Fairfax Living Real Estate Blog: February 2010

I read a short article in The Washington Post Business section this morning (from the Associated Press) that home prices are up in 40% of the cities in the U.S. in the last quarter of 2009. In the third quarter prices were up 20% over the third quarter of 2008.The increase was considered to have been caused by the home buyers credit.  The National Association of Realtors was noted as saying that 67 out of 151 metro areas in the U.S. were up over a year earlier with an overall increase of home sales up 27 percent from the same period in 2008.

Although it is clear that the home buyers credit has beefed up real estate sales, and especially during a traditionally slow time of the year, it is of concern to myself and my fellow real estate professionals what will happen after the home buyer tax credit disappears. Even more so what higher interest rates will do to the ability of persons to buy homes. Obviously, you work with what you've got and go from there.

The tax home buyer credit is due to expire at the end of April with a requirement to close by June 30th. This is not the only reason one should use in considering whether to buy a home or not. Buying the wrong home just to get in under the wire for the credit could be a costly mistake.

The real looming issue I see is the almost inevitable increase in interest rates for mortgages. It is likely that interest rates will up near 6% for a 30 year fixed mortgage by year end. It could be as soon as this Spring. The government has made it clear that they do not intend to keep buying mortgage backed securities. Add to that the likelihood that Fannie Mae and Freddie Mac are likely to be reincarnated.

For every increase of 1% in mortgage interest rates, the buyer is looking at about a 10% decrease in what they can afford. If you qualify for a $500,000 mortgage and the interest rates go up to 6%, you can now afford a $450,000 mortgage. In our area, it is tough enough to find a nice single family home for $500,000 and taking 10% off means the homebuyer is going to have to have less house, or put down more money. Another factor is that the inventory of homes for sale is very low in the D.C. area making it difficult to find a nice home. When you do, you can expect to pay the list price if not more (unless the home is overpriced to begin with) even in today's market. An increase in interest rates, and the expiration of the tax credit, is likely to cause housing prices to drop, or at least, keep them from going up (or being bid up) as fewer people will be able to afford the home. I haven't even mentioned the fear of unemployment. Although the unemployment rate is fairly low in Northern Virginia (about 5%), it is higher in other parts of the metro area (DC and MD) creating competition for what few jobs are available on the Virginia side of the river. Few employers are hiring or opening new positions adding to the fear.

The truth is that 2010 is going to be a tough, put your nose to the grindstone, year. If you are in a position to buy a home, and have a secure (government?) job, the current market is still a great opportunity for you to get in at what will be looked back on as historically low prices and rates. Even with the down market, houses are still almost twice as expensive as they were ten years ago in the D.C. area. Imagine what they will cost ten years from now.