Behind the boom in homeowning

Kiplinger's Personal Finance Magazine, Jan, 1998 by Elizabeth Razzi

AS NEW YEAR'S DAY 1998 APPROACHES, home buyers, home sellers and even homeowners who aren't planning an address change have plenty to celebrate. A record number of Americans, 66%, own their own homes, according to the U.S. Census Bureau. When the final numbers on home sales for 1997 come in, they're expected to surpass the 1996 record of 4.1 million. Mortgage rates are lower than anyone expected, having dipped below 7.25% in the fall. Refinancers are having a field day, and home-equity lenders are offering tempting deals. The vast majority of sellers no longer need to worry about paying taxes on their profits.

And there are more good times ahead: 1998 is expected to be another winner for nearly every part of the country. Rates on 30-year fixed-rate mortgages will remain in the low-to-mid 7% range, keeping first-time and trade-up buyers in the market even as prices rise. The statistics will be less spectacular than the record-breaking ones posted in 1997, but "slowing of growth is not necessarily a bad thing," says David Berson, chief economist for Fannie Mae, a corporation that buys mortgages and repackages them as securities for sale on Wall Street. Restrained growth pushes back the date when the Federal Reserve Board tries to cool the economy by raising interest rates.

Although Standard & Poor's DRI is forecasting double-digit home-price appreciation in many of the nation's largest cities (see the table of home prices for 100 U.S. cities on page 87), in most places pure home-price appreciation -- the value boost a homeowner enjoys with the passage of time -- is expected to outpace inflation by one to two percentage points.

Even the highflying markets of recent years haven't set themselves up for a housing crash. Builders have been uncharacteristically restrained in developing new-home neighborhoods, in part because it's harder to find suitable land and get all the necessary building permits and environmental approvals.

MINORITIES ON THE MOVE

Low interest rates and consumer confidence born of the Goldilocks economy aren't the only forces behind homeownership levels not seen since the early 1980s. Part of the credit belongs to people like Raul and Soledad Olguin.

Since they came to Los Angeles from Mexico City in 1959, the Olguins have raised three children, now grown. Raul makes deliveries to dental offices; Soledad works in a garment factory. In late October they moved into a brand-new, two-bedroom condominium in Hilltop Colony (a new, gated development in East Los Angeles) that they bought for $114,000. The complex has a pool and spa, and each unit has a gas fireplace. Their new monthly payment is only $120 more than their old apartment rent. "I never thought I would own a home," Raul says. "It's a whole lot different for me to own. Whatever I pay will be for the benefit of myself."

The couple couldn't quite swing the cost of their new condo without some help, though, and that reflects another trend underlying the increase in the nation's home ownership rate. The federal government, Fannie Mae (and its competitor, Freddie Mae) and lenders eager to establish good community-lending records have all been pushing for ways to get more mortgage loans into the hands of "nontraditional" borrowers like the Olguins. Fannie and Freddie are both promoting computerized loan-evaluation programs that promise to find credit-worthy borrowers among applicants who might not have made the cut under pen-and-ink reviews.

The city, of Los Angeles helped the Olguins get into their condo with 30-year fixed-rate financing at only 6.25%. And most of their down payment could be made with a "silent" second mortgage-that is, payments are due only after the first mortgage is paid off, or when the owners sell.

Minority households represent 29% of the nation's first-time buyers, according to Harvard University's Joint Center for Housing Studies. And their share is growing, with Hispanic households like the Olguins' leading the way. In many cities the arrival of this new wave of buyers into the housing market is freeing other homeowners to buy larger, more-expensive homes. Among the beneficiaries are the ubiquitous baby-boomers. Most boomers are now in their forties and fifties, when they can afford to trade up to the house they really want. They have been making the move like mad, and they aren't finished yet.

In areas reporting double-digit home-price increases, it's often baby-boomers buying bigger houses who are skewing the statistics. Home-price changes are based on the median figure, a statistical midpoint that gets boosted when a large number of high-price sales are added to the mix. "Over the past two years the homes being built and bought are larger homes," says Asieh Mansour, a senior economist at Standard & Poor's DRI.

HOMEOWNERS: HIGHER PRICES AND LOWER RATES

Rising home prices and falling interest rates translate into real wealth for current homeowners. The duo increases the amount -- and affordability -- of taxdeductible home-equity credit available for long-wished-for home improvements, children's tuition and other big-ticket needs. If you're considering borrowing against that wealth with a home-equity line of credit and you have a good credit record, shop hard for the prime rate (recently 8.5%). As of January 1, Texas homeowners may take out home-equity debt, too. Texans are still limited to borrowing against 80% of home value, but elsewhere, some lenders are offering loans that exceed the built-up equity in a home. Such loans carry rates several percentage points above the prime (see "Disaster Strikes!" below).