THE AFFORDABILITY GAP

TODAY’S ASPIRING firsttime home buyer may go down in history as one of the most tragic figures of the Eighties-poor wretch. Seldom has anyone been assailed by so many villainous pitfalls. Seldom have anyone’s hopes of realizing part of The American Dream been so rudely and repeatedly dashed.

Even if you’re sitting snug and secure in a home that you bought several years ago on an 8 1/2 per cent mortgage, and you’re smugly watching your equity balloon through appreciation, you should be able to spare a little sympathy for this pathetic character. Just consider his plight: Prices have doubled within five years; interest rates that were totally beyond belief in the mid-Seventies are now commonplace; strange new kinds of mortgages seem designed to squeeze the last drop of blood from the hapless housing consumer; excruciatingly high down payments are required at a time when inflation makes saving next to impossible. These are the qualifying requirements that make a $30,000-a-year wage earner feel like a pauper when he goes in search of a home loan.

On the other hand, if you happen to be one of the unfortunate many who are still scrambling in growing desperation to buy a home of some kind, don’t say we didn’t warn you. Exactly a year ago, in this very space, we tried to give you an inkling of what might lie ahead. “On the whole,” we told you last May, “you may never find a worse time to buy a house-unless you wait until next year.”

Well, next year is here -in spades. Sure enough, things got worse. And unlike last year, when everyone concerned kept insisting, “This mess can’t last,” and pinching themselves in hopes of ending the nightmare, nobody is predicting any “quick fixes” for the malaise enveloping the housing market. The pessimists say that we have already entered an era of permanently high interest rates, drastically reduced capabilities for average families to buy any kind of home, a shrinking and less desirable range of housing options, and one or more generations of lifelong apartment dwellers. To which the optimists can only counter with a weak “maybe not.”

No matter how you slice it, fundamental and far-reaching changes are taking place in the home building industry and the housing market, and there seems little chance that we will ever find our way back to the “good old days” that existed as recently as early 1979. Most observers now agree that there will be no sharp, miraculous turnaround in the housing situation. Frankly, 1982 may be even worse than 1981, and 1983 worse yet. In fact, as dismal as it is, this year may represent the last chance for many would-be buyers to purchase a traditional single-family home.

The past year has brought virtual extinction to some of our most hallowed home-buying institutions. The long-term, fixed-rate conventional mortgage has, for all practical purposes, gone the way of the hand-cranked Victrola. The 95 per cent conventional financing that so many of us knew and loved is as much a relic of the past as the tin lizzy. Fixed-rate interest and low down payments survive only in government-backed FHA and VA mortgages, and with President Reagan calling for cuts in federally guaranteed loan programs, these, too, may soon disappear.

Meanwhile, the new $50,000 single-family home has also shuffled off this mortal coil. Even suburban tract housing is practically nonexistent at prices below the $60,000’s, and most of it is significantly higher. The median price of a new home in the Dallas area is now almost $89,000 (up by more than 103 per cent since 1975), and by year’s end, some experts expect it to reach $105,000.

There are almost certain to be other additions to housing’s casualty list. There are even those who maintain that – as dear as it is to the heart of the Texas suburbanite – the typical free-standing dwelling on its own quarter-acre lot is itself about to become a vanishing breed on the new housing market. It hasn’t happened yet – but it could. Even the most optimistic observers see the coveted single-family residence with its three bedrooms, two baths, attached garage, privacy fence, and expansive yard beginning to yield the dominance it has enjoyed in the Dallas/Fort Worth new housing market for as long as anyone can recall. It isn’t extinct, and there is still reason to hope that it will never be, but it is at least being recognized more and more as an “endangered species.”

I n 1981, roughly three out of every four new housing units built in the area will still be traditional single-family homes. The other 25 per cent will be condominiums, townhouses and zero-lot-line homes, which may still be classified as very “un-traditional” by most land-loving North Texans, but which have literally come out of nowhere to claim a full one-quarter of the local housing market within a handful of years. If market conditions cause the trend to pick up speed, the shift away from single-family homes could hit established local home building and home-buy-ine patterns with earthauake force.

