Concerned over the impending recession, homeowners, buyers and investors are beginning to cut back on their real estate activity, according to brokers and analysts in major urban markets across the country.
Realty sales from southern California to Minneapolis to New England are down by 5 to 15 percent from last year. Demand for mortgages is also off slightly, prompting large-volume lenders on the West Coast to drop their prime home lean rates this week by 1/4 to 1/2 percent. Rates in most other big cities have now stabilized in the 10 1/2 to 11 percent range, and could show marginal declines in the coming several weeks.
Concern over the economic outlook is also contributing to a softness in Chicago's once torrid condominium investment market, and to the presence of 35 percent more unsold dwelling units in the greater Milwaukee area this summer over a year ago.
Thus far, brokers report, the buying public isn't over-reacting to the possibility of recession. But many consumers are unsure about the impact of a general economic slowdown, and many more - particularly in the younger segments of the market - are unfamiliar with what occurred in prior recessions.
To put real estate recession worries into perspective, here are some facts and forecasts about housing, mortgage money and appreciation rates.
Q: Are property values likely to fall in a recession?
A: Housing property values in good neighborhoods and in economically strong metropolitan areas - such as Washington, D.C. - are likely to keep rising through all but the most severs recessions, but at a slower rate than the past three boom years. Even in the 1974-75 recession, which was the most severe in three decades, property resale values rose steadily at 5 to 8 percent in the Washington area, and in many other economically sound urban markets. Property values have not fallen across the board na- tionally since the early years of the Great Depression.
Even in that economic cataclysm, the declines on well-located homes and other real estate in good condition were relatively modest and temporary.
Q: What kind of real estate is most vulnerable during a recession?
A: Speculative real estate, overpriced condominiums and cooperatives, property in marginal center city neighborhoods dependent on economic expansion to sustain values, tend to suffer the most during economic downturns.
Q: What will happen to interest rates in this recession?
A: No one can predict interest rates with certainty, but if this slowdown is like others in the past two decades, mortgage rates should decline from peaks they hit - 12 percent on the west coast, 11 1/2 percent in eastern and mid-western markets - during the "up" phase of the economic cycles. Rates of 10 percent or even lower may be witnessed again if the recession continues for six ro nine months.
Q: Is mortgage money as likely to dry up in the current economic slowdown as it did in the 1974-75 money crunch?
A: One of the keys to housing's present strength in the economy is its new competitive ability in the capital markets. Through liberal changes in federal regulation of lending institutions, the creation of two major, federally-chartered secondary mortgage market corporations, and the creation of new investment vehicles to tap capital resources such as mortgage-backed securities, housing is able to hold its own in any tight credit period. The availability of financing - even at high interest costs - should help sustain values in real estate.