VIEWPOINTS : 1987: Looking Ahead to a Year of Big Changes : Affording Homes
In 1987, you’re likely to see big changes in just about everything you buy. If you’re planning a vacation, you’ll notice differences whether you drive or travel by air. If you want to buy a home, you’ll be watching prices and mortgage rates closely. Eating out? You’ll see some unusual, new menus. The worlds of entertainment and retailing are in a state of upheaval. And, with a new tax law, investing may be more tricky than ever.
The Times polled experts in eight fields for their outlook on what 1987 will mean for businesses and consumers.
Home buyers--and sellers--had a good year in 1986. And things look good for 1987.
Housing affordability is the key. In the early 1980s, when mortgage interest rates rose as high as 17%, the typical American family earned less than 70% of the income required to qualify for a mortgage on the median-priced resale home. Since then, home price increases have been modest, interest rates have declined to around 10%, and incomes have generally risen.
The typical family now earns 108% of the income required to purchase a median-priced resale home. With mortgage rates expected to stay low and home price increases roughly equaling inflation, next year should be a good one for home buying.
Of course, some segments of the market will do better than others. Resale housing, with prices 15% below newly constructed homes, will have the strongest year. The sales rate should increase slightly from 1986 to 3.5 million homes. (Still, that’s somewhat below the housing heyday of 1978-79.)
Regional performance will be mixed, but disparities won’t be as wide as they were in 1986. Look for a slower sales pace in the Northeast with the most pickup in the Sunbelt. Existing home prices will go up about 4%--more in the most active markets.
While construction of single-family homes should also be strong--about 7% fewer homes will be started in 1987. Sales will be more sluggish in the highest price ranges because the income tax deductions for home ownership, while retained intact, will be less valuable to upper-income households as individual tax rates are reduced. Even so, about 1.1 million single-family homes will be built, a very healthy rate.
Rental housing will not fare as well. The combination of no tax incentives for construction of apartments, no use of real estate losses to offset other income and the highest apartment vacancy rate in years will continue to depress multifamily construction. The total number of multifamily housing units started in 1987 will likely be 20% below 1986 levels.
What does this mean to renters?
Rents will rise in 1987, perhaps by 10%, as owners of apartment buildings attempt to achieve positive cash flow. The ability to raise rents will be moderated, however, by the number of vacant apartments nearby.
These rent increases will spur some tenants to purchase homes immediately but will cause long-term damage to the home ownership plans of households who already find the accumulation of a down payment the biggest obstacle to owning their own home.
