Housing: It's Outasight
Amuse of many parts, the American dream is to get a good education, land a job with upward mobility, achieve success and, high on the list, buy a home of one's own. To a remarkable degree, that aspect of the dream las become a reality. Almost two of three American families own their own homes, a far higher proportion than in any other industrial nation. Though foreign visitors are appalled by the squalor of U.S. big-city slums, they are invariably awed by the spaciousness, conveniences and comfort of the houses in which most middle-income Americans live. Three or four bedrooms, two or three bathrooms, a modern kitchen--that is commonplace in the U.S., but fairly unusual even by the standards of affluent Western Europe, and still more so Japan, and virtually nonexistent (except for a favored few) in the rest of the world.
The dream was dented a bit during the last recession; mortgage money became so scarce that relatively few new houses were built. But the big and mercurial housing industry, which fell harder than almost any other business during the slump, is coming on strong in the current economic recovery. This year builders will hammer together 1.9 million dwellings, about three-quarters of them single-family homes and the rest apartments. That is still short of the 2 million-plus that the industry reached in three years of the early 1970s, but a spectacular rebound from the low of February 1975, when the annual rate was a mere 950,000.
Unleashing their pent-up demands and taking advantage of fairly easy mortgage money, millions of people are shopping for houses. In Santa Rosa, Calif., a 90-minute commute north of San Francisco, buyers in June began camping out in sleeping bags on a Thursday night to be first in line Saturday morning when 27 houses in a new subdevelopment went on sale. In the Kendall neighborhood of southwestern Dade County, the last open area reasonably close to Miami, prospective buyers on weekends parade caravan-like in cars and campers through flag-festooned developments.
But the boom is accompanied by a virulent inflation that is upsetting the American way of housing and pricing many people out of the market. Those who are still in it find that they have to pay more money than they had ever thought they would, and then go up to their eaves in debt. In some pleasant but by no means luxurious residential areas of the Northeast, Midwest and West, even $50,000 to $60,000 houses are almost nonexistent, while dwellings of $75,000 to $85,000--and up--are standard. The prices for new houses in June averaged $62,100 around Chicago, $67,700 in the Washington, D.C., area, and $72,100 around Los Angeles.
Using the rule that a family's gross income should be at least five times its mortgage payments (the one that has held up best over the years), FORTUNE calculates that in 1950 seven out of ten American families could afford the median-priced* new house; in 1975, after a quarter of a century of rising incomes, only four out of ten could do so. Going by a different formula that in practice parallels another standard rule--the purchase price of a house should be no more than double the buyer's annual income--the M.I.T.-Harvard Joint Center for Urban Studies estimates that last year fewer than three out of ten American families could afford a median-priced new house, and one in three a median-priced used house. That measures the cost of moving; many families are living in houses that they statistically could not "afford" if they had to purchase the same homes today.
Like all inflations, housing inflation has serious social effects. Some wives feel forced to go to work, not because they want to have careers or earn their own spending money, but because buying that dream house nowadays usually requires two incomes. Six out often first-time buyers are families in which both husband and wife hold jobs. Couples who want to have children sometimes face the brutal choice of a house or a child--and, more often than in past years, select the house. In the early postwar period, sociologists and merchants suggested that Americans spent too little on shelter, too much on less basic needs. If so, the market has more than corrected that tendency. In order to buy a house, couples are scrimping drastically on other spending--for cars, food and even furniture; not a few fancy new houses are almost bare inside. Young people have always asked parents for help in scraping up the down payment on a home; mortgage bankers call the payoff from papa a "gift letter." Now the pool of cash required to spend the first night in a new house--frequently $20,000 to $30,000--has made this sacrifice of independence a matter of necessity rather than choice.
Typical tales from house hunters:
Frank Fischer, 35, sold his solidly mortgaged house in Erie, Pa., for $40,000 when he took a job as an executive of a Florida medical-equipment manufacturer. He then set out to find a four-bedroom, two-bath home near Miami, figuring that he would have to pay about $75,000. After looking at some 60 houses, he and Wife Jeanne settled for one in Coral Gables that has four bedrooms and two baths, all right, but no dining room, no eat-in kitchen and a yard somewhat bigger than a pool table. Price: $115,000. Says Fischer: "If anybody had told me six months ago that I would spend $115,000 for a house, I would have laughed out loud." Rather than laughing, he sold all his bonds and cashed in his savings account to help raise $40,000 for the down payment. He had to put up that much to hold monthly payments to the $700 (insurance extra) that he figures is the most he can afford.