“Trends build up slowly for a while, but then they tend to break over the market like a tidal wave,” says Jack Crozier, president of Murray Financial Corporation, the huge Dallas investment and mortgage firm. “One thing we should have learned from the automobile situation is that Americans will adapt to changing market conditions. Detroit kept telling itself that people wouldn’t give up the luxury of their big gas guzzlers, but when gasoline prices made it impossible for people to keep driving them, they gave them up in droves. I think the same thing is going to happen in housing. It isn’t that people don’t still want the traditional kind of house, any more than they’d really rather drive a Toyota than a Cadillac. It’s just that they can’t afford it any longer.”

“Affordability” has become the housing industry’s favorite catch-word for the early Eighties-and with good reason. Only a little more than a year ago, quality houses, both new and pre-owned, were in short supply in Dallas. The market was pretty thoroughly picked over, and buyers were having to settle for the dregs. But now the situation is almost totally reversed. Early this spring, there were more than 4000 new homes, most of them in the $100,000-and-up category, standing completed, vacant, and unsold in Dallas County. There are plenty of houses for sale, and plenty of people who want to buy them but the price tags have simply moved beyond reach of all but a relative handful.

“I’ve got two new houses in the $130,000 price range that have been on the market for months,” says East Dallas realtor Hugh Feagin, discussing a common dilemma among brokers and developers. “They’re excellent houses for the money and I’ve had contracts on both of them with people who were willing to buy at the quoted price, but they couldn’t qualify for the loans.”

The fact that houses themselves have become much more expensive is less important in this scenario than are those elevated interest rates (currently 15 per cent or more on conventional mortgages and about 14 per cent on FHA and VA loans) which do nothing but add to the cost. To understand why so many people can’t qualify for loans, consider how times have changed during the past three or four years.

In 1977, an individual or family with a $30,000-a-year income would have had no difficulty in qualifying for an $80,000 mortgage. The house would have been palatial; the down payment would have been $5000 or so; the monthly payments, including taxes and insurance, would have run perhaps $750 per month.

Today, of course, you wouldn’t get nearly as much house for an $80,000 mortgage, even after paying 20 per cent down. But the point is, if you were still making only $30,000 a year, you wouldn’t be assuming an $80,000 mortgage at all. You couldn’t qualify.

Market analysts believe that more than 50 per cent of the potential first-time home buyers have found themselves in this exact situation -priced out of a market they desperately want to penetrate. And even many present home owners are finding it impossible to “trade up” to the new home they want.

“Five years ago, you could qualify for one of our lowest-priced houses with an annual income of $10,000,” says Dave Fox, chairman of Fox & Jacobs, the area’s largest home builder. “Today, you’ll need close to $30,000 a year to qualify for our lowest-priced house.”

Obviously, few families or individuals have seen their incomes triple within this five-year period. Thus, the increasingly urgent quest for “affordability” on the part of both builders and buyers of new housing. “The affordability problem is the number one problem, because we’re cutting more and more people out of the market,” says Frederick Roach, president of Centennial Homes. “We’ve got to come up with something affordable.”

In the view of Herman Smith of Fort Worth, current president of the National Association of Homebuilders (NAHB), that “something” is going to be smaller, cheaper housing units. “The affordability factor is going to force down the size of houses, just as the energy crisis caused people to drive smaller cars,” Smith says.

A move in this direction has already trimmed the size of some lower-priced suburban tract houses from more than 1600 square feet of floor space to less than 1200 – but it is apparent now that more stringent measures are needed. Alternative types of housing, in which more individual units can be crammed into the average acre of land, seems to be the only answer.

Besides rampant inflation and ravenous interest rates, there is yet another important factor in this shift. Dallas County is rapidly running out of land suitable for large-scale residential development-at any price. The entire north side of the county is already either developed or in the final stages of development, and even in such adjacent counties as Collin and Den-ton, desirable tracts are getting scarce.

’The first problem is finding land at all,” says Murray Financial’s Crozier. “Then you can worry about the price. Most is already in or gravitating to very strong hands, and there’s just not a lot left to pick from.” What there is, mainly in far western Piano and the Carrollton area of south Denton County, is going for $28,000 to $30,000 per acre. “This means you’re talking about $30,000 to $35,000 lots,” Crozier adds, “and this means you can’t use this land for single-family homes that sell for less than $150,000 to $200,000 -and houses in that price range are simply out of the mainstream of today’s market.”

