TIME: Almanac 1995

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<text id=89TT3291> <title> Dec. 18, 1989: Money Angles </title> <history> TIME--The Weekly Newsmagazine--1989 Dec. 18, 1989 Money Laundering </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 57 Money Angles When a House Is Just a Home </hdr><body> Until recently, Newton's First Law was that home prices could only go up. Now residents of that Boston suburb -- and homeowners nationwide -- are having apples dropped on their heads. Suddenly a lot of people are talking about home prices going down. And I don't mean just in Houston (actually, they've begun to recover in Houston) or Billy Joel's penthouse on Central Park South, first offered at $2.8 million, then at $2 million, then $1.5 million, now $1.1 million -- and still unsold. Your average home may be affected too. PREPARE FOR A DROP IN PRICE OF HOUSING, warns columnist Hobart Rowen in the Washington Post. "Experts agree that the nation may be facing a serious drop in demand for housing over the next 20 years, because the Baby Boom of the 1950s has given way to the Baby Bust of the 1970s." MORTGAGE CEILING LOWERED, reports the New York Times. "The ceiling on the size of single-family home loans purchased by the Federal National Mortgage Association is declining by $150, to $187,450 next year, the first drop in at least a decade." WHEN HOUSE PRICES FALL, chimes the Economist. "Two generations of Britons have grown up treating houses as the perfect investment. But a fundamental change is afoot. The engine of demography that helped drive houses up is now going in reverse." The difference is most dramatic at the top. Homes in Connecticut that shot up to $2 million may now fetch only $1.3 million. It's not so bad in the real world -- three-bedroom homes in my sunny but unfashionable Miami neighborhood that rose from $65,000 to $85,000 over the past two or three years are still $85,000. But the notion that real estate prices will always go up, once common knowledge, like the notion that grapefruits can be eaten only in halves, is finally subject to doubt. After decades of steadily rising prices, we could be in for years, if not decades, of relatively poor performance. In one sense this is good. (And of course it's very good if you don't yet own a house.) In the U.S., we need to invest relatively less on expanding our living space and more on retooling our factories. We need fewer real estate agents and more teachers, fewer mortgage brokers and more engineers. So if people get the notion they'll make more money investing in stocks and bonds than in homes -- good! To succeed long-term, we need to save a little more and consume a little less. Granted, building a home or installing a pool isn't exactly "spending" the way flying to Rio is -- the home has lasting value. But neither is it a productive investment that makes the economy more efficient and competitive for the future. Sluggish home prices are also good news in the drive to dampen inflation. Returning to the days of negligible inflation, if we eventually can do so, should also mean returning to the days of low interest rates (from 1880 to 1965, home mortgage rates above 6% were all but unheard of), and that would be good news for the economy -- and for future home buyers. So if the bull market in homes really is over, that's not all bad -- unless it gets out of hand. It's one thing to have prices trail inflation for a number of years, quite another to allow a stock-market-style 40% crash in prices. That would leave the banks owning an awful lot of houses and the Government owning an awful lot of banks, which is why the Government is unlikely to let it go too far. The banks and the Government already own an awful lot of homes -- 250,000 would be a rough estimate -- which alone is reason to expect prices to be weak. The Resolution Trust Corp., set up to sell off the holdings of hundreds of failed S&Ls, is pledged to avoid triggering a price crash. Yet this is an arm of the same Government, after all, that actually lost money auctioning off confiscated drug loot. A house near me worth a minimum of $65,000 was recently offered for sale by HUD for $50,000 (mistake No. 1). I bid $58,100, but lost it to a bid of $54,000 because the Government decided to accept the lower offer even before the bids were opened (mistake No. 2). One bumbled sale a real estate depression does not make. But if it's happening in my neighborhood, you have to wonder whether it won't be happening in others as well. If prices come down and people feel poorer, consumer spending could slow a bit. Other factors may keep the economy humming, but one thing that's bound to slow is the turnover of houses. People are stubborn when it comes to selling their homes at less than they were counting on, let alone at a loss; and, especially after allowing for selling expenses, the equity available from the sale of one's first house may now be less, not more, than what's needed to trade up to a new one. Homes can still be a good investment -- much of my own money is in real estate, and so is much of the money of most of the successful stockbrokers I know (they sell stocks; they buy real estate). Even if there are fewer baby boomers entering the new-home market, the population continues to grow, and as it becomes wealthier, it will want more living space. So don't buy the new conventional wisdom unreservedly. But even in Los Angeles, where the whole point is to spend more than you can afford, rising values are no longer a given. So it's more important than ever not to buy a house you can't afford. And more sensible than ever to consider renting, if your career requires you to move often, incurring what can be upwards of 10% in commissions, closing costs and mortgage points each time you do. Rising home prices may not pay for Junior's education or Senior's retirement. Some real money may need to be set aside as well. </body></article> </text>