Sanity Returns - home prices across the nation - Brief Article

Kiplinger's Personal Finance Magazine, Jan, 2001 by Elizabeth Razzi

HOMES | Look for an armistice in the bidding wars and a year of MODEST GAINS for home prices across the nation.

AT SOME POINT, it gets hard for anybody to justify spending a half-million dollars on a two-bedroom bungalow, no matter where it sits. And 2001 may well be that point.

Across the country, the white-hot sellers market that has persisted in thriving communities for a couple of years--and forced buyers to fight for the privilege of paying Rockefeller prices to live in Roseanne digs--will cool off substantially. Bidding wars that pressure buyers to make snap decisions about the largest purchase of their lives will subside. In other words, a little sanity will return to the housing market in 2001.

Price hikes will be scaled back from double-digit growth to numbers more in line with inflation. In fact, 2001 will see the most modest price gains since 1995, an average of just 2.6% nationwide, according to Sara Johnson, chief regional economist for Standard & Poor's/DRI, which prepares the annual housing forecast for Kiplinger's. That falls right between DRI's projected 2.2% inflation rate and Kiplinger's 2001 inflation forecast of just under 3%. Johnson expects the brakes to be applied as buyers "turn more cautious in response to the stock-market correction."

You'll find DRI's expected home-price changes for 100 large metro areas--ranging from a high of 12.3% in Boston to a low of -6% in San Francisco--beginning on page 85. That's a dramatic pullback from home-price appreciation in 2000, when 13 of our 100 cities enjoyed double-digit price spikes, topped off by the 27.2% rise of the median price in Boston.

The table shows that many metro areas will experience price increases far outpacing the average increase nationwide. That reflects an enduring trend in real estate: It costs more to live in (or near) the big city--especially if that city is on the East or West coasts. The national average is brought down by slower appreciation in other places.

Stable mortgage rates

MORTGAGE RATES will play neither the catalyst nor the spoiler in the year ahead. The same slowing of the economy that's cooling home-price hikes means the Federal Reserve Board may feel little pressure to crank up interest rates. Johnson believes the Fed may even cut rates late in the year. The outlook for 30-year fixed-rate mortgages: Rates will remain below 8%.

A fixed-rate loan will remain the mortgage of choice for most buyers. Borrowers prefer the certainty of a fixed rate except when market conditions are such that adjustable-rate loans offer a real break. That won't happen this year: One-year adjustable-rate mortgages will continue to be a bad deal in 2001. There's now little more than one-half percentage point difference between a 30-year fixed-rate loan and the first-year rate on the far less certain ARM. With such a thin spread (which isn't expected to change much in '01), an ARM cuts your first-year payments by only $83 a month on a $200,000 loan. For most buyers, that's not enough to compensate for the worry that the payment could exceed the fixed-rate payment in only a year or two.

What can you afford?

THE PARADOX lumbering across the front lawn of the housing marketplace these days is this: While the latest figures show that a record-high 67.7% of Americans own their homes, housing affordability is at an eight-year low. The good news is that even at its lowest point since 1992, the National Association of Realtors' housing affordability index is 124.7. That means that half of the nation's families earn about 25% more than is required to buy a median-priced home. The bad news is that that's a national average.

In California, for example, the picture is decidedly worse: Statistics from the state's association of Realtors show that only 29% of residents earn enough to buy a median-priced home in the Golden State. Of course, the only affordability statistic that really counts is your own. You may be financially equipped to buy a $500,000 home. But you might consider a neighborhood where that kind of money buys only a modest bungalow insanely unaffordable.

That is why affordability is becoming a real problem--not only for first-time buyers, but even for well-compensated professionals. After several years of double-digit gains, prices in many of the most popular high-tech employment hubs on the East and West coasts have reached once unimaginable levels.

In 2000 alone, the average price of a house in San Francisco grew nearly 13%; with a current median of $404,323--half of the houses in the city cost more than that, half less--houses in Frisco are far and away the most costly in the nation. In several New Jersey towns within commuting distance of New York City, prices grew by about 10% in 2000.

At the peak in these markets last spring, home seekers prepared as if they were going off to war. Dea and Dan Viola were looking to replace their Manhattan and Brooklyn apartments with a house in the New Jersey suburbs where they could forge a new family with Dea's two children, John, 11, and Maria, 12. Dea knew from talking with friends that they would have to be aggressive shoppers. "The bidding gets so high, and it happens so quickly," she noted.