Bobby Phillips, 36, an office manager who is being transferred by MacMillan Bloedel Containers Inc. from Dayton, Ohio, to northern New Jersey, started looking for a new home and "was terribly disappointed." Says he: "The prices are so much higher than where I come from: $20,000 or $30,000 more for the same thing. And the real estate taxes are four times what they are in the Dayton area." Demand is so hectic that Phillips had to move fast: the 19-year-old house that he chose was on the market all of 30 hours before he agreed to buy it for $68,500. It has three bedrooms and two baths but only a one-car garage; his house in Dayton has the same number of rooms but is bigger, newer and has a two-car garage. Phillips also had to sweat out his application for a mortgage loan. The problem is that he is burdened with alimony payments; taking them into account, savings and loan associations would insist that Phillips and his second wife, Marilyn, show a combined income of $39,000 to qualify for a $50,000 mortgage. They can do so only if Marilyn, who is an executive secretary in Dayton, lands a similar job in Jersey and earns $12,000 a year. Phillips got the mortgage; now Marilyn has to find the job.
John Bjork, 27, an insurance broker, and his wife Stephanie, 24, searched for three months for a house on Chicago's suburban North Shore, where Stephanie grew up, but found that "the minimum for a bungalow is $70,000 to $80,000." They have now about decided to buy a bigger, older house in Deerfield, Ill, for $71,000. Stephanie's parents will chip in part of the $14,000 down payment, and monthly payments for principal, interest and taxes alone will come to $560. Laments Stephanie: "Those payments are not most of our budget--they are all of our budget." To help swing the payments, Stephanie has gone back to work as a receptionist in a suburban art gallery, putting in four hours in the evening when her husband can tend their 18-month-old son. "Some women I work with are not planning on having any children at all because of the cost of their new houses," Stephanie reports. "I think ours will be an only child for the same reason."
Patrick Burns, 28, and his wife Dawn, 25, shopped for four months for a suburban house but settled for a $33,000 home in a Cleveland neighborhood they do not especially like. The monthly mortgage payments of $299 will be such a strain that they have decided to add no more children to their present two. Besides that, says Dawn, "we budgeted the food shopping so that no snacks, no beer and especially no McDonald's are on the list." Even so, they could not meet the payments if Patrick did not collect frequent overtime pay in his job as supervisor of a record company warehouse.
Rachelle Resnick, 27, a San Francisco school-bus driver, counts herself fortunate to have bought--with much help from her father--a two-bedroom house that she candidly describes as "a little nothing." It cost $48,500, and she will have to spend $5,000 or so to repair termite damage. But had she waited, it almost surely would have gone higher. The house sold in June 1976 for $28,000, and has since been resold four times by four separate speculators, none of whom lived in it.
Such speculation is common in California and is beginning to appear in other states. Indeed, California is a housing Oz unto itself; its population is still growing faster than that of any other large state except Texas; the recession bit especially deep in California, creating a huge backlog of demand, and strict environmental requirements severely limit the land available for housing. Prices are starting to level off, but the level is in the stratosphere. In platinum-plated Beverly Hills, one cynical real estate broker exclaims: "Oh, I have such a dog on the market right now! Come to my Sunday open house and see what I'm offering for $185,000. I can tell you, for $185,000 you get a piece of nothing." Tom Lorch, a high school principal who is looking for a house in San Francisco, adds, "When we talk about houses, it's money, money, money--not how we're going to live, which seems wrong. And these absurd numbers, $100,000. It's some kind of fantasy world."
In the real world between 1970 and 1976, the median income of American families and consumer prices generally both rose about 47%. But, reports the M.I.T.-Harvard Joint Center for Urban Studies, the median price of existing houses jumped 65%, from $23,030 to $38,100. Worse, newhouse prices shot up 89%, to $44,200. The growth in size and quality of the houses brought part of this great increase, but most of it was produced by housing inflation.
