To a large extent, the Washington residential real estate crisis of 1979 is about ended -- and not just because a new year and a new decade are about to begin.
Mortgage rates here have peaked above 14 percent and are beginning to edge lower slowly. There is money to lend. Houses are being bought and sold every day -- some with price tags of more than $300,000.
During 1980, the prospects include continued declines in mortgage rates, to perhaps 11 percent, and a resumption of active house-hunting by current residents of the area as well as newcomers. Prices that have appeared to level off in recent weeks may head higher again as soon as cherry blossoms start to bloom around the Tidal Basin.
These developments come in the wake of a degree of panic that started to build here this fall and hit a fever pitch after the Federal Reserve Board moved in early October to restrain credit growth throughout the American economy.
The near-speculative binge in which house prices here soared well beyond the general inflation rate convinced many that the boom would turn inevitably to bust, especially in an environment of record-high interest rates that would discourage property transactions.
Alan Greenspan, former chairman of the Council of Economic Advisers, warned in testimony before the Join Economic Committee that many home purchasers had assumed "inordinately large debt in the expectation that in a few years inflation, in general, and constantly skyrocketing housing prices, in particular, would bail them out of their temporarily precarious debt burden."
His sober testimony came 50 years to the day after the Wall Street collapse in 1929 that was a psychological starting point for the Depression.
As interest rats soared throughout metropolitan Washington in October and November, housing transactions began to subside, the gap between asking prices and final selling prices began to grow and the time lapse between putting a house on the market and settlement also expanded.
Buyers were scared by the new rate structure. A $50,000, 30-year mortgage at 13 percent carried monthly interest and principal payments of $553, compared with $438 at 10 percent. Could other expenses be reduced by an amount equal to the higher monthly cash costs of buyng a house? Was a real estate crash starting? These were questions on many minds.
Typical of what happened is Washington builder Hendrick Browne's experience with houses he had remodeled near Hechinger Co.'s old warehouse complex on the outer fringes of Capitol Hill.
He advertised the houses and called brokers all over Capitol Hill to say that he had financing available at interest rates two points below what most lenders were charging. "We got no response, which indicates very clearly that people were not making an economic decision. It was an emotional decision based on the fact that everyone said it's a terrible time to buy," said Browne, president of Hendrick A. Browne & Associates.
For a while, all real estate transactions were halted in the District, and there were fears of an impossible credit crunch that would last until next spring. But Congress moved with unusual speed to ratify the city's most recent version of a 15 percent mortgage interest rate ceiling, and real estate actvity has now resumed in the city -- albeit in the rarefied atmosphere of 13 percent to 14 percent in permanent mortgage financing, with similar rates prevailing in the suburbs.
Today, it is the same story throughout the region: Real estate sales and purchases are being contracted every day but ther is a new attitude of caution all around.
Big houses, small houses, town houses and apartments are on the market and they are selling -- from $72,990 town houses at Lakepointe in West Springfield and $161,000 town houses at Old Georgetown Village in North Bethesda, to $91,900 houses near Chantilly, $345,000 Castro-Holdsworth homes in Potomac, houses in the $40,000 range by the Ryland Group in Forestville and condominiums starting at $25,000 at Carrollsburg Square in Southwest D.C.
To be sure, some projects have been sent back to the planners' shelves. Some mortgage financing companies have suffered a temporary cash flow shortage -- fatal in the extreme cases.
Mortgage rates are at the highest levels in modern history and this is being translated into fewer house sales for the moment. there are abundant hints of troubles to justify pessimism. It is obvious that the structure of the real estate industry is undergoing a dramatic change toward large companies with nationwide franchises, to help spread out expanding costs of doing business.
In many respects, however, the new caution that has put a brake on housing price inflation is one of the most hopeful developments in recent years. And people should not expect the same sort of price inflation seen in area properties over recent years, although gradual appreciation is expected to continue.
Throughout the 1970s, average housing prices here climbed at an annual rate of more than 10 percent and by the summer of 1979, new single-family house prices had soared to an average of about $100,000 -- up 14 percent from a year ago. Town houses averaged $81,000, up a staggering 32 percent in one year.
