TIME: Almanac 1993/TIME Almanac 1993.iso/time/121889/12188900.013

Text File | 1992-09-23 | 5.8 KB | 116 lines

                                                                                BUSINESS, Page 57

Money Angles

When a House Is Just a Home


    Until recently, Newton's First Law was that home prices
could only go up. Now residents of that Boston suburb -- and
homeowners nationwide -- are having apples dropped on their
heads. Suddenly a lot of people are talking about home prices
going down. And I don't mean just in Houston (actually, they've
begun to recover in Houston) or Billy Joel's penthouse on
Central Park South, first offered at $2.8 million, then at $2
million, then $1.5 million, now $1.1 million -- and still
unsold. Your average home may be affected too.

    PREPARE FOR A DROP IN PRICE OF HOUSING, warns columnist
Hobart Rowen in the Washington Post. "Experts agree that the
nation may be facing a serious drop in demand for housing over
the next 20 years, because the Baby Boom of the 1950s has given
way to the Baby Bust of the 1970s."

    MORTGAGE CEILING LOWERED, reports the New York Times. "The
ceiling on the size of single-family home loans purchased by
the Federal National Mortgage Association is declining by $150,
to $187,450 next year, the first drop in at least a decade."

    WHEN HOUSE PRICES FALL, chimes the Economist. "Two
generations of Britons have grown up treating houses as the
perfect investment. But a fundamental change is afoot. The
engine of demography that helped drive houses up is now going
in reverse."

    The difference is most dramatic at the top. Homes in
Connecticut that shot up to $2 million may now fetch only $1.3
million. It's not so bad in the real world -- three-bedroom
homes in my sunny but unfashionable Miami neighborhood that rose
from $65,000 to $85,000 over the past two or three years are
still $85,000. But the notion that real estate prices will
always go up, once common knowledge, like the notion that
grapefruits can be eaten only in halves, is finally subject to
doubt. After decades of steadily rising prices, we could be in
for years, if not decades, of relatively poor performance.

    In one sense this is good. (And of course it's very good if
you don't yet own a house.) In the U.S., we need to invest
relatively less on expanding our living space and more on
retooling our factories. We need fewer real estate agents and
more teachers, fewer mortgage brokers and more engineers. So if
people get the notion they'll make more money investing in
stocks and bonds than in homes -- good! To succeed long-term,
we need to save a little more and consume a little less.

    Granted, building a home or installing a pool isn't exactly
"spending" the way flying to Rio is -- the home has lasting
value. But neither is it a productive investment that makes the
economy more efficient and competitive for the future.

    Sluggish home prices are also good news in the drive to
dampen inflation. Returning to the days of negligible inflation,
if we eventually can do so, should also mean returning to the
days of low interest rates (from 1880 to 1965, home mortgage
rates above 6% were all but unheard of), and that would be good
news for the economy -- and for future home buyers.

    So if the bull market in homes really is over, that's not
all bad -- unless it gets out of hand. It's one thing to have
prices trail inflation for a number of years, quite another to
allow a stock-market-style 40% crash in prices. That would leave
the banks owning an awful lot of houses and the Government
owning an awful lot of banks, which is why the Government is
unlikely to let it go too far.

    The banks and the Government already own an awful lot of
homes -- 250,000 would be a rough estimate -- which alone is
reason to expect prices to be weak. The Resolution Trust Corp.,
set up to sell off the holdings of hundreds of failed S&Ls, is
pledged to avoid triggering a price crash. Yet this is an arm
of the same Government, after all, that actually lost money
auctioning off confiscated drug loot.

    A house near me worth a minimum of $65,000 was recently
offered for sale by HUD for $50,000 (mistake No. 1). I bid
$58,100, but lost it to a bid of $54,000 because the Government
decided to accept the lower offer even before the bids were
opened (mistake No. 2). One bumbled sale a real estate
depression does not make. But if it's happening in my
neighborhood, you have to wonder whether it won't be happening
in others as well.

    If prices come down and people feel poorer, consumer
spending could slow a bit. Other factors may keep the economy
humming, but one thing that's bound to slow is the turnover of
houses. People are stubborn when it comes to selling their homes
at less than they were counting on, let alone at a loss; and,
especially after allowing for selling expenses, the equity
available from the sale of one's first house may now be less,
not more, than what's needed to trade up to a new one.

    Homes can still be a good investment -- much of my own
money is in real estate, and so is much of the money of most of
the successful stockbrokers I know (they sell stocks; they buy
real estate). Even if there are fewer baby boomers entering the
new-home market, the population continues to grow, and as it
becomes wealthier, it will want more living space. So don't buy
the new conventional wisdom unreservedly. But even in Los
Angeles, where the whole point is to spend more than you can
afford, rising values are no longer a given. So it's more
important than ever not to buy a house you can't afford. And
more sensible than ever to consider renting, if your career
requires you to move often, incurring what can be upwards of 10%
in commissions, closing costs and mortgage points each time you
do.

    Rising home prices may not pay for Junior's education or
Senior's retirement. Some real money may need to be set aside
as well.