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Home Loan Creativity Declines Along with Interest Rates

November 09, 1986|DON G. CAMPBELL | Times Staff Writer

"I don't know. Under the same circumstances I'd probably do it again. It was a cheap way to get in at a time when I couldn't have done it without this option. After all, I only put $10,000 down--it was the only way I could qualify."

"It" was a land-lease arrangement under which Carolyn Wood, in 1981, was able to buy her $145,000-home in the Park Lane subdivision at Rancho La Costa in north San Diego County--a pleasant cluster of detached, single-family homes in the rolling green hills overlooking Batiquitos Lagoon near Carlsbad, a development of the Newport Beach-based Woodward Cos.

Five years later, the harsh economic clouds that hung over the real estate industry at that time--primarily mortgage interest rates that hovered in the 16% to 17% range--have lifted in most respects.

But, did the need for the welter of "creative financing" techniques that builders, developers and individual sellers drew on in the early '80s--of which the land-lease was only one--die out when interest rates plummeted?

And, in retrospect, did any of them work well enough to justify their revival if soaring interest rates should return?

The consensus: Some of the techniques were so blatantly ill-conceived that they should never have been tried in the first place. Others, though useful, have been dealt a judicial death-blow in the interval. Others, some feel, never got a fair trial, and still others worked reasonably well--well enough to put on "hold."

But, at present, state real estate experts say, the natural momentum of a healthy market is sufficient to preclude the need for any financial sleight-of-hand. This, despite an ominous trend that, at least for the first-time home buyer, casts almost as much a shadow over his ability to buy as the interest rates of the early '80s did.

While interest rates are back in what most observers consider an affordable range--fixed-rate mortgages at about the 10% level, that is--there is, in Southern California at least, another "ghost" still hovering over the real estate market:

Abnormally high home prices that, particularly for first-time buyers, almost make interest rates a moot point. And while--except for a few economically depressed areas--this is national in scope, California's hyperventilated real estate market simply exacerbates the problem .

At the height of the money crunch in 1981, the median-priced Southern California home was priced at $109,507, according to a survey conducted for the Real Estate Research Council of Southern California. As of mid-summer, 1986, however, the median price stood at $137,117, up from $119,358 just a year and a half earlier.

Thus, even with a "normal" interest rate of, say, 10% (fixed-rate for 30 years), today's buyer is looking at a median home 25% higher in price than it was five years ago and requiring a conventional down payment of more than $27,000, monthly payments for principal and interest of about $964, and an annual income of roughly $40,800.

Why such a resounding jump in prices in such a short time interval--the return of a "good" real estate market notwithstanding--when inflationary pressures have slackened so markedly?

"There's no great mystery about it," Richard Rosenthal, president of the California Assn. of Realtors, feels. "The majority of the pressure has come about as a result of post-Proposition 13 restrictions on local governments to provide the necessary infrastructure for new housing developments--the schools, roads and what have you. It's generated a whole new set of development fees passing these costs onto new home developers.

"The Building Industries Assn.," Rosenthal continues, "has run research on this, and it estimates that for every $1,000 in fees that a developer must pay local governments, it translates into a hike of $5,000 for the home buyer--and it particularly impacts housing at the lower end of the scale, those aimed at the first-time buyer."

It's a theme echoed by the Woodward Cos.' vice president, Scott E. Woodward.

"We're building now in the city of Carlsbad, and it's the highest fee structure schedule we've ever encountered. We're paying fees to the city that are approaching 6 1/2% of the sales price of the home--and that's just in fees. Once we've paid it, then they expect us to build the streets, the sewers and what have you in addition."

It's a situation, the CAR's Rosenthal believes, that won't be solved until legislation is passed permitting the floating of general obligation bonds that would spread such infrastructural costs "across the entire population base, and not just (levied against) the new developments--and the home buyer."

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