As some of you may know, I'm the new kid on the block here at The Motley Fool, having just begun my illustrious career in early February. I must say, this is truly the most fun I've had in my working life, and I'm immensely happy to be here. (Read: gratuitously sucking up for raise.)
There is, however, one aspect of my decision to take this job that I'm becoming less enamored with each passing day. My wife and I are now in the precarious position of trying to find an affordable home in Washington, D.C.
Some of you may be saying, "Well, whoop-de-do! Poor thing has to accept his dream job and buy a new house all in the same year. Isn't that tragic." I understand the sentiment, as at first glance, this task doesn't seem like it should be riddled with misery and despair. But for those who have had the misfortune of being lowly buyers in this white-hot real estate market, I know your hearts bleed driveway sealant in sympathy.
The beginning of our good fortune
Before accepting this job, my wife and I lived in Atlanta, Ga. I initially felt upbeat about our housing campaign after the successful sale of our home there. The Atlanta real estate market has been weak for about a year now, reeling from the impact of sizable layoffs at some of the city's largest employers, such as Delta Airlines
This timely success could largely be attributed to the fact that we spent many weekends in '02 upgrading the home, installing everything from gas logs to hardwood floors (or what some might describe as me nearly blowing up the house, hammering my fingers, then watching my father fix everything -- details, details).
In any case, home prices in the Atlanta area have continued to weaken, so I was hoping our initial success was a sign of good things to come. And for a time, it was. Upon closing on the sale in late January, we enjoyed a smooth transition to our Alexandria, Va., apartment, the staging area for our assault on the D.C. housing market. Despite the fact that living above us were some very large people with a very large dog who chose to play with their very large dog indoors, all was good.
The end of our good fortune
After settling in and beginning work, we devised a plan of attack with a local realtor. Then, unexpectedly, the D.C. market struck first, releasing a fierce barrage of overpriced, remarkably unimpressive homes -- instead of assaulting, we'd been assaulted.
"They want how much? For that? Are you sure that's the same place?" In the past six weeks, I've asked those three questions in rapid-fire succession 5,347 times. As a remedy for my inability to comprehend what my wife is saying when answering these questions, she has ordered the "deluxe hearing aid system" for my benefit. Somehow, I don't think that's going to remedy my asking these questions repeatedly, and incredulously.
To be fair, it isn't really the asking price that's getting to me. It's more the asking price for a 1,200-square foot, one-bath fixer-upper that's getting to me. Scoff at will, but I refuse to participate in a bidding war for a home that has non-running vehicles parked on its front lawn.
It really comes down to the fact that in six weeks of looking, I haven't seen one home that I would pay anything for, much less the price the sellers are asking. (Actually, there were a couple of very tasteful seven-figure cribs, but unless there's a Mathew Emmert IPO in my future, those are wishful thinking.)
Committed to Foolishness
It's more than just affordability. I obviously came to the Fool for a reason. I have financial goals, as all Fools do, and being house poor isn't going to help me achieve them. So, am I really going to sell the rights to my firstborn in order to snatch up that lovely rambler with the asbestos siding? Not likely.
What's the deal with "the rambler," anyway? A few weeks ago, when I asked our agent what in the heck that is, she informed me that a rambler has an open floor plan, allowing you to ramble from room to room. Now, I don't ramble, and I have no intention of rambling in the future, but let's pretend I do. Could I ramble in a ranch, or a Tudor, or a nice little Victorian, or would that violate some principle of stupid house names? One has to wonder.
At any rate, living Foolishly is important to me, and I'm not willing to sacrifice savings and investing goals to chase some overpriced real estate. Of course, it would help if the Fool paid me in cash instead of Chuck E. Cheese gift certificates, but in this housing market, even that probably wouldn't make much difference.
A second bubble?
OK, other than some overpriced, ugly homes, what's the big problem with buying in this market? Well, I'm not screaming the whole bubble argument here, but I do have very real concerns about this real estate market, and I think there are several reasons to be cautious.
For starters, I get nervous when only a third of a given area's population can reasonably afford to purchase a home there, as was the case in San Francisco, Calif., and is the case in Washington, D.C. I really have to wonder who's going to be willing, or able, to take my one-bath rambler (complete with the lovely wood paneling and pink bathroom tile) off my hands for more than I paid, should I need to sell it in a few years.
Then, of course, there's the general economic funk. Housing starts were down about 8% nationwide last month, and I just can't believe the hot markets, including D.C., are going to be immune from this forever. Further, consumer spending is falling, and personal debt levels are at all-time highs. Granted, someone's buying these places, but I have to believe many of these folks are a great deal more comfortable with extreme debt than I am.
You know we can't discuss housing without talking about interest rates. With rates at 40-year lows, it's likely that they'll only drop further if the economy dips back into full-blown recession. If that occurs, home loans remain relatively affordable, but what happens to the overall housing market?
Folks have a tendency not to want to spend a great deal of money when they lose their jobs, or when they might lose their jobs. They don't like to make large purchases when they're taking pay cuts, or when they look at their brokerage statements three years into a bear market and realize they have less than they thought. Affordable or not, I'm betting the housing market goes south, in this case.
OK, but that's just one side of the equation. What if the economy experiences a rapid recovery, then the housing market remains strong, right? I doubt it. Even though the market itself remains intact here, affordability is still negatively affected. In this scenario, sooner or later interest rates will be driven higher by the strong economy and/or inflationary pressures, which means monthly payments on that would-be dream home hop into the stratosphere.
Consider this: A 1% increase in the interest rate on a 30-year fixed-rate mortgage will equate to an 11% increase in the monthly payment (excluding taxes and insurance, which will, of course, vary). Two percentage points in rate will cost you 24% more in payment. We're talking about a very real impact on how much house folks can afford, and it's immediate.
The arguments I hear as to why the D.C. housing market is "different," and will therefore remain strong, are not terribly compelling. Even if the area has consistent turnover due to the high number of federal and military employees, it doesn't mean the good folks moving here can, or will be willing to, pay these prices. In this economy, I don't see many people receiving huge pay increases to relocate, and that's what it would take to reasonably afford a home here if you're moving from virtually any other area of the country.
Maybe skeptics will say I'm just trying to buy houses the Buffett way, but I simply don't feel comfortable participating in this housing feeding frenzy, especially when the properties in my price range are of less quality than the home I just sold. I don't mean to suggest that I expect the D.C. market to somehow equal Atlanta's, or any other city's for that matter. I would simply prefer that it equate a bit more with sanity.
For now, I'm basically sitting this one out -- with my wife's permission, of course. I mean, hey, I was able to avoid that whole Pokemon thing, so why not this? In the end, I don't think we're doing ourselves a disservice by staying on the sidelines and getting a better feel for this economy and this market. So, if you were wondering where to address my fan mail, that's where I'll be, at least until I find out where we can afford to buy something bigger than a pup tent.
If your personal housing market offers a bit more sanity, and you're looking to settle down, be sure to check out the Fool's Home Center before signing on the dotted line. And share your own home-buying experiences on our Buying or Selling a Home discussion board!
Mathew Emmert doesn't consider pitching a tent on the White House lawn a realistic housing option, even though it would likely lead to lower-priced, longer-term accommodations in a correctional rambler. He doesn't own any of the stocks mentioned in this article, but if you'd like to see what he does own, check out his profile . The Fool is investors writing for investors.