- The Washington Times - Thursday, October 7, 2004

The continued frenzy in the Washington-area real estate market, despite shockingly high home prices, is a little puzzling.

Area home prices have doubled in only five or six years. Surely area incomes haven’t doubled in such a short time.

How, then, can people today afford to buy homes that cost so much? Despite this conundrum, people are not only buying these expensive properties, but they are fighting tooth and nail to buy them before anyone else does.

One factor that has surely contributed to the madness is mortgage interest rates. Rates are still extremely low, and this factor alone explains much about today’s home prices.

At an interest rate of 5 percent, a $300,000 loan for 30 years will cost $1,600 each month, not including insurance or property taxes. If the rate were increased to 8 percent, the payment would jump to $2,200. That difference would force many buyers to look for a less-expensive home.

Instead, today’s low adjustable-rate and no-interest loans make it possible to buy a lot more home for a lot less money. And that’s why home prices can continue to rise even faster than area incomes.

The charts present price data from two periods. Each is useful, but you should understand what you are looking at before you draw too many conclusions.

The left side shows median prices for the entire year of 2003, compared with 2002. As you can see, even the counties with the smallest gain went up 12 percent last year. More-popular communities saw home prices rise by 20 percent in 2003. And there are some neighborhoods, including Adams Morgan, Capitol Hill, North Arlington and Bethesda, where median prices shot up even more than 20 percent last year.

On the right are median prices for August 2004 compared to August 2003.

It is important to note that monthly data is very susceptible to fluctuations caused by the sale of a few very expensive or very inexpensive homes. Those fluctuations even out in annual data, making 12-month data preferable for serious analysis. For this reason, I have presented both annual data and monthly data.

A note about median prices: Affordability is better determined from median-price data than from average-price data. The median is less volatile, and therefore more useful, than average price data. Average prices fluctuate more because they are easily swayed by a few very expensive sales.

Although the median data from August alone shouldn’t be relied upon too heavily, it is clear that 2004 home prices are rising as quickly as they did in 2003.

Data for the seven months preceding August also yielded double-digit increases throughout the region, so we can expect that to be the result when data is compiled for all of 2004.

Chris Sicks

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