Outlook for Housing in ’86 Favorable
Housing activity is generally expected to remain remarkably buoyant during 1986, mainly because long-term mortgage rates are likely to be in the 11% range--the best home-financing bargains in more than six years.
On the plus side, housing economists see mortgage rates remaining stable and the supply of mortgage money plentiful through most of this new year. One minority view is that mortgage rates will continue to fall and be even farther below 10% for adjustable rate mortgages, and fall under 11% for long-term financing. The other minority view is that mortgage costs will increase beyond 12% in 1986.
Many Washington area home builders and realtors do not attempt to conceal their satisfaction with the strong market for new and existing home sales in 1985--and they tend to look forward to more of the same in 1986. One veteran broker-seller commented that the closing weeks of 1985 were so strong in terms of sales that a “spring freshet of new and used home buyers is expected to flood the market during the first January thaw.”
Some Cautionary Notes
There’s usually at least one sunny and moderately mild Sunday in January, when the turnout of prospective buyers interested in new and resale houses provides a harbinger for the selling prospects in the months ahead. This year, sales agents will be disappointed if the turnout is less than impressive.
Yet, there are some cautionary notes being sounded from within and without the real estate and home-building industries. One veteran executive in new home sales pointed out that sales turned sluggish in some highly competitive new-home subdivisions in the “now-middle” range of $140,000-$160,00.
He attributed the slowdown to the apparent satiation of the pent-up housing demand caused by the high mortgage rates in the 1981-82 period. He noted that new-home sales have been good since late 1983. And the current market is regarded as the most normal, most stable housing atmosphere for new and existing home sales since 1975.
Nevertheless, new-home sales to first-time buyers face the deterring effects of what are mostly 5%-range price increases on new homes. Veteran realtor Earl Farr said that the price increases on new homes could even increase beyond 5% this year (in increments, of course) if mortgage rates remain stable and the buyers continue to demonstrate serious interest in becoming owners.
Higher Land Costs
New-home builders contend that most of the pressure leading to price increases comes from a considerably higher cost of buying land on which new dwellings will be built.
“Good residentially zoned land with sewer and water facilities could be bought at what were really bargain prices in 1981-82, when new housing suffered a severe recession,” commented sales executive Sam Barrow of the Charles Milton Co. “Builders have been using that land during the past three years and now must look to new acquisitions that are far, far more expensive,” added Barrow, noting that builders may increase prices at least 5% this year just to keep pace with the increased cost of doing business.
In recent years it has not been uncommon for a finished building lot for a single house to cost $40,000 in what would be developed as a “nice but only average subdivision.” The cost of the place needed to put a new home for Washington area builders could be nearly $50,000 before the end of this year. And the same pressures for an upward trend on buildable-land prices can be expected in any area of the nation where housing sales continue strong.
Most forecasts of housing starts in 1986 have been in the range of 1.6 million to 1.7 million. Unless there’s an overturned apple cart in the housing market’s immediate future, the 1986 total of starts should nudge 1.7 million, and be only slightly below the stable 1.7 million levels of starts in 1983-85.
Strong Rental Housing
On the existing-home sale front, ever-ebullient Jack Carlson of the National Assn. of Realtors has let it be known that he expects the pace of new-home sales to continue well over the 3 million mark in 1986, and possibly hit 3.4 million in 1987.
Starts of new rental housing may be even stronger than for owner-occupied housing. Multi-Housing News, the bible for the rental market, noted recently that “fears of tax reform have alternately driven up and slowed down rental starts . . . now most investors sense that nothing will happen in calendar 1986 to affect them on the tax front, and rental units will be produced at a rate to meet the continued high demand in the northern tier of the nation.”
Rental units are not built according to demand but more in relation to the supply of workable financing. With the commercial market for new office space overbuilt seriously in many parts of the nation, funds for income property are likely to go more into new rental apartments.
The rental vacancy factor is generally low--under 3% in this area--despite rent increases that make $500 a month rent not unusual for a one-bedroom, one-bath apartment in a moderately nice suburban location.
Cannot Afford Payments
Another positive sign for a strong multifamily market stems from the fact that many young people cannot afford the average monthly payment of $750 for a new home or $680 for an existing house. Instead of buying, many young people remain tenants longer.
While some form of tax law revision is expected to come out of Congress this year and then get a Reagan signature, the prevalent feeling is that homeowners have mainly escaped possible negative repercussions. Deductions for state and local taxes seem to be safe and the only cap likely on deductions for primary residence and second-home mortgage interest would be in the $20,000 range--above the level where it would hit average Americans.
