Home Is Where the Market Stability Is
Until late last year, Chail and Brian Norton planned to invest in the stock market to patiently build a down payment for a home. They took an investment class and interviewed financial planners.
But as Wall Street plunged in the last few months of 2000, the Nortons had a different idea: They gave up on stocks and immediately plowed their savings into a two-bedroom home in Hawthorne.
“With the stock market going down, we figured why not take that money and buy a house?” said Chail Norton, 28, a paper-conservation technician at the Los Angeles County Museum of Art. “We feel at this point it’s probably the safest place to put our money.”
Their decision helps explain one of the biggest surprises of the current economic slump: The housing market, usually one of the first victims of economic weakness, this time is a pocket of remarkable strength.
Homes sold at a record pace nationwide in March, and housing starts rose 1.5% in April even as the unemployment rate jumped to a 2 1/2-year high.
Housing’s resilience is more than a short-term story. Home sales and prices in most major cities remained on an even-keeled ascent through much of the 1990s--in stark contrast to the industry’s sometimes wild fluctuations in the ‘60s, ‘70s and ‘80s.
“[Housing] is much less boom-and-bust than it was previously. There’s no doubt about that,” said John Karevoll, an analyst at DataQuick Information Systems, a La Jolla housing research firm. “That doesn’t mean we won’t experience ups and downs. It’s just that those ups and downs are going to be much less severe.”
The housing market still depends heavily on the general economy and on mortgage rates. If a recession strikes and unemployment rises sharply, or if interest rates jump significantly, housing would surely get jolted.
And trouble may already be brewing in the Bay Area, once the nation’s hottest market. Amid the technology-sector shakeout, home sales tumbled 40% in Santa Clara County last month and median home prices skidded 5.4% from a year ago, according to the California Assn. of Realtors.
Nevertheless, a confluence of factors has made the housing market nationwide far less vulnerable to the violent cycles of the past, analysts say.
Aging baby boomers and new immigrants are providing a regular stream of buyers, particularly in California. Scarce land and a relative dearth of sellers have capped supply in many areas. And innovations in the mortgage market have made financing easier than ever.
Lately, housing has even gotten an assist from a former rival: the stock market. The slump in share prices over the last year has further boosted the appeal of home ownership for many Americans--like the Nortons--as home prices have continued to rise while stocks have suffered their worst losses since at least 1987.
The housing market’s continuing strength has been a bulwark for the economy. By acting as both a psychological and financial antidote to corporate layoffs and tumbling stock prices, housing is helping to stave off a recession.
“It’s a key cog that’s helping to provide support . . . at an important time when the economy needs support,” said Joshua Feinman, chief economist at Deutsche Asset Management in New York.
Home Buyers Benefit From Slowdown
In part, housing has held up well because this economic slowdown has unfolded differently than many others: It has been business-led rather than consumer-led. And home buyers, at least, have benefited from the slowdown.
Declining business spending beginning in mid-2000 helped trigger a plunge in long-term bond yields that dragged down mortgage rates.
At 7.14% today, the average 30-year fixed-rate mortgage is down from 8.64% a year ago, and not far from the 1990s low of 6.49% in 1998.
Besides fueling home sales, lower mortgage rates have prompted a refinancing wave that is helping consumers to keep spending.
Overall, the health of the housing market is a far cry from what some economists expected a decade ago.
As the 1990s began, some analysts predicted that demand for homes would tumble as the massive baby boom generation was followed by the smaller baby bust contingent. Also, many older people were expected to give up their big homes in favor of simpler living in apartments or condominiums.
A 1989 study by Harvard economist N. Gregory Mankiw and graduate student David Weil predicted that demographic shifts would push home prices down an average of 2% to 3% annually for 10 to 20 years.
Today, the study’s authors maintain that their demographic analysis was correct, but say it was impossible to foresee the forces leaning the other way.
“No one predicted in advance the amazing growth in the U.S. economy, the fall in interest rates and the growth in [stock] prices,” said Weil, now a Brown University economics professor.
Although Southern California suffered a housing bust in the early 1990s, that was the exception nationwide more than the rule.
Existing-home sales nationwide moved steadily higher for much of the decade, hitting a peak in 1999 when more than 5.2 million homes were sold. In the first quarter of this year the annualized sales pace jumped again, reaching a record 5.28 million homes.
The median home price nationwide also climbed steadily in the 1990s, but not so fast as to overheat the market. The median price, $139,700 as of the first quarter, rose an average of 4.1% a year in the ‘90s, compared with 4.9% in the 1980s and 9.9% in the 1970s, according to the National Assn. of Realtors.
Some experts contend that housing remains as vulnerable as ever to an economic downturn and that the storm lashing the rest of the economy will eventually damage the housing market.
“If the economy stays weak like this for the rest of the year, I would expect to see the housing market really soften,” said Scott Grannis, economist at Western Asset Management in Pasadena. “Lower interest rates can’t help forever.”
To be sure, housing is showing some signs of fraying.
Though the median prices of homes sold in Los Angeles and Orange counties continued to rise in April, sales were down slightly from a year earlier, according to DataQuick.
Also, builders in Northern California have reported a jump in the number of buyers canceling orders--fallout, it appears, from the technology sector’s collapse.
What’s more, though stock prices have rebounded in recent weeks, the still-heavy losses in many portfolios could catch up with housing later this year, some say. Even with the stock market’s recent rally, investors still have lost more than $3 trillion in the last year.
Sales, Prices Could Stay on Upward Trend
Nevertheless, many other analysts point to a bevy of forces that could help keep housing sales, and prices, in an upward trend for much of this decade, even if the market softens temporarily:
* Buying demand from baby boomers and immigrants should remain strong for years.
