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More on why buying your first home in the DC region is so hard

For first-time homebuyers, saving up for a down payment or taking on another loan to buy a house can be all but impossible. But those aren't the only big challenges to buying a house. Here's how competing against buyers who can afford not to use a mortgage, risk having to pay for unexpected repairs after making a deal, or simply offer more than the highest amount you're willing to pay can mean more barriers for first-time homebuyers.

Photo by are you my rik? on Flickr.

Recently, the Washington Post reported that home prices around DC reached their highest levels in ten years thanks in part to low inventory, which means more bidders for fewer houses. And the low end of the market—the part within reach for many first-time buyers—is the most competitive.

Before my wife and I bought in East Silver Spring last March, I felt like we'd never be able to save enough for our first house. Saving for a down payment--budgeting every penny, turning down dinners out with friends, and moving further away from work and public transportation for cheaper rent--was daunting. Where we once thought that saving enough money was the only major hurdle to owning our own home, we soon discovered that the down payment was only the beginning.

You don't have to save 20 percent, but you do have to compete against those who have more cash on hand

A number of mortgage options exist for people like us who have good credit and a decent income, but who see a 20 percent down payment as an impossibility due to high rent and a lot of student loans.

Starting our search in Hyattsville, we knew we would be up against people making all-cash offersin other words, waiving their "mortgage contingency" and telling a seller they could pay the purchase price without getting a loan from a bank.

Photo by Violette79 on Flickr.

All-cash offers are appealing to the seller for three reasons. First, the seller doesn't have to worry about the buyer getting turned down for a mortgage. Second, the seller doesn't have to worry about the house appraising for less than the amount of the offer, which would cause the bank to reject the sale price. Third, with no loan for a bank to underwrite, buyers can close more quickly.

Though recent data show the proportion of all-cash offers has decreased in Prince George's County, in 2015 they still made up a quarter of all offers, give or take, in Prince George's, Montgomery County, and DC.

To minimize the advantages of an all-cash offer relative to what we'd be able to offer, my wife and I got preapproved for a loan with a community bank. Preapproval reduced the risk that our financing would fall through. We chose a community bank (instead of a credit union or a larger bank, like Wells Fargo) because it did its underwriting in-house. With fewer players involved, we would be able to close in far less time than would take other financed buyers.

Having gotten pre-approval, we found a real estate agent and began touring houses. After seeing ten houses or so, found one we were ready to make an offer on.

Escalation clauses advantage buyers who have more money for a down payment or who have been preapproved for a higher mortgage

An escalation clause is a section you can add to your offer that says your bid will automatically go up (to an amount you decide, of course) if someone else bids more. These can seem helpful for first time home buyers, as they allow you to make your offer competitive while ensuring that you bid the least amount possible to win.

In our first offer, we set an escalation amount--$1,000 over the next highest offer--and a ceiling price. Our ceiling was limited by our preapproval and how much money we had on hand to cover the larger down payment.

Ultimately, we lost to a more attractive bid. We felt like we had done everything we could, but that somehow, the next offer we wrote would have to be even more competitive.

Photo by Vicki on Flickr.

Removing the inspection contingency is a risky strategy for a buyer who can't afford unexpected repairs after closing

Typically, offers include an inspection contingency to make sure that the house is sound and that big ticket items, like the roof, don't have to be replaced immediately. After a home inspector writes her report and before closing, the buyer and seller can negotiate the cost and responsibility for repairing any issues.

The inspection contingency protects the buyer and allows her to walk away if the seller won't address critical fixes. Like the mortgage contingency, some people waive the home inspection to make their bids more competitive.

Neither my wife nor I wanted to forgo an inspection because we knew it would take time to rebuild our savings after closing and we wouldn't be able to afford a large repair right away. With our budget, we were looking at older houses that would likely need something fixed. Someone planning to flip a house wouldn't have these concerns.

We ended up waiving the inspection contingency after all, but only because the sellers let us inspect the house before we put in an offer. If it had revealed major issues, we wouldn't even have written one, instead eating the cost of the inspection. Luckily for us, the house didn't need any major repairs, and we were able to write a winning offer.