These price increases are of course reflected in the monthly costs of owning a home. The costs--including mortgage payments, insurance, property taxes, heating, electricity and maintenance--rose 73.4% for older houses and 102.3% for new ones. The economists and other scholars who wrote the M.I.T.-Harvard study say that if house prices rise as fast, and incomes grow no more rapidly, over the next five years, "typical new homes in 1981 would sell for $78,000 ... the U.S. would become less and less a nation of homeowners."
Some builders regard the M.I.T.-Harvard study as excessively gloomy. They contend that income is not the only measure of whether a family can afford to buy; huge numbers of people own houses that they can sell at a profit and use the equity to help buy another. The median-priced new house is out of sight for millions of people, but by definition, half of all houses are priced below the median. Even young first-time buyers can usually find something in the lower price ranges, though often it will be much less house than they dreamed about.
Most buyers want more space and amenities, and they are buying a lot more house than in previous years. In 1950 the typical new house was only 894 sq. ft. in area, usually with two bedrooms, one bath, no garage and few built-in appliances. By 1971 the median dwelling had grown to 1,375 sq. ft. and last year to 1,590 sq. ft. Almost half of today's new homes have central air conditioning (up from little more than one-third in 1971), and two-thirds have two or more bathrooms (up from one-half in 1971). Says Patricia Roberts Harris, Secretary of Housing and Urban Development: "There are more and more homes with four fireplaces, three or more baths, $10,000 kitchens."
The pressure of demand on the capacity of the homebuilding industry and an inflexible--indeed shrinking--supply of building lots are pressing up prices. Wartime and postwar babies now starting their own families constitute the prime home-buying group, and their numbers are rising sharply. Between 1970 and 1975, says the M.I.T.-Harvard report, the number of families headed by someone aged 25 to 34 increased almost 18%, to 10.9 million; by 1985 the total is expected to grow 30% more, to 14.1 million.
Social trends also swell demand. What some builders call the "divorce market" is creating a need for two dwellings where one sufficed before. Single women a few years ago almost never bought housing property; today they are buying as many as 30% of the apartments in some Washington, D.C.-area condominiums and quite a few private houses as well. Unmarried couples--even homosexual pairs--are seeking houses or apartments. Says Mike Brenneman, a Washington real estate man: "Such cases were rare five years ago, but today they represent an important part of the market."
More and more people are looking on a house not just as a place to live but as the best investment they can make--better than a savings account, better than bonds, far better than the sagging stock market. The price may be a shock and the monthly payments a severe strain, but many families think the value of their home is bound to jump. Even if it does, the profit is only on paper until the house is resold, and most families will then have to buy another house at inflated prices. But they do get a big break; profit on the sale of a house is not taxed at all if it is reinvested in another home within a year. Even if the profit is pocketed, it usually is regarded as a capital gain and only half of it is taxed. Thus buying a house in most cases really is a sound way to build equity and generally more economical than paying rent.
In the longer term, demand is kept high, probably too high, by a post-World War II psychological phenomenon. Americans have come to look on a home of their own--and a pretty big, detached, single-family house at that--as not just a desire but a need and almost a right. They are being unrealistic. To shelter the entire nation in spaced-out, single-family houses near metropolitan centers would be a physical impossibility; to house even a substantial portion that way is turning out to be enormously expensive.
A main reason for housing inflation is that land prices have multiplied six times in the past 20 years and now account for an unprecedented 25% of builders' costs. In some regions the spiral appears to be accelerating. Two examples: in Miami's Bade County, a basic 100-ft. by 75-ft. lot that sold for $3,500 a decade ago now commands $17,500. The price has risen $2,000 just since May, and Douglas Wiles, a Miami housing economist, predicts a further $4,000 increase by year's end. In the northern Virginia suburbs outside Washington, D.C., Builder Edward Carr paid $7,442 for a quarter-acre lot in 1969; now the price is $23,000. That accounts for almost half of the rise in the price that Carr charges for his four-bedroom homes, from $40,950 to $74,823 (he also has taken away the carport and fireplace).