Though buyers age 35-44 account for the lion’s share of home purchases each year, ownership rates actually don’t peak until people reach their late-60s.
According to Fannie Mae, the mortgage financing giant, 68.3% of people age 35-44 own homes. That expands to 80.4% for those 65 and older.
The oldest baby boomers are about 56 now.
Likewise, the burst of immigration, especially into California, is pacing homes sales. For immigrants who have been in the U.S. for 15 to 20 years, home ownership rates equal those of nonimmigrants, according to Fannie Mae. After 20 years, the immigrant rate is higher.
* As important as continued demand, the supply of homes has been, and is likely to remain, limited.
New-home building, although steady, has been more modest than in the past. The 826,738 new single-family homes built in California from 1991 through 2000 was a 28% drop-off from the 1.15 million put up from 1981 through 1990, and the lowest number of new units in at least four decades, according to the Construction Industry Research Board.
A limited new-home supply has been key to preventing the overhang of unsold homes that has plagued the market in the past, analysts say.
Several factors lie behind the trend, but three of the biggest are scarce land in urban areas such as Southern California, anti-growth initiatives in many communities nationwide, and the disappearance of freewheeling savings and loans whose speculative 1980s lending to builders deepened the real-estate-led 1990 recession.
As for existing homes, there has been a relative dearth of sellers. The strong economy has coaxed many people into buying second homes rather than selling out of their first.
The supply of homes on the market is near all-time lows nationwide and in California. The state inventory averaged only a 3.2-month supply last year based on the sales rate, a record low in the 19 years that the California Assn. of Realtors has tracked the data.
* The odds of a housing bust have been lessened by the general absence of outlandish price spikes seen in the past.
In Los Angeles County, for example, home prices have risen at a 9.3% compound annual rate in the last two years, according to housing-research firm Case Shiller Weiss Inc. By contrast, from mid-1987 to mid-1989 they jumped 21.3% a year.
In San Francisco, however, prices have outpaced their scorching 21.3% peak rate from late 1987 to late 1989. In the last two years, prices have surged 23.6%.
Though prices nationwide have risen enough in recent years to push some potential buyers out of the market, rising incomes and low mortgage rates have counteracted the price effect. The result is that, overall, housing remains within financial reach for most people, data show.
“People are not pushing their finances to the edge” to buy homes, DataQuick’s Karevoll said. “It’s not like the way it was back in 1989, when everybody was pushing everything to the very edge and hoping they’d make it.”
* The evolution of the mortgage market and improvements in technology have helped smooth the cyclical fluctuations that dogged housing in the past.
Mortgage lenders now have risk-analysis software to more adeptly screen out the least credit-worthy. At the same time, a wide variety of mortgage choices make it easier for consumers who can’t qualify for traditional financing.
Improved technology has made the refinancing market highly efficient, which has made it easier and cheaper for homeowners to cut their monthly payments. Just a few years ago, the rule of thumb was that rates had to fall 2 percentage points below a homeowner’s existing mortgage rate to justify the cost of refinancing. That no longer holds today.
The effect has been to make some people more willing to buy homes even when mortgage rates tick up, experts say. Rather than feeling compelled to wait in the hope that rates fall back, people pull the trigger knowing they can easily refinance if rates slide back.
While the housing market may enjoy support from these factors, the most important force driving sales may be more emotional than technical: Most Americans would rather pour cash into their own homes than pay rent to landlords.
Many people also believe--rightly or wrongly--that owning a home is the surest path to long-term financial security.
“It’s the largest, technically safest savings account that we can think of right now,” new homeowner Chail Norton said.
And indeed, for millions of families, the equity in their home still is their biggest single source of wealth.
Americans’ home equity now exceeds $6 trillion, up from $5 trillion in 1998 and $4 trillion in 1991, according to the Federal Reserve.
Though the Fed calculates that stock in the hands of the public is worth $11.6 trillion, that wealth tends to be concentrated in a relative few households, whereas housing market wealth is somewhat more broadly dispersed.
Finally, the U.S. tax code has long been structured to encourage home ownership. Mortgage interest and property taxes are deductible; and the federal government allows homeowners to escape capital gains taxes on the first $250,000 of home-sale profit. For married couples filing jointly, it’s $500,000.
Yet for many, the biggest attraction in owning a home may have less to do with financial gain than with a gaining a sense of place and freedom.
“People don’t view their homes primarily as financial assets,” said David Berson, chief economist at Fannie Mae. “They view them as a very nice place to live.”
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Most Expensive Markets
Here are the median home prices in the first quarter of this year for the most expensive metropolitan areas in the United States, not seasonally adjusted:
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Median home price* % change from Metropolitan area 1st qtr. 2001 1st qtr. 2000 San Francisco $483,300 +15.5% Boston 345,100 +13.9 Orange County 337,500 +12.4 San Diego 284,700 +13.2 Honolulu 280,000 -3.1 Bergen/Passaic, N.J. 279,000 +10.0 Newark, N.J. 250,300 +9.1 New York 250,300 +13.5 Seattle 235,700 +4.2 Nassau/Suffolk, N.Y. 227,300 +8.7 Los Angeles 225,200 +11.5
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* Preliminary figures
Source: National Assn. of Realtors
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A New Era for Housing?
Sales of existing homes and construction of new homes grew steadily throughout the 1990s--a striking departure from the booms and busts of previous decades.
*
Existing-home sales have climbed at a steady pace since 1990 . . .
Sales of existing homes, in millions
2000: 5.1 million
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. . . and developers have built new homes at a restrained but consistent pace.
Housing starts, in millions
2000: 1.59 million
Sources: Bloomberg News, Times research
