Don’t bank on the home as an ATM

For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.

There have been booms and busts along the way, but from the second half of the last century through the start of this one, nothing derailed the real estate locomotive on its uphill climb. The train stalled here and there and rolled back now and then, but each time it roared back up and got homeowners to the mountaintop.

Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.

The economic fundamentals that drove home values up in the 20th century -- sustained growth in incomes, population and household wealth -- have been sputtering for decades. Though the future isn’t necessarily bleak, economists say there’s no reason Americans should continue to see a home purchase as a path to wealth.


“We can no longer assume that housing will be as good an investment for the future as it has been,” said Robert Reich, public policy professor at UC Berkeley and U.S. Labor secretary in the Clinton administration.

“We can expect a gradual rise [in home values], but not the bonanza we’ve become accustomed to between the end of World War II and 2006, and especially the last 20 years.”

Millions of homeowners have been rewarded handsomely as house values climbed steadily for decades after World War II. Houses in Valencia, for instance, sold for $22,000 to $33,000 in 1967 when that suburb was brand-new. Many of those homes sold in the mid-$500,000 range during the housing bubble and are now hovering in the high $300,000 range, property records show.

If you paid $33,000 for a house in 1967 and sold it in 2006 for $550,000, the annual return would be about 7.5%. If you missed the peak and sold this year for $375,000, you’d still have about a 6% annual return. Adjusting for inflation, $33,000 in 1967 would be equivalent to about $213,000 today.

But a broader look at home prices over time in Southern California shows that price appreciation usually has been more gradual than magical.

If you bought a home in 1988 in Southern California for the median price of $133,500 (according to MDA DataQuick) and sold it in August for the median price of $275,000, that would represent about a 3.5% annual return. If you had sold the same home at the peak price of $505,000 in 2007, it would have yielded about a 7.25% annual return.

The same home purchased in 1988 and sold 10 years later, in January 1998, at the median price of $159,000 would have returned about 1.8% a year. Those more modest returns were quickly forgotten during the bubble years, when, for instance, the median Southern California home price shot up from $265,000 in July 2002 to $505,000 in July 2007 -- an annual return of 13.8%.

The housing market may be hitting its bottom, as median prices lately have held steady or declined only modestly in many regions. But Reich and other economists say there are many fundamental reasons the coming decades won’t repeat the kind of dramatic rise in real estate values that previous generations experienced.

For one thing, many of the baby boomers who fueled the demand for homes in the 20th century are now retired or retiring, and as they move out of their homes, there are fewer younger people to purchase the houses. The years after World War II were exceptional, says Thomas Lawler, an influential housing consultant and a former Fannie Mae official.

“You talk about pent-up demand; you had all these people coming out of the Great Depression and others coming back from World War II at the same time, then that was followed by the baby boom” -- a convergence of events we won’t see again, Lawler said. “There were all kinds of demographic conditions conducive to more positive increases in real home prices. Those fundamental things started to shift a while ago.”

Despite rancorous debates over immigration, the influx of new residents isn’t enough to slow the aging of the population. In fact, the Census Bureau estimates that California’s working-age immigrant population grew an average of only 2% a year in this decade through 2007, down from 4.4% in the 1990s and 9.5% in the ‘80s.

Those who are 55 and older are now 25% of the population, and the Census Bureau projects that the 55-and-older group will climb to 31% of Americans in 2040. That’s up from 21% in 1980.

The median age in the U.S. has climbed to 36 today from 30 in 1980, and the Census Bureau projects that it will level off at 38 in 2030.

Not only is the population aging, but also the workers who are replacing today’s retirees are by some measures earning and saving less than their parents and predecessors -- which could mean they have less to spend on a home purchase.

Average weekly earnings, adjusted for inflation, peaked in 1972 and today they are lingering at roughly 1980 levels, according to the Bureau of Labor Statistics.

Household debt stands at 124% of income, according to the Federal Reserve, because people are earning less or spending more, or both. That’s nearly four times the 36% level of 1952 and close to double the 69% level of 1985.

With greater debt loads and flat wages, Americans have less to spend on houses, condominium units and everything else. That’s a greater problem today because consumer spending has replaced investment as the chief driver of the U.S. economy, accounting for roughly two-thirds of economic output. In the current economic model, consumption needs to rise to fuel the economic growth necessary to bolster home prices.

Also cutting into money available for housing: Americans are devoting more of their income to healthcare and retirement savings. And expenses such as college tuition have outpaced inflation and wage gains.

Reich has noted that people developed “coping mechanisms” so they could keep spending as wages began flattening in the 1970s. More women entered the workforce; the percentage of working women with school-age children has nearly doubled, to about 70%, since 1970, Reich said. The typical American worker toils two weeks more per year than 30 years ago, Reich said, and more than the average European or Japanese worker.

The final coping mechanism, according to Reich, was easy credit that allowed people to buy homes they couldn’t otherwise afford and supported other consumption by borrowing against inflated home equity.

Still, Reich isn’t forecasting a catastrophe.

“People in the middle class, although stressed, will still want homes, and homeownership will still be part of the American dream,” he said. “House prices will continue to rise, just more slowly than they did in the past 70 years.”

Leslie Appleton-Young, chief economist for the California Assn. of Realtors, said that the state’s median home price used to rise and fall roughly in line with the national median. That changed this decade, Appleton-Young said, when easy credit pushed home prices up faster in coastal markets than in the rest of the country.

“It didn’t really get out of whack until about four or five years ago,” she said. “It was tied into financing.”

With lax mortgage standards a thing of the past, at least for now, Appleton-Young said, home price increases will be more moderate in the future, which should lead people to “a much more realistic assessment of why they’re buying a home. They’ll do so more for the consumption value; it’s a place to raise your family, not your nest egg.”

Lawler, the housing consultant, said the latest real estate bubble led to some distortions in behavior that were probably one-time events.

People bought larger and more lavish houses than they had in the past, for instance, because “if you saw the house as an investment, and you wanted more of your money in real estate but did not want to be a landlord, you’d buy the biggest house you can,” Lawler said.

Forty-two percent of new homes in 2008 were 2,400 square feet or larger, up from 10% in 1970, according to the National Assn. of Home Builders.

The view of a house as the centerpiece of a family’s wealth has been more prevalent on the coasts than in middle-American markets where home prices have been more stable, Lawler said. Even in prosperous coastal regions, the expectation for housing’s financial performance will moderate, he said.

“In the period post-World War II, you bought a home, gave your family a great place to live relative to the alternatives, and if all went well, in 20 years you didn’t have a mortgage,” Lawler said. “That’s what people ought to go back to.”