A man's home became more than his castle during the 1970's. It became his tax-sheltered inflation hedge and major appreciating asset as well. Today a man's home is still his castle, but changing economic forces suggest it no longer may be his premier investment.
A major source of profit to homeowners during the last decade was the ability to take out long-term mortgages at interest rates below the high and rising of inflation. Borrowing at 7 percent was very profitable when home prices were rising at 12 percent and more.
Fixed-rate mortgages gave borrowers the benefits of inflation, but both the mortgages and the benefits are becoming endangered species. After years of bearing the costs of inflation, lenders are abandoning the traditional fixed-rate mortgage in favor of a new form of mortgage, which passes those costs on to the borrower.
Lenders in the future are likely to offer some of variable-rate mortgage. New federal regulations permit variable-rate mortgages tied to an index of money market rates, which generally rise and fall along with inflation. This not only places the costs of inflation squarely in the lap of the borrower, but it places some new risks there, as well.
If the borrowers' income does not rise as fast as the inflation reflected in his variable-rate mortgage, then he may have great difficulty in meeting his monthly payments. If the value of his particular home does not rise as fast as general inflation, then the borrower may find that his home is a poor investment. No one guarantees the borrower will enjoy his hoped-for appreciation in the price of his home, but he guarantees to make those monthly payments or lose his equity.
Mortgage money in any form, fixed-rate or variable, is hard to find today. There is little money available at the nation's troubled savings banks, which are engulfed by a tide of red ink and swept by a wave of new withdrawals. Most other traditional mortgage lenders are in lesser degrees of trouble and have reacted to it by reducing their willingness to make mortgage loans.
The scarcity of new mortgages slows down the "daisy-chain effect," where a homeowner sells his present high-priced home to obtain funds to buy another even higher priced one. If he cannot sell his present home for lack of financing, or if he must finance the sale himself by taking back a large second mortgage, then he does not have the cash buying power to push up the price of the next home he wants to purchase.
High mortgage rates combine with high levels of mortgage debt to impose a crushing burden on personal incomes. Mortgage payments on an average house as a percent of average household disposable income have risen from 15 percent in 1970 to 33 percent today. That willingness to devote ever larger proportions of personal income to housing was a major force driving home prices up during the last decade.
It is unlikely to be a major force in this decade. Buyers cannot raise the proportion of their income going to housing forever, and they probably cannot raise it much from current levels. If the proportion of income going toward housing merely levels off, then large real gains in home prices will become the exception rather than the rule.
Future home prices are victims of their own past success. Home prices have risen so far that they have placed a major strain on the family budget. The past success of borrowers in capturing the benefits of inflation has led to lenders to raise their rates and opt for variable-rate mortgages.
The tax-sheltered features of real estate, while still desirable, are likely to become less important in the 1980's. President Reagan has proposed a comprehensive reduction in personal tax rates, which, if enacted by Congress, will reduce the investment appeal of real estate as the nation's great middle-class tax shelter.
Homes seem to be reversing their decade-long transition from consumption object to investment asset. The absence of favorable mortgage financing and the presence of major strains on the family's housing budget suggest that in the future a home may be nothing more than a nice place to live.