Unlike Stocks, Home Prices Rarely Collapse
The headline in Barron’s financial weekly--”The Coming Collapse of Home Prices”--was an attention-getter.
Understandably. Most people regarded last year’s stock market collapse as distant thunder, affecting them only indirectly. But house prices are something else. Home equity represents the life savings--over 60% of the net worth--of those who own a home and the dream of those who want to own.
That’s why the Barron’s feature, an interview with Wall Street money men Michael Aronstein, Charles Minter and Stanley Salvigsen, was a grabber. The three, who manage pension and mutual funds under the name Comstock Partners, said they now see the same buying and borrowing frenzy imperiling real estate as preceded last year’s stock market crash.
They are not alone. Merrill Lynch’s Boston-based investment strategy group also predicts a decline in house prices because people are taking out home equity loans in record numbers--increasing the dangers of defaults if interest rates continue to rise.
Yet statistics from the world of real estate paint a different picture. House prices in Orange County are up 20% in the last year, says the National Assn. of Realtors, and up 19% in Los Angeles, 12% in San Diego and 15.5% in San Francisco. Nor is California a special case; prices are also up in Baltimore, Detroit and Seattle. Even in Houston, Tulsa and Salt Lake City, depressed prices have shown some bounce in the last six months.
So what’s the story? That housing steps to a different drummer than the one Wall Street hears.
Housing markets respond to local issues, says Kathleen Connell, director of UCLA’s Center for Finance and Real Estate. In Southern California, for example, scarcity of building sites, due to zoning and environmental considerations, is driving up developers’ costs and new home prices in today’s boom. “And no-growth initiatives will further affect prices,” says Connell.
New Buyers Attracted
Meanwhile, collapse is a word almost never associated with home prices, says Kenneth Rosen, head of the Center for Real Estate at UC Berkeley. Unless there’s a depression, says Rosen, prices don’t collapse but tend to fall back moderately after a sharp rise. Prices are off 10% to 20% in the Northeast, for example, after doubling and even tripling in the last four years.
Why the moderation? One reason is that people take houses off the market rather than sell at distressed prices, and another is that falling prices attract new buyers--presuming the local economy hasn’t capsized.
Even in Houston, where more than 100,000 jobs left town while overbuilding continued right up to 1983, prices are off only 26% from the peak, says Al Ballinger of the Center for Public Policy at the University of Houston. To be sure, some Houstonians saw their home equity wiped out, but others could get more for their houses today than they could in boomtime 1980. And the outlook is for prices to rise again by 1992, when supply and demand come into balance.
Why such confidence? Why is it assumed that house prices will go up? Their track record for one thing--for the last 40 years house prices nationally have risen faster than the consumer price index. Demographics for another--the number of baby boomers now forming families and wanting houses indicates strong demand for almost another decade.
But there are worries. First-time buyers--who make up 40% of the market, according to Century 21--are having trouble qualifying for mortgages at today’s interest rates. Also, the growing number of home equity loans could slow the move-up market because you can’t both borrow against equity and use it as down payment on a new home.
Such market worries, however, pale beside economic depression. California house prices can go down, too. A landmark study by Robert Williams, now professor emeritus at UCLA, showed Los Angeles house prices declining steadily from 1925 to 1940 (from a median $7,660 to $4,200) and again in the recession of 1948-49.
But barring a return of depression, a house beats almost any other investment, for tax deductions and appreciation. And, unlike stocks and bonds last year, its price almost never collapses.
