While the Reagan administration is tackling the inflation problem at the federal level, some Americans are trying to ward off its effects on their home-seeking children, by helping them make down payments on condominiums and town houses, lending them the money outright or going into partnership with them.
Now, in a variation on the "now is the best time to buy" theme often sounded in the real estate industry, David A. Swinburne of the Panorama Realty office in Burtonsville, Md., is suggesting that the parents of grade school children had better start thinking about how their kids will ever be able to afford homes of their own.
While the 38-year-old broker believes there is hope that the current high rate of inflation will moderate some day, he says young parents might do well to recognize where prices might go. A $75,000, three-bedroom "starter" house typical of this area, appreciating at a rate of 9 percent a year, would cost $273,000 in 15 years, when today's third-grader might be looking to buy, he suggests.
Swinburne points out that the whopping price tag is startling enough but that, according to even present financing costs, the down payment and closing costs for a conventional mortgage are likely to hover at $70,000 in 1996 and the monthly payment could "easily be $3,850." He further projects that the annual income needed to qualify for the mortgage might be $185,000.
Indeed, those are staggering figures. If you tend to brush them off as preposterous, consider that the appreciation average of houses resold in Montgomery County last year -- a dull one for realty sales -- was 9 percent according to appraiser-consultant Alfred Jarchow. And Jarchow's appreciation percentage for resales in the 1970s was 11 1/2 on a compounded basis.
To take some of the bite out of expected inflation in house prices, Swinburne suggests to young parents that they buy second houses now as investments until their children become mature house-hunters. He doesn't say it will be easy but insists it can be done, if there's a desire to provide a house with a mortgage payment that might, in 1996, be only 25 percent of what it would cost to finance today's $75,000 house.
The Swinburne scenario starts with obtaining about $19,000 to make the deal on a $75,000 house. Maybe the parents can borrow from grandparents or refinance a present house or take a second mortgage on the present house. The $19,000 is needed to cover the $15,000 down payment on a 20 percent conventional loan (mortgage rates are higher for investors) and the $4,000 in estimated closing and related costs, which would include a $500 cushion for repairs.
Young parents are warned that they must expect, as do almost all purchasers of second or investment houses, to carry a small negative cash flow every month in the first few years -- until rent is increased. It is assumed that the $75,000 house could be rented for $500 a month. That's $6,000 annually and $3,500 less than the sum of the monthly payments for carrying the house.
But that's not the end of the scenario. If the parents are in a high tax bracket, which might be the case if both are working, they could be in a position to take advantage of an estimated $8,400 in mortgage interest on the house in the first year (with the amount decreasing slightly in the next few years) and also have tax and insurance costs of $960 annually. A $2,400 depreciation figure on the rental house is included to make the total deductions for tax purposes $11,760.
"If you are in a 50 percent tax bracket, your actual cash returned each year might be $2,880" (half of the $5,760 deficit annually), he said. Although he didn't include it in his scenario, Swinburne agreed that annual maintenance on an existing $75,000 house might average $400 or $500, depending on the condition of the house and the tenancy.
The Burtonsville broker, a twice-divorced father of two children, has projected his "buy now for your children tomorrow" idea to other Panorma offices. He also cautions that his estimates are used for example only and should not be considered "statements of fact."
Each real estate transaction tends to vary: His mortgage figures are for 14 percent on a long-term basis. While that example is realistic, conventional lenders are moving away from long-term commitments and toward mortgages with rates to be renegotiated every few years, according to an inflation index. There are still 13 1/2 percent FHA and VA mortgages currently available here with long terms as well as 30-year conventional mortgages at 14 or 14 1/2 percent.
It's difficult enough to look ahead even one or two years in real estate and housing. Looking ahead 15 years is even more staggering. If housing production unexpectly surges and the anticipated increased demand for homes fails to materialize, annual appreciation might drop below 9 percent. In the 1960s, 3 percent to 5 percent annual appreciation was routine in this area.
However, you can write your own projection of what today's $75,000 house will be in future years.Choose any average appreciation percentage and add the result to $75,000 (or any other price) and you get the appreciated figure for the first year. Then apply and add the percentage to the new figure -- it's called compounding -- and keep going on that basis for as many years as you want to project an average appreciation.
Another rule of thumb was used by real estate agents is that today's house will double in value over 10 years if the annual rate of appreciation is 8 percent. CAPTION: Picture 1, This house at 30 Underwood Place NW is on the market for $69,950.; Picture 2, no caption, Photos by Harry Naltchyan -- The Washington Post; Picture 3, These houses, at 12513 Feldon St., Wheaton and 3730 Third St., Arlington, are priced in the mid-$70,000s, considered a "starter" price here for detached units. By James Thresher -- The Washington Post; Picture 4, Pepperwood model prices at Newington Forest, a Ryan Homes project near Springfield, range from $56,400 to $60,350. By Lucian Perkins -- The Washington Post