While conceding that the north side remains the most “desirable” area for Dallas’ more affluent home buyers, this situation has caused Murray and other major investors in the housing market to shift to the east, to the Mesquite-Garland-Rockwall-Rowlett-Sunnyvale area, where land is still available for $14,000 to $20,000 per acre. “Most of your higher priced housing is still going to be concentrated in the north,” says Crozier, “but the mass market is moving rapidly from north to east. All your major developers are active there, and land is selling like hotcakes.”

Much of this land will eventually be used for something other than detached single-family homes. In all probability, it will be consumed to a great extent by duplexes, townhouses, “cluster” homes, condominiums, and other types of housing units which are still rare and unfamiliar in most of present-day suburbia. The projections of Fox & Jacobs provide one glimpse of what lies just ahead. “In 1979, we built no attached housing at all,” says Dave Fox. “In 1980, it accounted for 5 per cent of all our activity; in 1981, it will run between 15 and 20 per cent. By 1985,1 suspect it will be around 50 per cent. Beyond that, it’s pretty hazy, but the trend is obviously in that direction.”

Not all experts agree on what will happen in that hazy area beyond the mid-1980s. The Texas Real Estate Research Center at Texas A&M cheerfully predicts that the long-term trend toward universal homeownership will continue, and possibly even accelerate, during the rest of the decade. Furthermore, the TRERC adds, the detached single-family home is here to stay and will make up the greatest share of the estimated 1.75 million new housing units needed in Texas between now and 1990.

Few would argue that the detached single-family house will still be the housing of choice for those who can afford it far into the distant future. But from a purely practical standpoint, countless others will have to turn elsewhere to purchase housing, and many others will be forced to accept the status of permanent renters, as has been the case for many years in the older cities of the north. “The rich will always be able to buy pretty much what they want,” says Fox, “but the middle income folks are having a tough time.”

Even if you are among the fortunate few who can afford one of today’s larger new homes, the experts advise you to think a long time before you give up your equity in an existing house and plunge into the uncharted waters of a new mortgage. Even if you have a sizable equity that could offset much of the expense of moving up to a newer, bigger domicile, beware. It may be easier than you think to get in over your head. One Dallas couple, for example, bought an older house in a well-kept neighborhood in 1976 for $24,000. After five years and a few thousand dollars worth of fixing up, they sold it in 1981 for $145,000. But even with more than $100,000 in equity to put down on the $200,000 castle they had their eyes on, they faced a mortgage of nearly half that purchase price. And instead of the comfortable $250-a-month payments they once enjoyed, they must now shell out more than five times that amount to meet their monthly housing obligation. “It didn’t take long to decide it wasn’t worth it,” says the huband ruefully, “but there’s no going back now. We’re just stuck with it.”

There are various intriguing ways to get “stuck” when buying a house these days. Especially for a public that has taken fixed-rate interest on home mortgages blithely for granted for all these years.

You may find yourself hooked into one of the new shared appreciation mortgages, in which the lien-holder may be able to claim half of whatever appreciation you realize on your home over a period of years, in return for a more favorable initial interest arrangement. Then there’s the graduated payment plan, under which monthly payments rise over a five-year period -and which some observers fear may cause many buyers to lose their homes when their income fails to rise accordingly. Under another plan, you can actually see the principal on your home mortgage grow larger, if the interest rate on the loan is not as high as the going market rate. In other words, you pay on a $100,000 mortgage for five years, only to discover that you still owe $110,000 at the end of that time. “Negative buildup” is what they call it.

To prospective home buyers-particularly those on the lower end of the economic ladder -all such plans have the same ultimate effect. They simply reduce the amount of real equity that a buyer can accumulate in his home. In the market of 50 or 60 years ago, even the home buyer who had to pay for his house “on time” expected to own it outright within five or six years. Beginning with the massive federal home loan programs of the late Forties, most buyers learned to live with the 30-year note, but could still claim a substantial equity after 10 or 15 years. From here on in, however, they could end up paying to the limit of their ability for 30 years and still end up with nothing worth selling. Since equity has always constituted a main middle-class form of saving, this means a diminishing chance to build net worth and financial stability for generations to come. “Home buyers are losing their equity,” says Crozier. “They are winding up with less house and less opportunity for equity buildup.”

