Home Prices and ARMS Collide

June 20, 2005

High Prices, Risky Mortgages

The average sales price for a single-family home in Loudoun County has now topped $650,000, making home ownership an even more remote dream for workers in the service industry.

Adjustible rate mortgages work well if interest rates stay low, as they have for the last five years.

As reported in the Loundoun Connection June 14, 2005. When is a home a home and when is it just an investment? We're seeing more and more new construction homes being purchased for pure speculative purposes. Buy now, little investment, flip!

Last year the DC Metro region added over 64,000 new jobs. Based on 1 1/2 workers per home, the region needed to add over 42,000 new units just to match the job growth. Actually, only 27,000 new homes were added - a 15,000 home shortfall.

We believe that as the region continues to have substantial job growth demand will out strip supply and prices will continue to rise. There will become a point when employers will not be able to attract job seekers because of the high cost of home ownership and general cost of living and the situation will somewhat stabilize. Employers will also consider relocating operations elsewhere in lower cost geographic areas.

ARMS and "interest only" loan programs are attractive. In this environment it may be the only way to afford to live here. There is a point however, that the piper will eventually be paid! Interest only is not and should not be the vehicle for many people. Here's is our advice:

• Seriously evaluate how long you may live in your home. If you are reasonably certain you will be moving on in 3 to 5 years then interest only ARMS may be a good option.
• If you have a lot of equity built up in a home and you just want the added benefit of lower payments (and more positive cash flow) then refinancing with an interest only loan may be the right financial vehicle. But, at the end of the fixed payment period (3 to 7 years) plan on paying the higher price! Interest rates are on the way up and we should assume for planning purposes they will continue to rise even if moderately for the next few years. Then, of course, no one has a crystal ball to know for sure.
• If you are considering buying or refinancing, interview 3 to 4 reputable lenders or mortgage brokers that give good advice. Be wary of the internet loan sharks. You want local, personal service with someone you can grow to trust that will give you good advice based on your financial circumstances and short and long range goals.

An attractive "interest only" loan today may turn out to be your worst nightmare in the future.

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