Home Prices to Rise in ‘90s, Study Says

WASHINGTON — Which of the following statements is true?

1--”Real housing prices may well reach levels lower than those experienced at any time in the past 40 years.”

2--”Today’s homeowners have little reason to worry. Over time, home prices tend to rise at or above the general rate of inflation making housing a solid investment and key component in the financial security of the current and future generations of elderly Americans.”

Both are true, according to two Harvard University studies of the housing market.

It’s a case of dueling reports.

The first report, issued last year and titled “The Baby Boom, The Baby Bust and the Housing Market,” is about demographic trends and their effects on the U.S. housing industry.

When co-author David N. Weil predicted last year in a widely read Barron’s magazine article that because the baby boom had ended in a bust, housing prices could fall as much as 3% a year or by 50% by the year 2007, angry, frightened reactions could be read in publications across the country.

According to U.S. government data, home equity accounts for more than 40% of household net worth. The second largest category is interest-earning assets at financial institutions, at 14.4%.

That home ownership might no longer be the best hedge against the relentless march of inflation and the single smartest lifetime investment--providing triple benefits of savings, functionality and capital gains--could not be taken lightly, or without comment.

More than a year later, the summary heralding the latest Harvard report, entitled “The State of the Nation’s Housing,” began with the words: “Despite speculation in the media and elsewhere. . . .”

It went on to say quite the opposite of the earlier report:

“Housing prices are unlikely to ease during the 1990s. While house prices and rents have risen in some areas and fallen in others over the last several years, the national averages have largely tracked inflation.”

The latter report was co-authored by William Apgar and Denise DiPasquale, professors at Harvard’s John F. Kennedy School of Government and sponsored by the Ford Foundation, and is likely to be received with a sigh of relief.

Indeed, figures compiled by the National Assn. of Realtors back the second report.

“Overall, home prices are still stable, and the median price is still going up,” said an NAR spokesman. In May, the national median sales price was $94,800. In May 1989, it was $93,100, and it was $89,300 in May, 1988.

Apgar and DiPasquale contend that although demographic changes will slow demand for new construction, they will not lead to an actual decrease in the total number of households or overall demand. Demand will continue to be strong from baby boomers trading up and from the growing number of elderly.

To put it simply, demographics are not the most important force driving the housing market, said Barbara Allen, a housing analyst at Kidder Peabody, the New York investment house.

“Gloom and doom forecasts have been made since the early 1980s, but serious analysis of the issue reveals basically no demographic impact on the housing market,” Allen said.

“What is more important is job growth trends in a region. The ability of a region to attract jobs is crucial. That is what I look at in determining where the good housing markets are.”

In addition, the housing market is “highly localized,” DiPasquale said at a recent press conference when the report was released. Various markets will undoubtedly see ups and downs, but those swings will be mitigated by building activity.

In local real estate slumps, she said, “Building activity will slow until population and income growth expand demand and exert sufficient pressure on prices to trigger additional construction.”

And the elements that drive the actual cost of new construction--land, financing, local regulations, material and labor--are not likely to shift downward, said Christine Williams, vice president of Real Estate Research Corp. in Chicago.

“Unfortunately, that means there is no bright hope for those people trying to break into the housing market,” she added.

After a comforting nod to the 55 million people who own homes already--Apgar explained the impact of sustained high housing costs on those who live below the poverty line.

More than two-thirds of the nation’s renters paid more than half their income in rent in 1987. In the future, they will have to spend even more on shelter or settle for less desirable housing. Already, more than one-third of the nation’s low-income households live in structurally inadequate housing, he said.

For those with low to moderate incomes yet to snag the brass ring of home ownership, the goal will prove more elusive. “These potential buyers face a ‘Catch-22,’ ” DiPasquale said. “They lack the savings and wealth to secure a home, the very asset that has proven to be the best source of wealth accumulation for the vast majority of American households.”

The report also found:

--Following six years of declines, the after-tax cost of home ownership moved up in 1989, further away from the more affordable levels of the early 1970s.

--Nationwide, 2 million more households would own homes today if home-ownership rates had remained at 1980 levels.

--Even with a 10% down payment, only 20% of white renters and 4% of black renters have sufficient income and savings to buy a typical starter home.

--Median gross rents have stabilized at near-record levels, while rents paid by poverty-level households continue to rise as low-cost units are lost to abandonment or upgrading.

But after scrounging through what seem to be discouraging statistics, Apgar uncovered an old-fashioned silver lining. The current construction slump offers “an opportunity to redirect national resources to address the unmet needs of the nations’s low- and moderate-income households,” Apgar said.

DiPasquale said the answer lies in a cooperative effort between the public and private sectors.

“As a nation seeking to address the growing inequality in income and wealth,” she said, “there is no better place to begin than by expanding the income range and racial and ethnic diversity of households able to purchase a home.”

Pennsylvania has become the first state to limit fees that realtors can charge for originating loans, and has established an important legal precedent as other states continue the debate reported on recently in this column.

Although it is illegal for a realtor to accept a fee for a simple referral to a lender without providing any service, many realtors now provide a service--filling out the loan application. And they charge for that service.

The new limit in Pennsylvania is $100 for each transaction. Although some realtors have been providing the service free, others have been charging as much as 2% of the loan amount.

Mortgage bankers and several consumer groups want the Real Estate Settlement and Procedures Act amended to make the practice illegal. Realtors, however, contend that mortgage bankers want a federal law to keep out competition.

Of the Pennsylvania Real Estate Commission’s decision, Brian Chappelle, vice president of the Mortgage Bankers Assn., said, “We believe it is a step in the right direction. It precludes real estate brokers from accepting excessive fees.”

But Norman Flynn, president of the National Assn. of Realtors, countered: “Whenever the services that a realtor performs are comparable to those that a mortgage banker or broker performs they should be allowed to charge comparable fees. To restrict those artificially restricts the marketplace and may be detrimental to the consumer.”

HOUSEHOLD INCOME AND HOME OWNERSHIP Household income and wealth in 1989 dollars.

Owners Households Homeownership Median Median Median (Thousands) Rate Income Net Home (Percent) Wealth Equity Total 83,347 65.6% $31,656 $86,563 $47,508 Age 25 to 34 19,480 42.9 33,917 40,532 22,074 35 to 64 45,877 71.2 37,309 102,661 56,228 65 and Over 17,990 75.8 15,828 89,717 50,875 Race White 64,418 69.9 33,917 94,416 50,875 Black 11,984 45.0 18,089 38,321 30,599

Renters Median Median Income Net Wealth Total $19,220 $5,116 Age 25 to 34 20,350 5,081 35 to 64 22,611 5,540 65 and Over 7,914 3,392 Race White 22,611 7,729 Black 13,002 735

NOTE: Data are for 1986 and include only households with heads aged 25 and over. Due to small sample size, there is no separate category for Hispanics. SOURCE: Federal Reserve Board, 1986 Survey of Consumer Finance, and “The State of the Nation’s Housing 1990.”