Even if different mortgage options make it easier to save for a down payment, the risks others are willing to write into their offers makes it hard for first-time buyers to be competitive.

In some cases, competing homebuyers may be more able to waive the mortgage contingency or the inspection contingency and shoulder the risk of coming up with the full cost of the house or major repairs. In a bidding war, people with more money up front may be able to escalate their bid to a higher price. Each of these may be more appealing to a seller than a traditional offer that is dependent on a mortgage or a home inspection.

I looked for data on how often homebuyers use escalation clauses and waive inspection contingencies, but couldn't find any. Have you used them, or lost out to to them? Share in the comments below.


Buying a house is incredibly difficult for me. Here's why.

As a young person in DC paying what feels like a ridiculous amount in rent, I wonder about buying my own place. With these crazy prices, wouldn't it be worth just making the jump to ownership?

Well... no. When it comes down to it, buying a home of any size in DC is just not possible for me. And I'm not alone.

Photo by Chris Devers on Flickr.

I shared my struggle with our contributors, and many submitted their own opinions on and experiences with the matter. There are so many barriers to home ownership in this area. Fundamentally, the finances of buying have changed, as have the financial realities for many would-be home buyers like myself.

Down payments are a pay wall

One reason I've been scared to even consider owning is because of the down payment required on homes as expensive as the ones in this region; it's magnitudes greater than the security deposit I typically have to put down as a renter. My fear isn't unique.

Arlen, a commenter on our site, said:

I'm a renter with a solid income who would love to own a home. The down payment is what stops me. It's going to take a long, long time to save up 20% of the price of a $500,000+ home. It's especially hard to do when paying rent on a place large enough for a family with kids and then paying for child care for those kids.
Of course, I could take out a loan for that up front cash, and interests rates are low right now. But in our region in particular, taking out this loan is more complicated and more risky. Gray Kimbrough said:
A lot of DC-area housing necessitates a jumbo loan (for mortgage value over $417,000), raising the down payment requirement from 10 percent to 20 percent. Down payments have to be much larger because the cost of housing is up so much. In my downtown Silver Spring neighborhood, houses were going for $200,000-$300,000 not long ago, so buyers needed down payments of $20,000-$30,000. Now those same houses are $500,000 or $600,000, needing a down payment over $100,000 for a conventional mortgage.

Image by 401(K) 2012 on Flickr.

These jumbo loans also have more stringent requirements for approval, and restrictions on how much interest I can deduct from my taxes. There are loans backed by the federal government that can help in particular with the down payment problem (Federal Housing Authority, or FHA, loans).

But as Gray pointed out, "FHA fees have been increased dramatically, making this a much less attractive option."

More debt? You've got to be kidding me

For me, taking out a loan to pay such a big down payment makes for a frightening amount of debt. Sure I could try to save up, but savings don't build quickly when I'm paying these high rents.

What is more, myself and many others are already suffocating from student loan debt. In fact, we are suffering from some of the highest amounts of student debt in history.

I personally am not interested in adding to that mountain of bills. Neither is Aimee Custis:

I've been watching many of my friends buy condos or houses, but others among us (myself included, even with a decently-salaried nonprofit job and a successful side gig) simply can't even fathom that jump. The number one thing that sets me back is my student loans.
Dan Reed added his take:
You can definitely see the ripple effects of the student loan burden in the housing market today. Condos that might otherwise attract first-time buyers are already harder to finance today after the Great Recession. But lenders and builders know they'll still have a smaller pool of buyers anyway, hence the glut of new rental apartments that are being built.
Beyond all that, it's been harder to buy a house since 2008's financial crisis

Before 2008, it was arguably much too easy to buy a home, and many people were exploited and took on bad loans.

Things have changed. It's probably good that people looking to buy homes face more scrutiny, but that also limits some groups of prospective buyers.

"Credit requirements have definitely gone way up since the early-2000s boom," said Gray. "This is particularly bad for people with limited credit history or who are self-employed."

