Climbing Out of the Basement

By John Greenwald

The once bleak outlook for American housing is rapidly growing brighter

Anne Feltus and Mark McFarlane had looked long and hard for an affordable house in Houston, but the task seemed almost hopeless. Then in midsummer, interest rates suddenly went into free fall. Now the engaged couple is buying a two-bedroom house that will cost $873 a month in mortgage payments, fully $230 less than it would have before rates fell. Says Feltus, 34, who works in public relations for Exxon: "That was quite a saving."

Delighted home buyers have been swapping such tales from Boston to Berkeley as the three-year-old log jam that has cut back sales and brought about the greatest housing slump since World War II begins to give way. Bargain hunters are now trooping into real estate offices and tramping across construction sites in ever-growing numbers. SOLD signs are sprouting in front of homes that had been languishing on the market for months and even years. Says Carroll Dunham, an owner of the Dunham Co. Realtors in Old Lyme, Conn.: "The gloom and doom are slowly dissipating. The feeling is that things are going to be up, not down, from here on out."

A robust housing comeback would be a bracing economic tonic. The giant industry accounts for about 35% of the G.N.P. when products related to homebuilding, such as furniture and appliances, are considered.

Housing rebounds have helped lead the U.S. out of every one of the seven postwar recessions. Economists have therefore been watching the housing statistics for clear signals that the depressed industry is finally climbing out of the basement. Now at last there are some. Almost no one interprets them as heralding a quick return to the peak levels of the '70s, when housing starts surpassed 2 million units in no fewer than four years. But starts have fallen so low that there is room for spectacular improvement without touching historic pinnacles.

Last year housing starts sank to 1.08 million units, the lowest level since 1946, and most economists are expecting the 1982 tally to be slightly worse. Nevertheless, the outlook next year is for as many as 1.5 million new homes, with more in 1984 as the economy perks up.

The big come-on is the comedown in rates on conventional fixed-rate mortgages. A year ago, the mortgages cost a forbidding 18%. Now they average less than 14% across the U.S. Variable-rate loans, resisted by most borrowers but accepted as better than nothing after a lenders' market began to develop in 1980, are going for around 13%.

A veritable stampede has developed among home buyers eligible for Government-insured VA and FHA mortgages, which are going now for 12%, down from a high of 17.5% in October 1981. FHA offices around the country have been staying open twelve hours a day and sometimes seven days a week to process the flood of loan applications, but they are still falling behind. Eager mortgage seekers have been jamming the 68 offices at the staggering pace of 19,000 a week, an increase of nearly 500% over the year-ago clip.

House prices, which rose by an average of 17% annually throughout the 1970s, are also getting more affordable. Prices have been more or less flat since the spring of 1981 and have declined rather strikingly when inflation is taken into account. For example, since 1980 the Consumer Price Index has risen by nearly 28%, while the median price of new homes has grown by only 13%, to $70,700. (Note to nostalgia buffs: ten years ago the median home price was $27,600.) Last week, however, the Government provided evidence that housing costs may be heading up again. The Labor Department reported that the October CPI rose at an annual rate of 5.9%, due in part to a recent firming in home prices.

The decline in housing values in the past couple of years has been greater than the statistics show because so many home sellers have been forced to offer buyers financing at cut rates, a factor not reflected in prices. Now that mortgage money is flowing again, there are fewer such "creative financings." The best news in this for sellers, and for the housing market in general, is that homeowners are now getting cash when they move, which makes it a lot easier to plunk down the downpayment on their next home.

Hosts of other favorable housing trends are popping up. One of the biggest surprises is that the inventory of unsold new homes is currently at its lowest level since 1971 (see chart). Says Robert Gough, a housing specialist with the Massachusetts-based economic fore casting firm of Data Resources Inc.: "Given dropping interest rates and shrinking inventories, a growth in housing starts will have to follow." Other bullish signs include a lofty rise in October building permits, which were a full 60% above the depressed level of a year ago.

Builders are already profiting from the release of pent-up demand. Earnings of U.S. Home Corp., the largest single-family home producer, jumped nearly 60% in the third quarter when compared with a year ago. Ryan Homes Inc., the No. 3 builder, expects sales to grow by at least 25% next year.

Much of the mushrooming new construction is of smaller homes selling for less than $100,000. In Louisiana, for example, builders are slicing their two-bedroom floor plans to 1,200 sq. ft. or less and are moving them quickly for about $60,000.

The rising tide of residential purchases should also give a lift to many of the other things that make a house a home. Furniture manufacturers, whose business has been depressed for the past five years, expect 1983 sales to rise a healthy 20%. Experts estimate that every home sale eventually leads to the purchase of four major appliances, such as dishwashers and clothes dryers, to go with the house.

Real estate insiders insist that further improvements are needed before the housing rebound can become a boom. Interest rates will have to fall more, they say, because the monthly payments on mortgages of 13% or 14% remain beyond the reach of many buyers. Only about one-quarter of U.S. households, for example, have the income (more than $33,000) to support a $60,000, 30-year mortgage at 14%. At 12% a third of all families could be home buyers. The current rates, despite the drop, are still high, and deceptively so. Kenneth Rosen, chairman of the Center for Real Estate and Urban Economics at the University of California at Berkeley, points out that after adjusting for inflation, mortgage rates have not budged. Says he: "The real rate of interest has not declined at all."

In some parts of the country, in fact, housing remains stuck in the cellar. California builders went on a binge in the 1970s, and many now find themselves with large inventories of high-priced condominiums and houses. Uncertainty and a lack of confidence in the future are scaring off many consumers, particularly in the Midwest, where unemployment is ubiquitous. Says Bruno Pasquinelli, president of Pasquinelli Construction Co. in Homewood, Ill., whose business remains depressed: "It will take an upturn in steel and autos to bring customers back. People here are not buying homes unless they absolutely have to. We have to improve our economy first." That could happen sooner if housing, which has had much to do with the nation's current economic problems, should once again become part of the solution.

--By John Greenwald.

Reported by David Beckwith/Washington and Adam Zagorin/New York

With reporting by David Beckwith/Washington, Adam Zagorin/New York

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