This Housing Boom May Be Hard to Locate

Interest rates are falling. Inflation, if not actually dead, is dormant. If good things come in threes, will we now see a good old-fashioned housing boom?

Well, yes and no. It depends on your definition of boom. And it depends on the three great principles of real estate: location, location, location.

National statistics show new homes being built at a good clip--1.7 million new single-family and multifamily dwellings this year. But that’s a continuation of a trend, not a boom. If projections hold, 1986 will be the fourth year in a row that more than 1 million single-family homes will be built--a postwar record. Resales of existing homes are also strong--projections running to 3.4 million sales this year--but, again, a continuation of a healthy trend.

So where will declining mortgage interest rates--to 10% from 13.5% a year ago and 15% to 16% five years ago--have their effect? In the number of people eligible to buy homes. This time last year, the buyer of a $100,000 home needed more than $32,000 in annual income to qualify for a mortgage; now, that buyer needs to earn $24,000.

The resale market also will benefit, says economist Donald Straszheim of Merrill Lynch Economics, because of the wave of refinancings. The ability to trade in 13% to 15% variable-rate mortgages for the 10% fixed-rate loans available today gives people options. They can stay put and enjoy paying a lower mortgage, or they can trade up to a bigger house.

Either way, it’s good news for suppliers of home furnishings. And good news, too, for the long-beleaguered savings and loan companies, which get to charge 2 points--or 2% of the loan amount--as a refinancing fee and end up with a solid loan at 10% in a time when their cost of money is 7%.

But joy is not universal in the domicile business. The Northeast is frenzied--home prices are rising 2% a month in Connecticut--but Texas and the rest of the energy-producing Southwest is moribund. The Midwest is understandably spotty due to economic troubles in the farm regions, but the West is picking up smartly.

“California is responding very well to the drop in interest rates,” analyst Barbara Alexander of the Salomon Bros. investment firm says. There’s more pent-up demand than elsewhere in the nation, she explains, because high prices in California shut relatively more people out of the market even before interest rates rose in 1981. Now that demand can be met.

Joe Hanauer, the Newport Beach chairman of Coldwell Banker Residential Group, agrees. “The buyer getting in is able to afford the market,” he says.

That’s the young buyer, who may have grown up in Los Angeles or Orange County but, unable to afford houses there, is finding a home in the Riverside area. Brokers of the Century 21 system report houses selling fast in Riverside at $87,000. Last year, comparable Riverside houses cost $78,500.

That’s 11% appreciation in a year. Are we about to see a repeat of the 1970s housing spiral? Not yet, anyway. The lower-priced houses, reflecting pent-up demand, are moving. Higher-priced houses, waiting for the trade-up market, are not so hectic.

But a couple of questions arise, one philosophical, the other economic. Why, if the U.S. population is not growing rapidly, are we looking at active housing markets at all? Why, with all of the housing that we have built, have we not achieved stability?

One delightful answer is that we are living longer. Longer than whom? Than our forgotten ancestors. The English people, the Economist magazine reported recently, owned their own homes in the 750 years from William the Conqueror to the Industrial Revolution. But they owned them serially. When one generation would be marrying--forming a household, in real estate parlance--the previous generation would be passing on. The result: village housing markets were rock stable.

We, on the other hand--and happily--have increasing numbers of generations wanting housing. So we expand into the high desert, or Florida, or stay put and buy another house. Salomon Bros.’ Alexander even speculates, only half-jokingly, that the 1990s will see a boom in second homes. Why? Because the baby boom generation will be over 45 years old.

And the economic question is: When does a desire for shelter shade into speculation? The answer: when house prices grow at 20% a year, as now in New England. At that point, even with 20% down payments, a buyer can recover the equity in a single year. And that’s when the great American dream of Home Sweet Home begins to mingle with that other American dream, Get Rich Quick.