"Unnatural . . . unhealthy," said broker Foster Shannon in describing the prices being asked for houses in 1979 -- prices that represented a doubling or tripling of initial investments just a fews years ago.
"Each time prices jump like they did in 1977, 1978 and this year, we lost a segment of people from the home-buying market . . . people move up from smaller to larger homes, but they can't afford to do so when the houses they want have prices they can't afford . . . I'm glad to see the lid come down for a while," said Shannon, president of Shannon & Luchs Co., a Washington-based firm that is among the largest real estate businesses in the area.
Added Thomas Owen, who heads the area's largest thrift institution, Perpetual Federal Savings and Loan Association: "I don't think people can expect the same rates of appreciation they saw in 1976, 1977 and 1978. Frankly, I hope we don't return to those because they just mean inflation is rampant . . . It doesn't mean the house is worth more."
Shannon said he views the current situation as part of a normal cycle and not much different from the housing slowdown here during the last recession, in 1975. "It's happened periodically ever since I've been in real estate," he observed.
Shannon praised the Federal Reserve attempt to slow inflationary fires but criticized the Carter administration for not taking steps earlier to reach the same goal. "The government action came too late," he said.
And the substantial consequence will not be a major housing recession in 1980, which is what the builders and real estate industry economists warn about today, but "a severe housing shortage" in the Washington area and other major markets, Shannon said.
A lot of builders currently face a "terrible problem" -- the cost of borrowing money from their banks at two or three points above the prime rate, for an effective interest rate of 18 percent or more, he said. "That's enough to choke builders, and projects have been delayed some lost forever," Shannon added.
Still, the sales volume at Shannon's firm has not withered. During October, Shannon & Luchs transactions were up 5 percent from a year ago and dollar sales volume was up 10 percent, for a firm where more than half the volume comes from residential property sales. "In 1975, we didn't lose any money. It wasn't a disaster. It won't be that bad now but something similar," Shannon added.
When building resumes in earnest next year and buyers return in droves to the market, these factors will force housing prices up even higher than they have been because of an artificially created shortage.
Washington economist Leon Keyserling, who headed President Truman's Council of Economic Advisers, argues that periodic, government-induced credit shortages have created not only inadequate housing supplies but also reduced gross national product, a loss of 8.5 million years in construction employment and a loss in government tax revenues on property exceeding $500 billion.
The problem of housing shortages is particularly relevant to the Washington area -- high interest rates or not -- because many families are moving here as their companies relocate employes, because many small households are locating in the District and leading to an acute housing shortage for low-income residents and because long-term trends point to continued employment growth in both the government and private sectors at relatively high wages.
The individuals involved like large single-family houses and in-town living.
About 1,000 families, many of them now residents of the New York City area, already are looking for houses in the Washington area because Mobil Corp., the petroleum and retail giant, is moving its U.S. domestic marketing and refining headquarters from Manhattan to Fairfax County.
Sites in Northern Virginia, around the Capital Beltway in Montgomery County and the District are being shown to the Mobil workers by several area brokers -- with all moves scheduled to be completed by the end of next summer. There is a virtual requirement that hundreds of existing houses changes hands and additional hundreds of new houses be completed and sold within a few months.
In addition, American Telephone & Telegraph Co. has approved mortgage subsidies for more than 300 families who will move to the are starting in February. Southern Pacific Communications will be relocating families to the area in the near future, with its headquarters planned for Montgomery County. Dozens of national corporations are either expanding facilities in the area or bringing their entire shops here, all of which translates into future housing needs in the city, its neaby suburbs and the far reaches of the greater Washington and Baltimore region.
To some extent, the regional housing situation was misread during the fall. While there always is demand for house purchases here, activity normally declines during autumn in any year. Thus, to some extent, the current slowdown is a seasonal phenomenon and the likelihood is that housing prices will not be coming down by much before resuming an upward path.
The only year during this century that real housing values were actually declined was during 1931, and if that history is repeated in the near future -- because of a Mideast oil crisis or cataclysmic international confrontation that can't be foreseen -- values of all investments or property would decline and depression would be duplicated. The likelihood of such events is remote.
