryland: I have a close relative in the home-building business who generally fills me in on how things are going. Month in and month out I have been surprised at the coverage of the industry (and his company)by the Post and how it has diverged from what is really happening in the home buying market. The Post is consistently more optimistic than the facts on the ground bear out.

One major home builder has had major divisions selling NEGATIVE numbers of houses lately (meaning they sold fewer houses than they had people backing out of existing contracts). Most are happy to get back to zero for the month. But I never see that level of detail in The Post's coverage, and most negative stories refer to a recovery just around the corner.

I don't think that the Post reports are purposely telling it wrong, but I get the feeling that the people they talk to for their stories are all people who have a vested interested in a healthy home buying market.

What do you think?

Peter Tatian: Hi, Maryland. Prediction is a tough business and, I think it's fair to say that we all have our own ideas about what's most important to consider. I tend to agree with the guardedly optimistic view that most of the experts espoused in the real estate section. We have a strong economy in the region, with good job growth, and lots of communities that are desirable places to live. Basically, we've just come off of several years of unsustainable, double-digit home price inflation, and now we are settling in to what seems to be a more normal rate of price growth. So, the market is doing pretty well, overall, but it's just not as exhuberant as it was before.

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Washington, D.C.: Thanks for doing the chat. Does the data allow you to identify whether particular neighborhoods in the District or suburban counties are being more hard-hit than others by foreclosures? Thank you.

Peter Tatian: Lots of researchers are trying to get a better handle on the foreclosure situation. Areas with higher use of subprime loans tend to be places where we see more defaults and foreclosures. We've started monitoring foreclosures in D.C. and seen modest increases at the moment, but it could get worse as more of the adjustable rate loans reset to higher rates.

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Georgetown, D.C.: How much responsibility do private companies like Fannie Mae and Freddie Mac have when they push the credit envelope and continually stretch standards all in the name of increasing homeownership, which is largely a nice bi-partisan cover for keeping their growth trajectories moving upward.

Peter Tatian: Fannie and Freddie really had very little to do with this. The growth in subprime lending was largely funded by Wall Street investors who bought private mortgage-backed securities. In fact, some people are arguing that Fannie and Freddie should now get MORE involved in subprime so that they can exert more influence on this market.

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Baltimore, Md.: I've often viewed the housing market as existing in a "cycle" like a wave pattern. Where do you think the DC metro market sits in that pattern with respect to the rest of the nation and do you think this cycle will be shorter than the last? Also, with respect to the housing prices in the D.C. area, do you think more homebuyers will be encouraged to look in a less expensive place like Baltimore or stay right here?

Peter Tatian: Hello, Baltimore! As I said, I think the D.C. metro market is relatively strong. I don't think that we will have the kind of down cycle you are seeing in other metro areas. I'm sure that more people have already been looking at Baltimore, which has much cheaper real estate (although that may be less true than it was a few years ago). But, they also will consider quality of life issues, such as commuting times, in making that choice, which is why Baltimore has a harder time selling itself to people who work in or near D.C.

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Washington, D.C.: I was thinking about doing a no downpayment loan, and buying something inexpensive to make sure I don't have trouble with payments. I'm not trying to purchase something well above my means, but I will end up buying something I don't want to stay in for more than five years, since what I can afford now won't suit my needs much longer than that.

Are no downpayment loans a bad idea no matter what? I've got friends who are telling me the no downpayment deal is always bad news. But this may be my one chance to get into the real estate market in this area.

Peter Tatian: I'm glad you are aware of what you are getting into and scrutinzing the loan terms carefully. All other things being equal, no, I don't think a no downpayment loan is necessarily a bad idea. But, you need to look at all of the loan terms and think about whether you can afford paying back the loan. It's good to get advice from family and friends, but I would also recommend you sit down with a qualified counselor, someone who is not trying to sell you a product, to make sure you are getting a deal that is right for you. HUD has a list of qualified counselors on their web site. Capital Area Asset Builders also has good resources on their web site that can help you.

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Arlington, Va.: Would you advise waiting until next year to purchase a new home? It appears that prices are lowering.

Peter Tatian: I think you should be patient, if you can, and look around for the right home for you. It's not just a question of price. If you find a good home today that you can afford, then I would buy it! But, as I've emphasized, you want to make sure you get a mortgage that will be right for you. In the market today, that probably means you will need to make a 20 percent down payment.

