Region joins housing bubble

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Washington is caught up in a housing bubble affecting a couple of dozen urban areas nationwide, characterized by soaring home prices and increasing speculative activity in local real estate.

As people learned with the stock market bubble in 2000, the ride up may be exhilarating for investors and homeowners, providing an opportunity to make big money, but the ride down --if the bubble bursts -- can be devastating to people's finances and crippling to the economy.

Washington area home prices surged 24 percent last year, twice the national rate and the fourth straight year of double-digit gains, according to the Office of Federal Housing Enterprise Oversight. Since the late 1990s, home prices have doubled in northern Virginia and many other parts of the region.

Richard DeKaser, chief economist with National City Corp., estimates that Washington is one of 28 U.S. cities where houses are 10 percent or more overvalued, based on income levels and other factors, and could be in a bubble.

"There is a growing risk of 'bubblettes' in certain places," although the U.S. market overall does not appear overpriced, he said.

Standard and Poor's Corp. has placed Washington among a group of major U.S. cities where it expects home prices to retreat because of unsustainably large gains characteristic of a bubble in recent years.

So far, the huge gains in prices and booming home sales have mostly benefited the 69 percent of Americans who own homes. They have been able to sell at a profit, or cash into their rising home values through cash-out refinancings and home-equity loans to pay for renovations, college educations, new cars and a myriad of other things.

The increased household wealth caused by soaring home values also has given many baby boomers sizable real estate assets that they hope to cash into when they retire. As a result, many have let their retirement savings slip.

The main downside has been sharply increasing property-tax assessments driven by skyrocketing valuations -- forcing homeowners to pay hundreds of dollars more each year. Many area residents got big, new assessments just this month.

Also, young, first-time home buyers and working-class families are finding it increasingly hard to afford homes in Washington, where the median home value last year soared to over $350,000 -- more than three times the average household income here.