The land-price explosion primarily is the result of simple scarcity: the best housing sites were built on long ago. Another important factor is restrictive zoning practices by communities that set aside less-than-generous land for new housing to begin with and then specify minimum lot sizes that force builders and home buyers to purchase more land than they may want or need. William Kennedy, president of the Homebuilders Association of Greater Chicago, traces the zoning restrictions to a "We've got ours, now close the door mentality" among people who already own houses. Their defense is that they want to hold down property taxes--by reserving land for future use by industry and stores that would carry a large share of the tax burden, and by avoiding an invasion of families with young children that would force up school budgets.
Beyond zoning restrictions, there are countless other minutely detailed regulations at all levels of government--but chiefly local--that balloon builders' costs. A Rutgers University study of 2,000 builders concluded that "excessive" regulation of all kinds now accounts for $9,844, or almost 20%, of the price of a home that sells for $50,000. Many communities specify not only minimum lot sizes but also minimum house sizes; that is a sure way to keep out the lower income groups.
New, and overlapping, federal, state and local environmental regulations are the current headache. They are well intentioned and may indeed prevent ecological damage, but they promote inflation. Fairfax County, Va., stopped all building for 18 months while officials drew up a master plan for development; when the moratorium was lifted, pent-up demand sent land prices soaring.
Environmental regulations jack up the cost of preparing sites for building; in many places that expense is becoming as heavy a burden as the price of the raw land. George F. Schoeck, a bank executive in Morris County, N.J., gives this example: "A builder used to put in a 28-foot road with no curbing. He'd compact it, roll it, lay two inches of black top and dedicate it to the town--and it would be their problem. Now the developer has to lay eight inches of stone with a three-inch binder coat of coarse asphalt and 1 1/2 inches of topping and Belgian block curbing." The result of these and other requirements is that an $8,000 lot may cost another $8,000 to develop, v. $4,000 six years ago. Says Schoeck: "The cost had doubled before the house went up."
Delays in meeting the complex rules, which must be complied with before building can start, boost costs. Says New Jersey Builder Philip Azzolina: "Two or three years ago, you took the architect's blueprint for a house to the local authority, and while you waited it was approved or rejected. If it was approved, it was stamped on the spot; you then paid the fee and got the building permit. Now you submit the plan, and in some towns it takes a month to get it approved and permission to build. Before a blueprint is passed, it has to be approved by engineers, the building inspector, the zoning officer, and in some towns by the fire inspector and the health department."
High interest rates further pump up costs for both builders and buyers. A decade ago, many builders paid only 5% to 6% on their construction loans; now they are charged 9% to 9 1/2%. Mortgage rates average around 9% nationwide, v. about 5 1/2% a dozen years ago. That difference may not seem like much, but it is a 65% rise--and, when stretched out over the 360 monthly payments made in 30 years, it adds $23,000 to the cost of paying off a $30,000 mortgage.
So-called hard costs of materials and on-site labor account for only 47% of the cost of a new house, v. 54% in 1970. But the decline is misleading; hard costs have in fact gone up rapidly, though not quite so fast as the costs of land, site development and financing. Builders are paying as much as $400 for 1,000 ft. of lumber that cost $100 ten years ago. The price of cement has risen about 60% over the last five years, in part because it is dried in kilns that require costlier energy. On-site labor accounts for less than one-fifth of homebuilding costs, but it is scarcely cheap. From 1970 through mid-1977, average wages and benefits of building-trades workers jumped 75%, to $12.20 an hour; benefits alone more than doubled. Builders who have to pay handsomely for land, labor, materials, site clearance and financing feel forced to put up fairly luxurious houses that they can sell at a high enough price to recoup their costs and make a profit.
Though many home seekers cannot afford such opulence, the pull of the dream is so strong that the majority will not turn away. They try to come as close as their budgets will permit, rather than seeking more economical alternatives. One such alternative is the "no frills" house. Typically, it lacks such amenities as a basement, built-in appliances (except for an oven) and extensive hallway space. A variation is the "patio home," built on a small plot with one side of the building resting nearly on one of the lot's boundaries and with as little as 10 ft. from the next house. (Windows are tactfully angled so that no kitchen or bedroom window looks directly into a neighbor's.)
Builders have successfully sold no-frills or patio houses in some areas, but these dwellings have been a bust in most of the country. Says Joseph Rodek, executive vice president of the Homebuilders Association of Delaware: "A lot of people grew up in eight-room houses. They just don't want a no-frills house."