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D.C.: Which county/city/area do you think whould get a "good" rating for affordable housing. I thought a few years back that Arlington County was supposedly trying to become a "diversified" place to live - but with all the apartments/etc. being torn down to make way for $500,000 to $600,000 townhomes on the outside they don't look to be doing a very good job.

What are your thoughts?

Peter Tatian: All jurisdictions in our region likely need to do more on affordable housing, and we should look at this as a regional issue. I think D.C. has made a step in the right direction with the Housing Production Trust Fund and the recommendations of the Comprehensive Housing Strategy Task Force. Maryland and Virginia also have programs in place, but, if we act together as a region, we could be more effective.

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Washington, D.C.: Are there any neighborhoods in D.C. that are being particularly hit hard with foreclosures? I read the article about the "Ghost Town" in Cleveland in Sunday's paper and am wondering if any area in D.C. is experiencing something like that?

Peter Tatian: I don't think that the foreclosures are hitting us that hard....yet. We need to keep an eye on it, though. We also need to make people aware that, if you are in trouble on your mortgage you need to get help as soon as possible! A number of local organizations are stepping up their efforts to work with homeowners in difficulty. For example, in D.C., Housing Counseling Services Inc. has just announced a series of free foreclosure prevention clinics.

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Southeast Washington, D.C.: A couple years ago, sellers could place their homes on the market, put their feet up and pick and chose offers. Not so in this market. Buyers are becoming quite demanding. Is a buyers market a bad market? My senses tell me that I should be buying. Just need to find an affordable neighborhood because my $32,000 salary still prices me out in D.C.

Peter Tatian: Hello to Southeast D.C.! It's normal for a market to shift between favoring buyers or sellers but, as I said, you need to be more concerned about your own situation than what the market is doing. You are right that, unfortunately, it is tough for someone with your income in many neighborhoods in the city. But, there are programs to help people like you. Contact the D.C. Dept. of Housing and Community Development or the D.C. Housing Finance Agency to see if they can help. You can also look at organizations like Manna Mortgage, Acorn, and NACA, who provide lower-cost loans for qualified home buyers.

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Arlington, Va.: You said that "we are settling in to what seems to be a more normal rate of price growth," even with the strong local job market and economy don't you expect that to follow a downward correction in this area's market over the next year or so? The housing bubble wasn't just inflated with sub-prime loans and bad ARMs, it was fueled by speculative buying and fear that if you didn't buy today, the price will jump tomorrow and you wouldn't be able to afford to buy a home at all. Those things just aren't happening anymore. Won't that result in a considerable price reduction?

Peter Tatian: Again, I think our housing market overall was fueled by a good economy, more than by subprime lending or ARMs. Now, having said that, some places, like PG County, had quite a substantial share of subprime loans. So, I don't want to say that we don't have places at risk. But, overall, I don't see indications of a major downturn.

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Washington, D.C.: I'm 100 percent with the first commenter. Prices got ridiculous way overvalued. People should have known it was better to rent during that/this time. I read an article once on MSN that said renting is, long-run, more often than not better than buying. The author said to invest the money in the stock market. Anyway, the great majority of people in the United States cannot truly afford homes with the prices the way they are now.

Peter Tatian: You make an excellent point that renting needs to be a viable option in more of our communities. Especially with home prices rising so high, many people will not be able to afford to buy until they can build up their incomes and savings. So, we need to provide good rental options for people of all income levels throughout the region.

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Bethesda, Md.: Affordability is very tough for a single person in this area. It takes two good salaries to buy just about anything. I bought a condo (in downtown Bethesda!) in 1998, and in retrospect that was a rare window of opportunity for a single person, even with a professional's salary. And I don't see this changing any time soon.

Peter Tatian: I understand your pessimism. It has been very tough for a lot of people trying to buy in this market. We need to have policies and programs that will create more housing choices for single people and families. The market is the market - we can't really control it. But, we can do more to help people find affordable housing that is right for them.

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Peter Tatian: Looks like our time is up! I enjoyed our discussion. Thanks for all your great questions, and sorry if I didn't get to yours. Please visit NeighborhoodInfoDC.org for more information on the local housing market. So long!

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