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The Washington Scene

Housing Market Starts to Cool Off

November 01, 1987|JOHN BETZ WILLMANN | Special to The Times

An overheated housing market appears to be cooling off rapidly--in tandem with the stock market but not nearly as drastically.

Even economically vibrant areas such as this nation's capital, New York, San Francisco and Southern California are facing the tri-pronged effect of record high housing prices, rising interest rates and mounting inflation. No wonder some steam is escaping from a boiling housing market that has been red-hot for the past 18 months.

However, since Sept. 1, astute realtors Earl Farr and Wallace Agnew have noted that stories of fast resales at ridiculously high prices are heard much less often.

"It's fundamentally a matter of mortgage rates having recently gone up one or two percentage points to the 11% range, before starting to decline again due to the stock market shake-out," commented Agnew, who maintains contacts with potential buyers.

"Young people still have good jobs and impressive take-home pay, but they also are living to the hilt, for the most part, and cannot keep pace with the rising cost of homeownership for the first-time buyers."

And now, for the time being, they have also lost some confidence in any kind of investment.

On the other hand, young and older folks who own apartments or houses still have the option to move if they can sell their current dwellings for a considerable profit and then move up into something newer, larger--and more expensive. Yet, any time mortgage rates go up a percentage point or more, there's both a real and a psychological deterrent to any change of ownership dwellings.

Two of my neighbors provide a current example of a house resale market that has changed sharply in the past 90 days.

A recently widowed chap decided to retire and move to a new house in Florida. He put his rather new and well-kept house on the market a month ago. He asked a price comparable to the amount that another neighbor had gotten in early summer for a similar house.

House No. 1 had sold quickly in June, for what seemed an astronomical price. That misled the widower, who didn't reckon with rising interest rates, a change of seasons and a slackening of housing demand--some of the latter in response to prices that had gone up unreasonably. House No. 2 is unsold and unsought!

At a nearby model home office, the sluggishness in recent sales bears out my neighbor's inability to sell his house at the inflated price he is asking. "We are still getting nearly the same number of house shoppers, but the sales pace has slowed," a veteran salesman pointed out.

Prospective buyers may find these conditions somewhat to their advantage for awhile. If they are willing to make a deal and can handle the financing costs, sellers of existing houses may be more willing to lower their asking price--especially if they have to sell within the next 90 days.

Thus, in another reaction, there could also be a shift to apartment rentals if the slowdown in home sales increases to any significant degree. Higher costs for new and resale houses, combined with higher mortgage rates, always make homeownership more difficult for folks coming out of rentals.

This led researchers Charles Froland and Jay Little to point out that "apartment living becomes more of a necessity for a broader section of the population . . . In the future, mortgage interest deductions will provide fewer tax benefits to potential homeowners, thus making renting a more attractive option."

Although apartment vacancies have been mounting moderately for about five years, rents have been increasing even faster than the rate of increasing vacancies. Last year the overall vacancy rate for multifamily rental housing was up to 7%, the highest level since the early 1970s.

In a recent edition of Urban Land Magazine, Froland and Little pointed out, quite significantly, that much of the upsurge in vacancies was due to overbuilding that peaked last year. The vacancy upturn is expected to peak at 13% in late 1988.

That means that apartment construction will decline, and rents should be stable for at least 18 months. But if the market in housing sales also cools off to any degree, newly formed households will be channeled, almost without choice, into rental apartments.

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