Housing Blight

The endless slump goes on

Signs of the deep American recession continued to mount last week. The Labor Department reported that unemployment rose in March to 9%, the worst level in seven years and equal to the highest rate since the Great Depression. Perhaps the hardest hit of all industries is housing. Other Government figures released last week showed that in February, sales of new single-family houses dropped by 11.8% to the second lowest monthly rate in almost two decades. Says Realtor Marie Tighue of Trenton, N.J.: "It's a day-to-day battle to make sales." She recalls the bargaining for one house: "It was a $78,000 home with a $50,000 down payment and the rest in loans. The original mortgage was at 8.5%, but the bank said it wouldn't renew at that level. The buyers and the bank finally settled at 13.5%. We had listed the property for two years and almost lost it over the financing."

Even Ronald Reagan, who in January finally unloaded the Pacific Palisades home that he had been trying to sell for more than a year, calls the housing picture a "nightmare." Last week, in a talk to the National Association of Realtors, Reagan proposed a plan to boost house sales. He would allow pension funds to invest more in housing, for example, and make more first-time house buyers eligible for loans backed by the Federal Housing Administration. The realtors and the National Association of Home Builders, though, regarded the action as much too modest in view of the troubles the industry faces.

Despite the disastrous housing market, home prices are declining only modestly. After the very steep increases in the past decade, the median cost of a home sold in the U.S. dropped from $68,900 last year to $66,500 in February. In California, where house prices ballooned by 200% between 1975 and 1980, the cost went up another 5% last year and an additional 6% in January and February.

Those nominal prices do not take into account the array of so-called creative financing schemes that lower the final cost. As much as 70% of home sales involve some type of creative financing. Says Broker Bill Adams of W.T Adams & Co. in Atlanta: "We haven't made a house sale through a bank or an S and L in almost a year." The few houses that do not involve seller financing, he says, just "sit there and their real estate signs rust."

Under creative financing plans, the seller usually gives the buyer a private mortgage at less than market rates (currently 17.52%) for part of the cost of the house. Even some of these vaunted methods, though, are losing their appeal.

This has been the fate of the SAM, or shared appreciation mortgage. This program lowers the interest rates to, say, 12%, but gives the seller of the house a share of the profit that is presumably made when the home is eventually sold by the new buyer. Many sellers, however, do not like the idea of leaving their money tied up in someone else's home, especially now that the go-go years of real estate prices appear to be over.

Some people have become so desperate to sell their houses that they are turning to one of the oldest methods of transaction: the auction. In Southern California, where the inventory of unsold houses is 25% higher than it was a year ago, Kennedy-Wilson of Santa Monica, the area's leading home auction firm, has sold 325 condominiums and 100 homes at auction during the past twelve months, for a total of $90 million. Two months ago, in l 1/2 hours, the firm's auctioneers sold 62 condos at prices of $48,000 to $89,000. Says Kennedy-Wilson President Bill Stevenson: "We're getting the price down low enough so that demand can be filled."

In some areas, however, nothing seems to work. In Pittsburgh, the steel industry and its suppliers have been badly hit by the recession. Unemployment in some neighboring communities like Butler is up as high as 18%, leaving the area almost bereft of buyers. Paul Murphy, an agent for Century 21 in suburban Pittsburgh, reports that many people would like to leave the region to look for new jobs elsewhere, but can find no buyers for their houses.

Real estate people in all parts of the U.S. hope that sales will begin picking up if declining interest rates combine with an improving economy some time during the last half of the year. They point out that the large postwar population bulge is now into its 30s, which is a prime house-buying age. Says Jim Sherin, a spokesman for the New York State Association of Realtors: "There's so much pent-up demand out there that it just has to be let loose." Real estate agents, however, have been making such statements for more than a year.

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