- The Washington Times - Thursday, June 3, 2004

Q:My wife and I have been approved for 100 percent financing to purchase a home for up to $320,000.

We are looking in suburban Maryland and have been amazed at how much property values have increased.

Now that interest rates have risen, what’s going to happen to property values? I’m afraid that if we buy now, the property values will fall and my mortgage will be for more than the house value.

We don’t have any reason to think that we will relocate to another area any time soon, but it’s always possible that I could be offered a better job somewhere else. Should we continue to rent until the market cools off?

A: The Washington-area real estate market has been red hot for the past three years.

I believe in the theory of “the bigger the boom, the bigger the bust.” Housing values have shot up almost everywhere, thanks to few homes on the market and high demand.

To put it bluntly, the housing market has been out of control.

Personally, I don’t think such a market can last. Eventually, as prices continue to increase, affordability will become the spoiler, and home prices will either flatten out or begin to fall.

The recent spike in interest rates certainly doesn’t help. Only two months ago, you could find a 30-year fixed-rate loan at about 5.25 percent. Today, you’re looking at 6.25 percent or higher. That’s an additional $203 per month for a $320,000 loan.

I think your fears are certainly justified.

However, real estate is invariably a good investment over the long term. And like any other investment, it will have periods of depressed values. The timing of acquisition and sale becomes less important the longer you hold the property.

But timing is crucial if you have a short holding period.

It appears from your question that it is likely that you will remain in the Washington area indefinitely, although you would be prepared to relocate if the right opportunity arises.

Here’s your downside scenario: You buy a house for $320,000 and take out a 100 percent loan, putting down nothing in cash. Interest rates continue to rise, and the bullish real estate market turns bearish. In two years, there is a surplus of houses on the market and values have declined by an average of 10 percent.

After a bit of research, you realize that you’d be lucky to sell your home for $290,000 after several months on the market. Since you put no money down, your current balance is $312,000. You realize that if you sell your home, you’d have to write a check for $22,000.

At the same time, you are offered a fabulous job in Charleston, S.C.

This could be bad. If you were to move, you would need to sell the property and take the loss, or rent it out and face a possible negative cash flow.

Now let’s be a bit more optimistic.

Most professionals expect the Washington real estate market to soften, which will certainly cause home values to flatten out. But there’s no certainty that values will drop. In fact, it’s possible that home prices in the area will continue to appreciate. No one knows for sure what’s going to happen. The only good bet is that values will increase over time.

My advice is to find the property that’s right for you and buy it. Because your plans do not definitely involve relocation, the likelihood of your remaining in the area is high.

If, on the other hand, you are offered a great opportunity that requires relocation, you will assess the situation at that time and make the proper decisions.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by

e-mail (henrysavage@pmcmortgage.com).

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