MANAGING YOUR MONEY : THE RIGHT PATH : Up in the Air On the Cost of Housing
Across the country, desperate sellers are hatching strange and creative plots to ensnare prospective buyers: special financing, decorator allowances, Caribbean trips. One hopeful seller even appeared recently in a major newspaper polishing his bait--a Rolls-Royce that would be thrown in with his $1.5-million house.
As the number of anxious and motivated sellers grows, it would seem an ideal time for buyers to jump in. Indeed, both prices and interest rates are dropping. But so are the numbers of home sales.
So where are the buyers?
Initially, their dearth was attributed to the astronomical prices, which many potential buyers simply couldn’t afford. But as the latest housing downturn continues, the reasons have become more complex. Economic uncertainty makes consumers more cautious, and the threat of a recession and the Persian Gulf crisis have created ample uncertainty.
As a result, some buyers are waiting for prices to drop even further, a scenario many experts fully expect, and perhaps by as much as 20% in some areas. But it may be more than that. The traditional, frenetic “buy now, before it’s too late” psychology has been replaced by a more cautious approach as buyers catch their breath and ponder a decision.
Some have decided to rent until the current housing problems blow over. Others are putting off a move-up purchase until they are more confident about the economy--and their ability to sell their own house.
Yet if it’s a newly constructed house you want, this is the time to buy, say the experts. Once the bargains are gone, builders are unlikely to be caught again in the overbuilding trap.
Perhaps the brightest aspect to the decline in home prices is the resulting expansion in the pool of potential buyers.
For first time in years, the California Assn. of Realtors’ affordability index is improving. In June, the latest figures available, 18% of the state’s households could afford a house at the median price of $194,821. A year earlier, only 14% could afford the median-priced house, which cost $199,441. The median is the point where half the homes cost more than that price and half cost less.
In Los Angeles County, 15% of the households could afford the median price house of $215,029. A year earlier, only 10% could buy at the median figure of $220,253.
But, so far, the increasing affordability of homes is not stimulating buyers. Statewide, sales of existing single-family homes are down 14.9% from a year earlier, according to the latest figures. Sales of condominiums were down 9.3%. Meanwhile, sales of newly constructed homes are faring even worse.
According to the National Assn. of Home Builders, sales of new homes dropped 41% from August, 1989, to August, 1990, in the Western region of the United States.
The situation offers some bargains for the right buyers, particularly to a first-time buyer who doesn’t have to worry about selling another property and buyers who must act immediately.
“If you are a qualified buyer, there are motivated sellers,” advised John Flynn, a partner in Arthur Andersen & Co.’s real estate group. “I don’t know that waiting will get you a better deal, if you are willing to bargain and negotiate.”
This counsel is probably most true for buyers considering newly constructed homes. Although most expect the housing slump to continue another year or two, inventories of new houses will not last that long, said David L. Knowles, managing director of Salomon Bros., the New York investment house.
New regulations contained in the savings and loan bailout restrict the amount an institution can lend to a single builder, cutting off a traditional source of financing for many developers. And, because builders are having trouble borrowing, they will build less.
“The question of whether or not to buy, at least for new construction, is simple,” Flynn said. “Buy now, because builders are not going to build more for awhile.”
The situation is more complicated for the move-up buyer because, for those in the game, real estate is really just one big chain reaction. In order to buy, most people must first sell.
Prices of houses at or below the median price tend to be firmer than those above it. And houses in the lower end of the market usually sell faster because they have a larger pool of prospective buyers. These days, as the prices goes up, houses stay on the market longer and usually sell at a bigger discount.
Experts expect prices of most resale housing to continue their downward spiral for 12 to 18 months.
“You’ll see another 10% to 20% (drop) in the next year to year and a half,” said Lawrence A. Krause, chairman of a financial planning firm in San Francisco that bears his name. “Times are going to be tougher. It is naive to think that your area will be immune.”
Krause advises that buying a house only makes economic sense these days if you plan to live in it for several years. Otherwise, you should rent, he said.
“And if you (already) own, remember that it shouldn’t make a whole lot of difference to you if the value of your house goes up or down a little,” he added. “If it were listed on the New York Stock Exchange and lost five points, would you sell it?”
