Housing prices in Maryland and Virginia have climbed steadily, according to FDIC state profiles released Tuesday.
Maryland's home prices climbed by 21 percent in the first three months of 2005, the fifth-highest statewide appreciation rate nationally, according to the report. West Virginia was ranked 31st, with a 7.8 percent increase in home prices. Pennsylvania's home prices grew by just 11.9 percent, though Philadelphia was identified as a boomtown because of its 44 percent increase in housing prices.
Kathy Kalser, regional director with the FDIC's New York regional office, said as housing prices climb, an increasing number of home buyers across the state are seeing interest-only or adjustable-rate mortgages to increase their buying power. According to the FDIC profile for Maryland, the use of interest-only mortgages grew to 32 percent last year, and housing prices grew at four times the rate of income growth in the state.
While those rates initially aid home buyers in purchasing more expensive homes than they would otherwise be able to afford, Kalser said those who stretched to afford more pricey homes could experience significant financial strain when interest rates climb and the caps that allow them to pay interest only are lifted.
Softening the blow, Kalser said positive signs, including a strengthening economy, should help to bridge the 4.26 ratio between the median housing price and income levels.
"Because home prices are growing, we see a gap opening up between home prices and income," Kalser said. "Balancing all that is the economy is improving. It would be worse if we had all this with the economy still in a downturn."
Dave Skaff, administrative vice president and mid-Atlantic mortgage manager with M&T Bank, said about 70 percent of M&T's jumbo-loan customers - those buying homes of more than $359,650 - are opting for interest-only loans, though the percentage drops considerably for those buying homes of less value. Still, he said, there is the potential for customers to spread themselves too thin.
"Those concerns are valid about the programs that are out there and their ability to borrow," Skaff said. "That's a risky thought process, in my opinion, for some people ... if this thing flattens out or even dips. I think most people are probably OK, but there are some people who are probably going to get caught in that window."
Tom McCarthy, mortgage specialist with the Eastern Panhandle region of City National Bank in West Virginia, said he expects the housing market will slow down rather than bust, though there still is a fear some residents will get pinched when interest rates catch up with home prices.
"Personally, I don't see a bust. I see, maybe, an equilibrium, a flat line in prices," McCarthy said. "The big question, I guess, going forward is: Can the average annual-income family, can they afford the average sale price, especially as interest rates go up?"