Planned communities of attached houses--whose occupants share wooded areas, swimming pools and the like--once seemed a promising answer to housing inflation. But this "cluster" concept has never really caught on. Says Bernard C. Meltzer, former chairman of the Philadelphia city planning commission: "The planners love this idea, the professors love it, the media love it, the bankers love it, everybody loves it, except one group--the public. As you go through the Delaware valley you'll see planned community after planned community sitting there empty and bankrupt. The public has said the hell with all the shared ownership of woods and recreation areas and Olympic-sized pools. They're saying: 'I'd rather have my own lot where I can put my own pool and my own barbecue stand and where I can cut my own grass.' "
Apartments make more efficient use of land than single-family houses do. For a while early in the 1970s, apartment building surged, but now taste is swinging back to the classic detached house. Apartment construction fell even more rapidly than house building during the recession of 1973-75 and has not really recovered; such dwellings account for only 19% of this year's housing starts, v. 39% in 1969. Many Americans share the sentiments of Cheryl Johnson, who with her husband Michael, a Zenith personnel supervisor, is straining the budget to buy a $53,000 house 35 miles north of Chicago. Says she: "After apartment living, we didn't want to share walls with anyone."
What then can be done to cool down housing inflation? Nothing spectacular, as long as Americans remain so enamored of the single-family house. The supply of land within reasonable, or even unreasonable, commuting distance of metropolitan centers cannot readily be increased. Still, some steps could be taken to alleviate, if not end, the trouble.
There are scattered efforts to crack down on speculators, though speculation is a symptom rather than a cause of high demand. Some California savings and loans are either refusing to lend mortgage money to would-be buyers who do not intend to live in the houses, or charging them higher interest. A few builders, too, are declining to sell to the buyer who, say, tries to purchase five houses at once.
Financing innovations hold promise of helping middle-income people to afford better housing. HUD is backing a bill to authorize "graduated-payment mortgages" for FHA-insured loans. These would set low monthly payments during the first five years, which would rise thereafter, when the householder presumably would have a higher income. Some lenders are experimenting with such mortgages on their own; federal blessing would give these tests a needed boost.
The California legislature is considering a bill that would allow graduated-payment mortgages and introduce several other ideas not now widely used. Among them: mortgage loans on which the householder would pay only interest the first year, deferring principal repayments until the second year; and "reverse annuity mortgages" that would sensibly permit retired people to borrow on the equity in a home and live, in it at the same time, with the loans to be repaid by their estates when they die. Whether such mortgages are permitted now is a tangled question of federal and state regulation; in any event, giving them specific legislative sanction in California would advance the idea.
HUD officials are considering a much more basic attack on some of the regulatory snarls in which housing is enmeshed. Secretary Harris talks of reforming some of HUD'S own rules, which she calls "small regulatory requirements that can consume days--during which builders cannot build but during which their interest costs must nevertheless be paid." She also sees no reason why both HUD and one or sometimes several state or local jurisdictions must at times make separate studies to determine whether environmental rules are being met. Asks Harris: "Why can't we accept their studies or they accept ours?"
Authorities at HUD also talk of re-examining the Real Estate Settlement Procedures Act of 1974 to see what changes could be made to reduce closing costs. William White, HUD's manager of new community development, also would like to bring pressure on states and localities to reform restrictive building codes. Says he: "I don't necessarily want to live in a plastic society, but we're going to have to use more plastic in building materials. Yet what a struggle we had with many [state and local] authorities when we first pushed plastic pipes instead of lead! And there are also substitutes for lumber. Why do we have to have blacktop roads in subdivisions? It's a waste of oil and it's expensive. Some codes require granite curbs, which are costly." Washington has less leverage over such matters than it once did because its FHA and VA programs now cover only 19% of mortgages granted, v. 35% in 1970. But it can still set an example with the standards it adopts for FHA and VA houses, and nag state and local officials to change their own rules.
No one of these steps would have any great overall effect, except for reform of building codes--an old campaign that will still require years to complete. Taken together, however, these moves could have a measurable impact on the runaway rise of home ownership costs--and it is clearly time to chip away at them wherever possible. Builders boast that the U.S. is the only nation in which a private house has been brought within the reach of the broad middle class. Quite true--and well worth keeping that way.
* The statistical midpoint: half are priced above, hal below.
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