"I've been self employed almost my entire career," said Julie Lawson, "and getting a mortgage is incredibly difficult due to variable income and verification requirements."

Charlie, a commenter, agreed: "We've tightened lending requirements. Good luck trying to get a mortgage if you are self-employed... Easy to get a car loan or credit card though."

In many ways, our financial system has simply shifted. It still favors home ownership in many ways (some less equitable than others), but does not encourage it like in the past.

As kob, another commenter, points out:

Banks no longer want home ownership. There's more money to be made in rental investing. Apartment complexes, and single family homes, are being bought up by investment groups for rental. By raising lending and credit requirements to unreasonable levels, people seeking to buy are punished.
So where does this leave me?

For now, I'll remain a renter. And honestly, I don't feel like I have too much of a choice.

What has impacted your decisions about renting or buying?


The biggest beneficiaries of housing subsidies? The wealthy.

It's almost the first of the month, and that means rent's due. That rent or mortgage check is the single biggest expense in most Americans' budgets, so it's no wonder that Congress directs a ton of federal dollars to housing. But what should be surprising—and infuriating—is that a lot of this support goes to housing the wealthy, while very little goes to those who need help landing a stable home.

Photo by Peter on Flickr.

These policies aren't accidents—they're bad choices that we should simply stop making.

We're in the middle of an affordable housing crisis

The United States is in the midst of an affordable housing crisis. Nearly 1 in 3 households with a mortgage devotes more than 30 percent of their income to their home. The situation is even worse for renters—more than half of the United States' 38 million rental households are shouldering a cost burden.

Some of this crisis is fallout from the Great Recession, which brought homeownership rates to historic lows. African-American and Latino households were hit particularly hard, because of predatory lending practices that targeted racially segregated communities .

Congress spends a lot on housing, mostly through tax programs

Given these crises in housing affordability and homeownership, congressional strategies to support housing deserve special scrutiny.

Congress supports housing in two main ways: rental assistance programs and homeownership tax programs. In 2015, the price tag for federal rental assistance programs—which includes Section 8 housing vouchers, public housing, Homeless Assistance Grants, and other programs—was $51 billion. In contrast, two of the largest homeownership tax programs—the Mortgage Interest Deduction and the Property Tax Deduction—cost $90 billion in 2015. That's nearly double the amount spent on public benefit housing programs.

The biggest beneficiary of the billions spent on homeownership tax programs? The wealthy.

There's nothing wrong with providing support through the tax code—benefits are benefits, whether you get them from your local HUD office or on your tax return. The important question is: who benefits? Rental assistance programs are designed to help those who will benefit most—primarily individuals and families with less income and less stable housing. But this isn't how Congress designed homeownership tax programs. All told, households making over $100,000 a year received nearly 90 percent of the $90 billion spent on the two tax programs discussed above. Households making less than $50,000 got a little more than 1 percent of those benefits.

It gets uglier. There are nearly eight million low-income homeowners that struggle to pay for housing from month to month. On average, low-income households get about eight cents per month from these two homeownership tax programs. Eight cents. There are also about four million middle-income households paying more than 30 percent of their income on housing. The average monthly benefit from these tax programs for middle-income earners? Twelve bucks. Don't spend it all in one place.

In contrast, the top 0.1 percent of earners—folks with an average annual income of more than $9 million—get an average of $1,236 per month (nearly $15,000 per year) from just these two homeownership tax programs. That federal benefit is much more than the typical cost of rent in most American cities, and it's going to wealthy households who really don't need help keeping a roof over their heads.

Why these tax programs are so upside down

So why are these tax programs so out of whack? It's no accident—it's how the programs are designed. Most low-income families don't even qualify because they don't itemize deductions. Even among those that do qualify, every dollar they deduct is worth less than a dollar that a high-income earner deducts. As nonsensical as it sounds, the value of homeownership tax support goes up as your income goes up. In addition, higher-income households get bigger deductions when they buy bigger houses (or bigger yachts, which qualify for the same tax benefits).

