Washington DC bubble?

In response to my earlier posting questioning whether home prices were outstripping income gains, one reader (IDed as

In response to my earlier posting questioning whether home prices were outstripping income gains, one reader (IDed as "Audiorich") writes...

"Not in the Washington D.C. area! House prices here may rise less rapidly in the future (and that would be a good thing), but they won't stop going up. If you lived here, you'd see that."

Actually, Audiorich, I lived in Washington for nine years (1989-1998). And a recent visit convinced me that Washington is a huge bubble waiting to pop...

Consider this: My wife and I bought our first home in Alexandria, near the Mount Vernon estate, in 1991 for the princely sum of $216,000. For the next seven years the house did...nothing. When I transferred to become the magazine's Atlanta bureau chief in late 1998, we sold it for..$222,000.

We visit Washington every year during our kid's spring break, and during our latest visit this past April, my jaw dropped. The house next to our old house (identical in structure) is on the market for $520,000. That's roughly 130% appreciation in six years.

Now let me tell readers what you're getting for $520,000: A 2700-square feet, two-story, aluminum-sided, starter house with no basement sitting on a 7000-square-foot plot that floods during heavy rains (the house is near the Potomac river) in a mediocre school district. Now explain to me how young families buy into Washington. They have to put $50,000 down and take out a $470,000 mortgage for a starter house? Or do a $520,000 "interest only" mortgage with a starting payment of $3700 a month that balloons to over $5000 a month when the principal comes due? I'd like to hear the argument of Washingtonians as to how this isn't a bubble?

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