Housing Sees Daylight

The weakest housing market in a generation is at last showing signs of life. It's almost nostalgic. Colleagues at work and acquaintances at parties eagerly share the latest anecdote proving the market is rebounding. Local newspapers carry story after story about a recent happy seller or satisfied buyer. A stroll around the neighborhood shows that the "for sale" signs are coming down as well as going up.

Ask Karl E. Case, economist at Wellesley College in Massachusetts. After months of waiting, he put his house up for sale at $247,000 on Mar. 5. "People are coming out of the woodwork to look," he says. Seattleites Michael and Genevieve Dennis are now making home improvements to enhance their house's sales appeal--and they're not alone. In San Francisco, broker Helen Dawson sold a $428,888 house in three weeks at more than the asking price. And in New Orleans, first-time home buyers Carolyn Couvillion, 26, and her husband, Kevin, 27, plan on buying the house they now lease in the suburb of Metairie. "I believe that this is the time to buy before property values go up again, along with interest rates and everything else," says Carolyn Couvillion.

'BOTTOMING OUT.' For a nation of homeowners, it's about time. After all, victory in the gulf has bolstered consumer confidence, and economic prospects are better. The Federal Reserve Board's easier money policy has cut long-term mortgage rates to around 9.4%. And median income relative to median home-buying costs is the highest in years (chart). Says Michael Sumichrast, publisher of the newsletter Real Estate Perspectives: "The market is bottoming out."

This is the way the economy is supposed to work. As consumers and companies alike cut back in a recession, slumping demand pulls down interest rates, and lower rates lure buyers into the housing market. Every home purchase, in turn, is a tonic to the economy, as homemakers lay in everything from major kitchen appliances to zoysia grass.This housing recovery won't provide its traditional strong jolt to the economy, though. For one thing, interest rates are down only slightly, since they averaged a fairly stable 10.25% between 1985 and 1990. For another, buyers have reason to be cautious. The unemployment rate jumped to 6.5% in February from 6.2% the preceding month. Real consumer incomes fell at a 3.7% annual rate in the fourth quarter of 1990.

Bankers are leery, too. After losing a bundle of money on sour real estate loans, lenders are requiring bigger downpayments and demanding stiffer lending terms. They are even more wary of construction loans for builders. Total housing starts are down sharply (chart). And it is construction that typically accelerates the economy's recovery, as builders order up lumber, piping, paint, and other materials. Residential construction has jumped an average of 30% during the first four quarters following the trough of postwar recessions. Not this time, says Barbara Allen, housing analyst at Kidder, Peabody & Co.: "Instead of a big oomph to the economy, with a 30% to 50% rebound in construction activity, you'll get a 3% or so bounce."

DAMPERS. Longer term, two trends will dampen the demand for housing. One trend is demographic. New households are the driving force behind home purchases. The number of households in the 1990s will increase by some 1.1 million per year. That's 14% below the 1.3 million rate in the 1980s and 34% under the 1.7 million rate for the 1970s.

The other long-term damper is financial. House prices have mostly failed to keep pace with inflation over the past several years, and the outlook in the 1990s is for more of the same, says Susan Wachter, economist at the Wharton School. That means people can take their time finding a house without worrying that it will rapidly move out of reach.

All of these factors seem to be reflected in the spotty, if improving, situation that BUSINESS WEEK bureaus in 12 major metropolitan areas report. Modest sales increases and flat prices are typical. In many cases, expensive homes remain in the doldrums. But the lower-end part of the market is perking up.

In California, for example, prices overall are soft, and sales are off. But Kaufman & Broad Home Corp., the state's largest single-family homebuilder, is starting to see improvement. It offers home buyers 30-year fixed-rate mortgages at 8.5%. It has kept prices down by selling 1,700-square-foot homes, down from 2,000 square feet a year ago. "We are starting to see some light at the end of the tunnel," says Bruce Karatz, CEO at Kaufman."But it is still a long tunnel."

The split between the high end and the low end of the market in California is striking. Sales in coastal cities such as Los Angeles and San Francisco are sluggish--hardly surprising considering that the median home prices are around $200,000 and above $240,000, respectively. By contrast, such inland cities as Sacramento and Fresno, both buoyed by rising employment, are doing better. The median home price in Sacramento is about $135,000.

PICKUPS. The Rust Belt never enjoyed California's boom, and it has avoided the threat of a bust. Pittsburgh, Chicago, and Minneapolis are typical cities that are doing better, although expensive homes also languish there. But "expensive" means homes priced at $250,000 or more. In the Southeast, the market is flat. It will take six to seven months to sell off the inventory of unsold homes, vs. two to three months just a few years ago, says economist David Orr of First Union National Bank of North Carolina. And in the Southwest, the Dallas area can best described as "normal," says Ted C. Jones, economist at the Real Estate Center at Texas A&M University. Of course, after the boom and crash of the 1980s, normal in Texas is a relief.

Even New England is stirring after several dismal years. Pending sales of homes listed on the Greater Boston Real Estate Board Multiple Listing Service, for example, showed about a 50% increase for the first seven weeks of the year over the same period last year. But the recovery may be the nation's most fragile. The unemployment rate in Massachusetts is 9.3%. "High unemployment will be a drag on the market," says Christopher Dunn, executive vice-president at Boston Five Cent Savings Bank.

Still, the bottoming out of the housing market is positive for the economy. Residential real estate serves as collateral for about 23% of commercial banking assets, for example. A stronger housing market would give many a beleaguered bank some valuable breathing room.

Better yet, a stable residential market will make it easier for future home buyers to purchase a home. And as the more sensible housing market attracts less money from people treating housing as an investment, the money will be free to go elsewhere. If it goes into creating new jobs and enhancing the productivity of American business, the economy could emerge healthier in many respects than in previous recoveries.

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