When the average worker cannot afford the average home

Warped by inflation and wracked by the efforts to cure it, the United States housing industry enters the 1980s inauspiciously. During the next few years bankers and builders will play a delicate game of "pickup sticks" to put the pieces of the $100 billion industry back on a firm foundation.

Barring unforeseen economic shocks, they should succeed.

But the interim struggle for those buying a home will be arduous. Prices are not likely to plummet. The term "affordable" will remain relative to the new price scales brought on during the 1970s. Potential new homeowners will work harder to wring more dollars from their paychecks to assemble a down payment and obtain a mortgage.

In short, shelter is fast becoming a luxury item. There are still bargains. But in the places where most people want to live, in the thriving economic regions of the Sunbelt, the cost of housing is rising right along the demand.

The exasperation felt by many was depicted in a recent editorial cartoon by Tony Auth. Winnie the Pooh, standing despondently in front of Christopher Robin's tiny tree house, thinks "Sigh . . . I'll never be a homeowner." A sign in front reads: "For sale, $95,000."

Minuscule bungalows, indeed, are sometimes sold in southern California for prices that approach six figures. In rest of the country, the situation is not that bleak. But where costs are somewhat reasonable compared with the situation in southern California, steep mortgage rates are making purchases prohibitive.

The Oct. 6 decision by the Federal Reserve Board to sharply increase the discount rate it charges member banks from 11 to 12 percent was intended to make money more expensive to borrow and to control the money supply. It worked. Interest rates soared. And, right in step, mortgage rates did too -- above 13 percent.

As the demand for credit slips this year, those rates will decline some. But they will remain in most markets well over 10 percent -- a level that most economists believe is too exorbitant for a healthy market.

The effect of high mortgage rates on the key question "to buy or not to buy" is easy to see. The Median price of a new home today, according to Data Resources Inc. (DRI) of Lexington, Mass., is $67,700. With a 20 percent down payment, a 25-year loan, and a 9 percent interest rate, the homeowner pays $455 each month. If the rates rise to 14 percent, the monthly payment jumps to $652 per month.

That extra $197 quickly cuts off most buyers. In 1977, according to DRI, 25 percent of all families could afford the median-priced new home in the country. Today, just 20 percent of all families can afford that same home.

If inflation stays high -- and most forecasters expect it will dip only to 11 or 10 percent in 1980 -- interests rates will remain lofty as well. and while sellers today find most housing markets slowing, prices today are not taking a comparable dip for a reason that is uniform from coast to coast; demand.

The babies of the baby boom need a place to live. Foreign investment and speculation absorb some real estate, too. And general immigration takes its share.

Housing experts say that 2 million houses need to be built every year to meet that demand. But in 1979, just 1.7 million new homes were added to the landscape and only 1.4 or 1.5 million starts are expected in 1980. By 1981 or 1982,in other words, the backlog for the industry will be considerable. But if the money markets are squared away by then, the industry should experience a strong surge. Even then, prices will stay high.

"Everybody likes to remember the good old days, but I think we have to look at where we are," says Eli Broad, the chief executive at Kaufman & Broad Inc., a major home builder based in Los Angeles. "It is difficult to build any other case than for continued appreciation."

A "baked in" inflation rate of 8 percent due to soaring energy costs, says Mr. Broad, guarantees that trend.

Continued inflation further furrows the brow of savings bankers, who endured a horrible 1979.

With savings banks offering depositors interest rates that are 6 to 7 points below the rate of inflation, consumers have moved funds out of their passbook accounts and into durable goods, long-term certificates of deposit, money market funds, and other investments like art and antiques. The effect of that trend on the housing industry is serious because savings accounts provide the bulk of money available to lend in the form of home mortgages.

"Things have deteriorated pretty badly," says Saul B. Klaman, president of the National assocation of Mutual Savings Banks, whose 465 members account for $ 165 billion in total assets. Between April and November of 1979 the bankers experienced a 4 percent net outflow of savings deposits. "That reduced our mortgage commitments to a trickle," says Dr. Klaman.

For the money that is available for the mortgage markets, therefore, banks ask -- and get -- top interest rates.

In many states -- at last count 22 -- usury ceilings further dampen lending activity and depress the housing market. Those usury laws are designed to prevent loan-sharking, but the high interest rates force many bankers to hold their money instead of taking a loss on loans made below the going rate.

"If it weren't for usury laws, mortgage bankers would be able to do a better job providing money for the market," says Mark Riedy, exexecutive vice-president of the Mortgage Bankers Association of America.

Many banks in Wisconsin simply stopped accepting applications for mortgages last October. Activity is only now beginning to pick up again. Some Chicago banks started requiring 40 percent down payments.

In late December, President Carter passed a bill that exempts mortgages backed by the Federal Housing Administration (FHA) from state-imposed usury limits. But the bill includes a curious twist that reduces its effectiveness: The exemption is only valid until the state decides to reimpose a ceiling.

The Carter administration also is working on a number of steps to stimulate construction. One would boost interest rates for savers who invest in savings certificates, another would subsidize interest rates on home mortgage through provisions of the 1974 Emergency Home Purchase Assistance Act.

Congress recently acknowledged the severity of the problem when it raised the mortgage limit available through the FHA -- about 7 percent of the market -- from $60,000 to $67,500. Other plans are being fashioned for the Federal National Mortgage Association to purchase home mortgages at below-market interest rates in order to increase the supply of mortgage funds and to slash payments for potential buyers.

