Spring has arrived once again, and with it, the start of the home-building season. Recent data on single-family homes sold and constructed suggested that 1977 could produce a bumper crop.
Mortgage interest rates, the availability of mortgage credit and the terms of credit are little changed from last spring, but single-family homes are carrying a higher price tag. In addition, the economic situation has improved over last year with real growth higher and unemployment down.
Personal income registered a 10 percent gain last year, but the growth in new single-family home prices again out-paced the gains in income. Perhaps one consolation is the fact that new one-family homes built last were larger and contained more amenities than those completed in 1975.
Regardless of home size and amenities, in recent years households buying a home are forced to allocate a larger share of their budget to housing. In February, the median price of new single-family homes sold nationwide was $47,500. However, local housing prices tend to be significantly above the national figure.
The Washington metropolitan region has the unenviable distinction of being one of the highest housing cost areas in the country - although incomes are also higher than average. In the first quarter of 1977, the average price of a conventionally financed new home in the Washington metropolitan area was about 20 per cent higher than the national average, while existing homes conventionally financed sold for about 45 per cent more than the national average.
Obviously, given the cost factors it has become increasingly difficult for many first-time buyers to enter the market. The absolute downpayment level is larger and the cost of carrying the home (principle, interest, insurance, and taxes) has increased sharply. Thus, many first-time buyers are faced with a double paradox. Buying a home at inflated prices and allocated a larger part of the household budget for shelter, or continue to rent and receive no benefits of homeownership such as equity build-up, appreciation, or tax savings. On balance, the choice is not an easy one to make.
In terms of absolute dollar outlays, renting is usually less expensive relative to purchasing. Moreover, rents have not been increasing as rapidly as homeownership costs.
Renters do not share the same tax benefits, however. Owners are permitted to deduct interest payments and property taxes and the mortgage interest deduction in itself can be greater than the standard allowable federal deduction.
A home financed for $40,000 at 8.5 per cent for 30 years, for example, will result in a initial interest deduction of more than $3,300 a year for about 10 years.
Another alternative to renting or buying a single-family home is condominium ownership. With a condominium, an individual enjoys identical tax benefits as a single-family homeowner, however, the appreciation aspect is still unclear. Condominiums are relatively new and no track record of appreciation is obvious, but a well chosen condominium, like any good piece of real estate should appreciate.
Most homes are conventionally financed - with a fixed payment over a 30-year period - by lending institutions with no government support or guarantees. But, a conventional loan usually requires a larger downpayment. For households that are not able to make a sufficient downpayment the Federal Government will guarantee a mortgage loan issued by a lending institution. The guarantee is not a subsidy, but rather a promise to make good on the loan if the buyer defaults. This reduces the risk lending institutions must take and thus makes them more willing to issue more mortgage credit.
As an alternative to the fixed payment, 30-year mortgage loan, the government and some state chartered savings and loan associations are experimenting with alternative mortgage payment plans.
Paul R. Maihan is an economist with the National Association of Realtors in Washington.