Local Commentary

Editorial: How Bad Will It Get?

 Dr. Stephen Fuller’s prognostications reported on Page 1 of this edition seem reasonable, including favorable prospects for the City of Falls Church about right-sized and right-located condos. But they came notwithstanding the caveats he always includes in such presentations.

His so-called “Threats to the Forecast,” factors that spell “all bets are off” range from the dramatic, like new terrorist attacks to major global oil supply disruptions and sudden political shifts away from federal spending and procurement patterns, to more seemingly mundane but powerfully determinate factors such as the quality of the regional labor force, housing affordability and transportation congestion.

   At Fuller’s forecast briefing last week, there was a lot of talk among business suits at the breakfast tables prior to his comments. Much focused on the fate not of the frugal small condo owner, but of the impact of the fast-cooled housing market on too many homeowners who bought well beyond their means and now stuck with very unfavorable mortgage terms. Mortgage lenders have long since abandoned their responsibility for making sure that a homebuyer does not go into debt over his or her head.

   “What do you mean housing has become unaffordable?” one shortsighted person quipped to us recently. “If you can get a mortgage, that means you can afford it, and you can.”  Not really. By federal guidelines, any housing that costs more than 30% of a monthly household income to pay for and maintain is deemed unaffordable. By that standard, Dr. Fuller pointed out, two thirds of homeowners in the Washington, D.C., metro area live in homes they can’t afford. That’s a staggering figure. But with the economy awash in liquidity, the public makes up for having relatively less to spend for life’s other necessities by putting those costs on credit cards or other loan instruments.

   One thing is for sure, with the cooling housing market thousands of especially newer homeowners are in for a big shock. With too often less than no equity in their homes (due to no down payment, interest free mortgages), if for even ordinary reasons, much less the onset of balloon mortgage payments, such people have to sell, they often will find they can’t recover their original cost of buying their home. Even worse, homeowners who default and try to walk away from their homes, leaving keys behind for the bank, will be not be free from liability. The recent changes in bankruptcy laws mean these folks will still be liable for at least half the unpaid balance on their loan.

  No wonder banks have been so eager to offer loans that consumers can’t afford. With defaults, not only do they come away owning the homes, but the first born children of their borrowers, as well.

   For those caught in this squeeze, the only question becomes one of degree: not “will it be bad?” but “how bad?” Thousands are sure to be hurt terribly. But just how many depends on those unpredictable factors that Dr. Fuller included at the end of his report.