A major problem in the current housing picture is that, despite painfully high interest rates, home mortgages are not bringing in sufficiently attractive returns to investors, in comparison to other investment possibilities. With money-market CD’s, for instance, paying 16 per cent, investors are less than anxious to put their money into home mortgages at 14 per cent. This is why many observers doubt that mortgage interest rates can be reduced anytime soon, and why some predict further increases in the near future.

With the government easing restrictions on lending and investments, the country appears headed for a genuine “free market” economy for the first time in most of our lives. It is probably only a matter of time until the federal government discontinues the artificially low, fixed-interest mortgages it now guarantees on FHA and VA loans. “It could be a year or it could be three years,” says Fox, “but it will happen.” When it does, it almost surely means more chaos for the housing market and more frustrations for anyone trying to buy a house.

“In a free market – and I think we’re going to it -the home buyer will have to compete against the rest of the world with no government shelter,” says Crozier. “We’re undergoing a fundamental change in the way we finance real estate. We don’t know everything that’s going to happen yet, but it’s going to put everyone who needs housing under considerable pressure. It will force a greater percentage of the population to remain in apartments permanently, but they’ll still be under the same pressure. Apartment rents have just begun to rise in this area. They may go up 25 per cent by the end of next year.”

Meanwhile, the savings and loan industry-the source of most conventional home mortgages in the Dallas area -is itself in grave circumstances because of upheavals in the investments market and wildly gyrating interest rates. Some fear that it may become extinct long before the single-family house, unless drastic measures are taken in Washington to save it. A number of large S&L’s in other parts of the country have already gone broke, and although continuing “boom” conditions in Texas have kept that from happening here thus far, many local firms are hurting.

“My association lost money in January, broke even in February, and God knows what we’ll do in March,” says one suburban S&L president, “but we’re still in better shape than a lot of other associations. I don’t expect you to understand or sympathize with this as a borrower, but our interest rate on mortgage loans really should have been around 18 per cent for all of last year in order to give us a decent profit picture. Now, rates have got to stay high enough for us to take up the slack. Otherwise, we’re dead.”

There are a few solitary rays of hope amid all this gloom. For one thing, insiders feel that there’s an excellent chance for Congress to pass some kind of legislation which will completely exempt savings accounts from income taxes on the interest they earn. This would have two almost-immediate results: (1) it would give the S&L’s a vital new source of funds with which to make profitable home mortgages, thus bailing them out of their present difficulties and also making mortgages more accessible to the home buying public; (2) it might even trigger a long-term downturn in mortgage interest rates.

For another thing, the reluctant move toward smaller housing units is forcing developers to experiment with new concepts, new designs, and new efficiencies that are almost certain to eliminate much of the wasted space that has always characterized the single-family home, and to make homes of the future more comfortable and convenient -as well as more compact.

As one example of this, U.S. Home, the national company that builds more housing units than any other American firm, has already introduced a “sub-compact” condominium that contains just 423 square feet. “The footage is minimal, but the utilization of the space is outstanding,” says Clark Roland, regional sales manager for U.S. Home. “Most buyers can’t believe it, because it seems at least one-third bigger than it really is.”

And, as a final hopeful sign, there are some indications that the runaway inflation of the recent past may be slowing down at last. “The market isn’t ’flattening out’ by any means, but prices aren’t increasing as rapidly,” says Ron Witten, president of M/PF Research, a real estate consulting and analysis firm. “There has been some slowdown in the rate of land cost increases, and both condominium and single-family home prices have stabilized a bit.”

So maybe there’s time. Maybe you’ll yet find a way to own the home of your dreams, if you’ll just keep trying. But if that dream home isn’t a condo, a town-house, or some other kind of “alternative” housing, you don’t have a single day to waste. Time is running out.

“I don’t want to be an alarmist,” says Dave Fox, “but I don’t know how the typical young home buyer is ever going to get a single-family house of his own, unless he does it in the next five years.”

And don’t say we didn’t warn you.