Like a piece of plywood, the layered economic troubles are difficult to break. "It will be late in the first quarter [of 1980] before we see any significant easing in interest rates," says Richard G. Marcis, the acting director for the Office of Economic Research at the Federal Home Loan Bank Board. "Even in the ensuing recovery in the mortgage market," he adds, "mortgage rates will not fall much."

For now, the spiral continues. Consumers regard housing as a prime investment, which increases the demand for existing homes, boosts the prices that sellers can post, and fans the fires of inflation.

Around the country, housing markets vary; but the few are free of trouble. A check on several regions shows:

Southern California. This area holds the dubious distinction as the most expensive housing region in the country. Larry Kimbell, director of forecasting models for the University of california at Los Angeles Graduate School of Economics, put it succinctly: "The average worker can't afford the average house."

In April last year, the average price of an existing home in the seven-county region around Los Angeles topped $100,000. At that time, the annual rate of increase had stabilized at about 20 percent. That rate has dipped some since, but not much -- perhaps 5 or 6 points. Just by sitting on their property homeowners in and around Los Angeles usually make a profit well above the rate of inflation. With a little investment in the house, they can positively clean up.

Rent control and moratoriums on apartments being converted into condominiums have further discouraged investment from developers and stepped up the already insatiable demand for single family homes. The situation is so bad that many southern California industries cite the high cost of housing as a deterrent to their growth. Employees can't be brought in.

All over the basin, prices are high enough to make outsiders flinch. Comparable quarters in the East and Midwest are often $50,000 less.

The Northwest. Prices are more reasonable. But the pressures are on. "It would be a mistake to wait for the prices to come down," says John M. Teutsch, the president of the Ranier Mortgage Company, a subsidiary of Ranier National Bank. In the state of Washington the 12 percent usury ceiling has depressed construction in the past three months, but the demand continues unabated. That demand, says Mr. Teutsch, is felt in Oregon, too, and should extend for 10 years.

The success of the Boeing Company, currently on an extended upswing, and of the Port of the Seattle has kept the employment base sturdy. "TThe supply of affordable housing in the metropolitan area [of Seattle] is in trouble," says Mr. Teutsch. "But assuming we get a handle on the economy we should have an outstanding decade in the Northwest."

Texas. The most-affordable region checked. A small tract home can still be bought for $40,000. That is partly due to some overbuilding in Houston that is forcing builders to back off. Texas housing starts will drop 15 to 20 percent in 1980, says George E. Crosby, the chief economist for first City Bank Corporation of Texas.

A floating usury ceiling still hovers around 12 percent in Texas, and since the state imports credit from New York insurance companies, among other sources, builders and bankers now are finding it difficult to attract money. With construction slackening, says Mr. Crosby, there is likely to be a shortage of single-family homes in the second half of 1980. But again, demand will not dip, especially in cities through midland and west Texas where energy-related activity is strong.

Thus the price posted on many homes will still prompt buyers to think twice. "The average price is leaving the mass market behind," says George H. Matters, a senior vice-president at US Home Corporation in Houston, the nation's largest builder. But the industry found in the early 1970s, he says, that buyers are not interested in stripped-down dwellings as an option to high prices.

"Bare bones does not sell very well or have much appeal. They may accept fewer square feet, but they want the amenities of a regular house," says Mr. Matters. Paying for those extras requires more income per household. Two-thirds of those families who bought from US Homes last year had at least two incomes.

Florida. "The buying frenzy is still going on," says Donald L. Koch, chief economist for Barnett Banks of Florida Inc. in Jacksonville. The Housing market there is propped up by foreign investors, particularly from Europe and Latin America, and from the general migration to the state's warm climate. Between 1980 and 1990, says Mr. Koch, Florida's population will move the state from the eighth largest to the fourth largest in the country, from 9 million to 13 million residents.

Dade County is absorbing much of the growth, most of the lush condominium developments, but the spillover to other cities, especially along the West Coast , is well under way. Buying into Florida will not be easy, says Mr. Koch, who sees another peak in the interest rate developing next spring when the new round of oil price hikes pushes inflation up again.

Chicago. The housing market is quite. But single-family homes are still valued at $80,000 and up. "It's going to be stretch for new families -- there's no doubt about that," says E. Stanley Enlund, the chairman of the First Federal Savings and Loan Association of Chicago Some homes are overprised, he says, but not many.

The demand has led to a downtown revival in housing and to the success of a new project known as Dearborn Park in the South Loop. "We are really having a renaissance in terms of people returning to the city," says Mr. Enlund. "It is a very gradual but very strong evolutionary process that is changing the city itself."

But that shift will not create much slack in prices in other sections of Chicago. "there are buyers standing by now, but that pent-up dedemand will break through after midyear," says Mr. Enlund. "Once the buyer makes up his mind that inflation is not going to disappear, he comes back into the market."

New York. A usury ceiling of 10 1/4 percent, one of the stiffest in the country, forced banks to tighten credit and require tougher terms for potential home buyers seeking a mortgage. the market slowed to a crawl. Prices have remained flat and in some places have begun to drop. But bankers and builders throughout the state expect strong demand right through the 1980s and prices, as always, are likely to stay high.