If we ran the Food Stamp (SNAP) program the same way we run our housing tax programs, low-income parents buying a simple, nutritious meal for their kids would get somewhere around zero dollars in federal support. Millionaires charging their MasterCard with a $5,000 FleurBurger with seared foie gras, truffle sauce, and bottle of 1995 Ch‚teau Petrus would get a few thousand dollars in federal benefits.

Clearly, this would be a crazy way to run a social program—but this really is how we structure billions in support for wealthy homeowners through the tax code. Even worse, study after study shows that the Mortgage Interest Deduction doesn't even succeed in boosting homeownership.

How we can get away from this upside-down system

It's not hard to think up a better way to spend $90 billion. We could redirect this spending to help lower-income Americans save for a down payment, or use some of these funds to create a first-time homebuyer credit, or create a simple refundable credit for all homeowners. Or all of the above. That's the focus of the Turn it Right-Side Up campaign, which zeroes in on reforming unfair tax programs like these homeownership credits.

A version of this post first ran at Talk Poverty.


Freddie Mac downsizing is an opportunity for Tysons

While much of Tysons Corner is slated to become a new urban center, parts of the area will remain disconnected office parks for the foreseeable future. By planning for future demand and leveraging rising property values, Fairfax County can encourage more investment in the area and provide new public amenities, like improved transit.

Freddie Mac's campus in Tysons. Photo by the author.

Last week, President Obama announced that the federal government may try to reduce its support for mortgage company Freddie Mac, headquartered in Tysons Corner. If Freddie Mac eventually downsized or consolidated its operations, they might sell their 37.8-acre campus on Jones Branch Drive, far from Tysons' core or the Silver Line.

This may not happen for years, if not decades. By then, it may not be as desirable a location, especially when the Silver Line opens and Tysons begins the transition to a more urban, walkable place. But a land sale could be an opportunity to bring one of its largest office parks in line with the larger vision.

Freddie Mac's campus contains just 800,000 square feet of Class A office space. When built in 2002, it had a very desirable location: direct access to the Dulles Toll Road and adjacent to the Westpark transit center, served by 6 Fairfax Connector routes. It's also close to the new Jones Branch Drive exit on the new 495 Express lanes.

Map of Tysons with Freddie Mac and Jones Branch Drive from the Tysons Comprehensive Plan Amendment and edited by the author.

By 2025, much of the land around the four future Tysons metro stations will be substantially developed. The street grid will still be discontinuous, and each of the station areas may act as a discreet hub, similar to Reston Town Center. But the area will have enough density to justify its own internal transit needs, perhaps even exceeding the capacity of bus service.

Meanwhile, the office parks of North Tysons, where Freddie Mac is located, may have filled in with some residential development. But it still won't have direct access to transit, nor is it covered by the design guidelines of the Tysons Comprehensive Plan, which guides the redevelopment of Tysons. Freddie Mac's property will be very valuable, but the current zoning and allowable density prevents major redevelopment from occurring.

In order to take advantage of this site's potential, two things need to happen. First, Fairfax County should rezone the property for higher density and mixed-use development to fit with the larger vision for Tysons Corner. Second, the county should start planning for high-quality transit service to North Tysons that can not only support future redevelopment, but be financed by it as well.

Street section of light rail on Jones Bridge Drive. Image from the Tysons Comprehensive Plan Amendment.

The Tysons Comprehensive Plan refers to a light rail circulator that would serve parts of Tysons Corner that are far from the Silver Line. The estimated cost of a 2.5-mile light rail line along Jones Bridge Drive between the future McLean and Spring Hill Metro stations (via a future bridge over Scotts Run) is about $60 million.

This assumes that Jones Bridge's existing right-of-way could accommodate a new rail line. Let's take a worst-case scenario and say the county would need an additional $40 million in right-of-way. For approximately 200,000 square feet of land, that comes out to a very conservative $8.8 million per acre.

