Housing's Roof Caves In

High mortgage costs bite

The all-American dream of home ownership is turning into a black nightmare. Last month the number of new houses on which construction was begun crashed 42% from last year's levels to a seasonally adjusted annual rate of just over 1 million units. This is the lowest rate since the 1974-75 recession and the sharpest monthly drop in 20 years. Worse still, the number of new building permits granted in March also sank sharply, which suggests that the bad housing news will get even worse. Says Robert Sheehan, director of economic research for the National Association of Home Builders: "Buyers and builders, sellers and lenders are all getting frightened. The figures over the next few months could be dreadful."

The culprit of the crunch is clearly the Federal Reserve's credit squeeze. Would-be house buyers are now finding it difficult to obtain money to borrow, and when they do, the rates are high enough to make any bail bondsman blush. The nation's average mortgage rate today is an astronomical 17%, vs. 11% late last year and 9% in 1977. Last November a family buying a $100,000 house would have needed an income of $36,500 to qualify for the normal $80,000 mortgage, and faced monthly payments of $761. Today, obtaining a mortgage for that same amount would require an income of $55,000 and monthly outlays of a staggering $1,140.

Mark and Delain Gorden both work for the Department of Health and Human Services in San Francisco and have a combined yearly salary of $33,000. In mid-February they arranged a 12% veteran's loan for the purchase of a modest $113,000 two-bedroom house. Within a month the mortgage rate rose to 13%, and the Gordens backed away. Says he: "The extra point would have taken an extra month's pay."

Because of the shortage of reasonably priced mortgage money, the number of houses sold this year is expected to be about half last year's 5 million. The slowdown in sales is beginning to have an impact on the cost of shelter; the median price for houses has already declined from $66,000 last September to about $65,100, a major change after the regular annual gains of 14% and more during the past two years.

The buckling of the housing industry is not confined to any geographical area. Former housing boom towns like Houston and Atlanta are also suffering, and even Florida, which looked as if it might be spared for a while, is feeling the slump. The hardest-hit region is the Midwest. Laments St. Louis-area Builder Tom Berry: "Home sales are not bad. They have just stopped."

The collapsing market is hitting builders and construction firms hardest. Merrill Butler, president of the NAHB, estimated that nationwide unemployment in the industry could jump to 15% by October. St. Louis builders are predicting that local industry unemployment will rise to 80%; in some areas, like Chicago, more than 50% of all firms could go bankrupt. Says Michael Keston, president of a California-based construction company: "Builders have crawled into their shells like turtles."

And the impact spreads. The rule of thumb in the housing industry is that the laying off of a single worker by homebuilders results in two additional layoffs in related industries like cement, copper tubing, building materials and wood. The signs are already ominous. Oregon Governor Victor Atiyeh reports that sawmills in his state are "closing almost daily." The Western Wood Products Association notes that 141 lumber mills in the twelve Western timber states have already closed and an additional 249 have curtailed production.

Last week President Carter took some minor emergency measures to shore up housing by approving the expansion of the federal program that subsidizes interest payments for both homebuilders and buyers. The plan, which will cost an additional $75 million, would provide mortgages of up to $50,000 at interest rates as low as 11%. The President estimated that this might stimulate construction of 100,000 new houses. The only long-range relief for the industry, however, will come when interest rates begin falling from their dizzying heights. qed

This file is automatically generated by a robot program, so viewer discretion is required.