The year of the house
Editorial
The Chicago Tribune
Published September 9, 2002
The house has loomed ever larger in the U.S. economy and the American psyche over the past year.
Be it bungalow, colonial, townhouse, mansion, loft, condo or doublewide, the "house" as home provided sanctuary for Americans after the Sept. 11 terrorist attacks. The house was castle and refuge. It signified a place of safety and security as families gathered close.
The house as a source of financial security and flexibility has grown in importance as well over the last year. Interest rates at 40-year lows continue to fuel historic growth in homebuilding, home sales, home prices and mortgage refinancing. As the economy faltered and the stock market plunged, millions of Americans turned to the burgeoning equity in their houses as a source of discretionary income.
That turned home sweet home into home sweet equity investment. Last year, consumers extracted more than $90 billion from their homes by refinancing their mortgages at lower interest rates and lowering their monthly payments. That's $90 billion that was added to household incomes at exactly the right moment in a weak economy.
After dropping off in the winter months, the refinancing boom has picked right up again this year. That has helped buffer consumer angst over stock market losses and meant consumers continued to spend quite robustly throughout the recession. Since consumer spending makes up two-thirds of the U.S. economy, that in turn kept a shallow recession from deepening.
The Homeownership Alliance, a housing advocacy group based in Alexandria, Va., estimates that housing-related activity last year accounted for fully half of what meager economic growth occurred.
Much of the record-setting housing activity in the last year reflects the culmination of trends, some years in the making.
- More people than ever own their own homes--about 68 percent. Census figures show that statistic jumped from a 20th Century low of 43.6 percent in 1940, reflecting the financial devastation of the Great Depression, to 61.9 percent in 1960. The figure remained stuck in the low 60s until the mid-1990s, when it began a steady, incremental rise.
- More people continue to enter the housing market, defying expectations and keeping demand high. The giant baby boom generation, now aged 38 to 56, has pretty much bought its primary housing, but continues to be remarkably active in the real estate market, either trading up in house value or investing in vacation and other second homes.
Record immigration in the 1990s brought more than 9 million newcomers to the U.S. Many of those new families are now, or will be, in the housing market. Finally, access to homeownership has increased in low-income and minority communities.
More than half the new households added in the last five years--3.5 million of the 6 million new households--are headed by minorities, according to the Joint Center for Housing Studies at Harvard University. Even if immigration slows from the last decade's sizzling pace, as now appears likely, Harvard's center predicts that those already here plus other factors at work will lead the number of homeowners to rise by more than 1.1 million a year each year over the next two decades.
- Continuing demand means the value of housing continues to rise. Home prices rose more than 8 percent last year, continuing a trend of rising prices outstripping income growth that began in the mid-1990s.
Is there a bubble developing? That's the worry and some individual metro areas--San Francisco and Boston, for example--may be vulnerable.
Home prices can't continue to increase at rates that are double, triple, even quadruple, the inflation rate. That's not sustainable. But the price escalation lost a little steam toward the end of last year and, in any event, the demand factors underlying those increases aren't about to evaporate like shoddy accounting. They're real.
Federal Reserve Board Chairman Alan Greenspan thinks a housing bubble is unlikely because residential real estate isn't one big market like the stock market, but rather many, many local markets. In addition, the transaction costs--not to mention hassle factors--involved in dumping one house, then buying and moving into another are substantially higher than getting rid of a dicey stock.
- As housing rises in value, its equity value to the homeowner increases. With record low mortgage rates, more than 7 million homeowners refinanced last year. Financing and refinancing of home mortgages has become easier, less time consuming and more accessible to an increasingly broad pool of homeowners.
Serial refinancers aren't uncommon these days. Syndicated real estate columnist Kenneth Harney referred in the Tribune last month to the new syndrome of "refi addiction."
Many people, having been burned by financial markets, now are investing in their homes--and taking equity investment out of their homes, switching from 30-year fixed-rate mortgages to a bewildering array of shorter-term fixed/adjustable products, allowing them to take advantage of these low rates.
In addition to straight refinancing, the Federal Deposit Insurance Corp. estimates Americans now have $290 billion tied up in home equity loans, lines of credit and second mortgages on their primary residences. That's more than double the amount a decade ago.
Of course, any prolonged slowdown or sharp rise in interest rates could turn that leverage into a worrisome burden for some homeowners. But, for the moment, it's not at danger levels.
The house has performed yeoman-like service during what has been a difficult year for the nation. It has provided a safe harbor for American families and, in many ways, a safe harbor for the American economy. Home sweet home, indeed.
Copyright © 2002, Chicago Tribune
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