With a floor-area ratio (FAR) of 3.0, Freddie Mac's 37.8 acres could easily support 5 million square feet of development. (To compare, the property's current FAR is about .5, and the maximum FAR allowed in downtown DC is 10.) If the county rezoned the property, they could also levy a special tax as was done for rezoned properties associated with the Silver Line, or to cover school and public safety improvements.

At the current assessed price per square foot, a fully built-out development on this property would have assessed value of $2.1 billion, generating $23.1 million in taxes to Fairfax County and $2.1 million in special taxes each year. The county could initiate a bond using the special tax as backing that could pay for all capital costs associated with the light rail.

Is this all pie in the sky? Of course, as is the case with all long-term planning, everything over the course of 20 or 30 years is an assumption based on reasonable estimates created from a past history. If Tysons' critics are right, it may struggle to get development activity going, and vacancy rates could be high enough to undermine the marketability of such a land transfer. If that were the case, the above scenario would not be necessary.

So far, that's not the case. Land sales in Tysons have garnered a lot of private interest, especially for large corporate campuses. If those trends continue, Freddie Mac could sell their property to a developer in the future, and the county as well as taxpayers could really benefit. It would also be a step towards creating a new type of infrastructure in Tysons, giving more options to commuters, workers, shoppers, and residents.

What the sprawl history of Tysons has taught us is that if you don't plan for the future, you are destined to end up with a disconnected mess. Instead of leaving the Freddie Mac property to deteriorate or hoping for a new corporate tenant, Fairfax County needs to plan their next steps and leverage future changes to the benefit of Tysons and the county.


Mapping underwater mortgages shows shocking divide

The Washington Post created this astounding map of the places where the greatest percentage of mortgages are "underwater," or owe more than the home's current value.

The Post's article, which talks about how home prices have risen, says:

Many of the homeowners with mortgages higher than their home's value were clustered in the eastern parts of the District and in Prince George's County.
This makes it clear that the economic recovery is not hitting all areas or all people equally. We need more jobs east of the river and in Prince George's County, especially at Metro stations, to help our economic success benefit all.


Would mortgage tax reform slow sprawl and gentrification?

The co-chairs of the deficit commission created by President Obama released several proposals this week as a starting point for a conversation about deficit reduction. One of the proposals drastically reduces the largest home ownership subsidy, the mortgage interest tax deduction.

Photo by Dean Terry on Flickr.

The proposal would lower the mortgage cap within which mortgage interest is deductible from $1 million to $500,000 and eliminate the deduction for second homes and home equity loans. Such a structural change in housing incentives could have big consequences for sprawl, gentrification and other housing and land use patterns.

Sprawl: This subsidy encourages people to build more expensive homes, which are generally bigger, detached, single-family homes. Reducing this subsidization of home sizes would thus lead to greater density as a natural outcome of the free market.

Gentrification: A common response to the argument that reducing this subsidy will reduce sprawl is that it will also reduce urban infill of condos that are more expensive than existing housing. While this may concern some urbanists, I think this would be great. Poor and working class neighborhoods would upgrade their housing stock more organically, without the sudden displacements of existing residents that can occur through government-subsidized luxury condos.

Furthermore, by encouraging people to leverage themselves to the hilt, this subsidy helps undermine communities when home buyers bet big on the housing market and lose. This is true whether the buyers move into new sprawl developments in Prince George's County or infill in Columbia Heights.

The idea that the mortgage interest deduction boosts home ownership rates is a myth, as numerous economists have demonstrated. But simply comparing home ownership rates by country makes the same point.

Home ownership by country.

The United States is one of only four developed countries that allows homeowners to deduct mortgage interest. And the other three (Sweden, Switzerland and the Netherlands) tax imputed income from home ownership.

Clearly, offering the most generous housing subsidies in the developed world is not the key to boosting home ownership.

Before 2010, most opponents of the mortgage interest deduction considered it a sacred cow. But with the deficit commission's co-chairs attempting to insert real solutions into the deficit debate and Tea Party-supported members of Congress talking big about deficit slashing, perhaps this massive subsidy is no longer off the table.

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