Instead, according to Perpetual Federal's president Owen, Washingtonians should look forward in 1980 to a year with real estate sales slow in the first months of the year but picking up after spring.
"I think the interest rates will come down about mid-year, if not before," he said. For the time being, potential home buyers "will be faced with the same dilemma they're always faced with -- is it better to defer buying in hopes that the interest rates will go down farther or take advantage of the . . . current market and buy at the prices prevalent."
Owen said he thinks "housing will continue to be a strong commodity in 1980 and that mortgage money availability will increase."
Edwin Brooks, president of Security Federal Savings and Loan Association in Richmond and the new head of the U.S. League of Savings Associations, said last week that he expects the 1980s to be "boom years for the housing industry" and for S&Ls, which provide a large share of housing mortgage money.
But Brooks noted that in order to meet an estimated $1 trillion of mortgage fund requirements in the next decade, buyers and sellers or houses will face a new array of tools besides the traditional mortgages now used. "Although the standard fixed-rate, fixed-term mortgage will continue to be an important home financing mechanism during the 1980s, we expect to see a much broader use of such mortgage alternatives as the rollover, or renegotiable, mortgage which is today standard in Canada; the variable rate mortgage (where interest charges vary with money market rates); and the graduated payment mortgage, which can be very useful to younger home buyers purchasing their first home," Brooks said.
In addition to changes in the types of financing, other developments that can be expected in the 1980s include a consolidation of the S&L industry itself as smaller institutions are merged into larger S&Ls that can compete more broadly for money to lend.
Pressure will grow for regulating the mortgage banking business and national real estate companies will become common but still supplemented in individual local, small firms that will continue to offer the sort of specialized and personalized services that make them attractive to many buyers and sellers.
By the end of the 1980s, the area will need an estimated minimum of $200,000 new housing units for a growing population. The suburbs here will grow because many new employment centers are being built in the Maryland and Virginia counties near Washington. But the recent upturn in house-buying interest in the central city probably will assume boom proportions as smaller household units seek to live near their places of work near leisure attractions.
There will be more middle-aged persons and gasoline will cost far more than today, placing a premium on city properties because of growing demand. More town houses will be built in the city and many more condominium apartments, too.
Browne, the District builder who has been in business for himself since 1976, is convinced that in the long run "we are going to make a lot of money," even tough the current situation is clouded. Once the crunch is over, "we're going to do so well," he said of 15 houses he is remodeling in Northeast Washington. "I'm working in Capitol Hill and I've got the only houses under $90,000. I'm going to sell my houses."
Today, however, the decisions by potential house buyers to stop looking are making life rough for builders such as Browne, who has laid off some workers. Lenders are reluctant to put money into enough new projects to keep businesses like his going full steam and so he is doing some of his own subcontracting and other things to keep busy.
"It's a survival technique. I've got to keep working to pay the rent," he added.
Not surprising for a builder, whose economic future depends on people buying, Browne thinks the conventional wisdom is wrong. He argued that this is a good time to buy. "For somebody who makes $30,000 and qualifies for a $75,000 mortgage under normal circumstances, if they continue to look for a house for which they normally qualify, the chances are very good they'll be able to put it together," he said.
"The builders are willing to do what they have to do. The banks are willing to do what they have to do. Everybody is in a business based on moving the product. Nobody gets in trouble until the product is not moving," Browne continued.
He predicted that once the current slowdown is over, house prices will rise again so that buyers will pay more than under the high interest rate structure they now face. People with housing to sell will recover their carrying cost for the period in which they didn't sell the houses and with available units on a decline, prices will be pushed up.
Builders and sellers should not panic and reduce prices, he advised: "The problem is not whether I'm going to sell my house but when I sell my house. It doesn't matter what I charge for the house because nobody is buying anyway, so why cut the price?" CAPTION: Picture 1, Houses costing from $320,000 to $340,000 in builder Jessica Berk's Bradley Bend project in Bethesda: A number of new homes here bear similar prices. By Larry Morris -- The Washington Post; Picture 2, Construction along MacArthur Boulevard earlier this year: Demand for in-city housing here has continued unabated. By Margaret Thomas -- The Washington Post