Keeping a firm financial foundation as roof falls in on housing prices


October 24, 1990|By JANE BRYANT QUINN | JANE BRYANT QUINN,1990 Washington Post Writers Group

NEW YORK -- If your house is worth less today than it used to be, you have plenty of company. Median prices will drop this year in 17 of the 50 largest metropolitan areas, according to the WEFA group, an econometric forecasting firm in Bala Cynwyd, Pa. Last year, 10 areas showed declines.

In a few unlucky areas, prices will slide from 1989 right through 1991. That's not quite as bad as the "Houston disease," which is five straight years of falling values. But it's coming close. The three-year losers: most of New Jersey; Hartford, Conn.; Long Island, N.Y.; and New York City.

On the other end of the scale lies Seattle, where the median house may gain 21 percent this year, on top of a 24 percent rise in 1989. Memo to Seattle: New Yorkers, Bostonians and Washingtonians remember how that was.

Such huge speculative gains usually are a prelude to disaster. But the Northwest may escape the sharp price reversals suffered by homeowners in the East because -- for now -- the gathering recession seems likely to pass that region by. Analyst Sara Johnson of the forecasting firm DRIMcGraw-Hill in Lexington, Mass., predicts that growth will slow in the Pacific Northwest but will not stop.

Even so, Seattle's boom in housing values is probably history, so this is no time to speculate. WEFA predicts price gains there on the order of 3 percent in both 1991 and 1992.

If you're living in a city where prices have dropped, your response will depend on your personal plans:

* If you're happy in your house and intend to stay, the bad news on housing doesn't matter. You can afford to wait out the decline. Over the long term (say, five to 10 years), housing prices generally match the inflation rate.

* If you planned on borrowing against your house, your credit line may be curtailed. Before the drop in

housing values, bankers were lending up to 85 percent of a house's value to people who earned enough to carry the loan. Now, many banks won't go higher than 70 percent.

* If you're thinking of moving, don't. Stay put for a few years, until the slowdown (or recession) passes.

* If you must move, don't buy a new house until you've unloaded the old one. Thousands of Americans are staggering under the burden of two mortgages. That's the road to foreclosure, which will ruin your credit record for years.

What if you've taken a new job in another city? Rent a room there until your house is sold, even if it means leaving your family behind and commuting home on weekends. It's the lesser misery.

* Consider renting your old house with an option to buy. The tenant pays the rent, plus something for the option, plus money toward the down payment. The price of the house may be fixed later, say in three years.

Three warnings if you go this route:

(1) Rent only to someone likely to qualify for a mortgage in the future.

(2) Don't let a slick investor talk you into giving him an option to buy for no more than the price of the rent. If the monthly rent is, say, $800, he should perhaps pay $1,100 if the deal includes the right to buy.

(3) Get a real estate lawyer to draw up the contract, so that your interests will be protected.

* If you're a buyer today, you're in hog heaven. Prices are down, vTC and lease-buy options can be had by people with insufficient down payments. In 1989, for the first time in more than a decade, the percentage of young people owning their own homes turned up.

One suggestion to homeowners in cities where housing values are still riding high: If you plan to retire and move away within two years, consider selling your house or condominium now, at top prices. Invest the proceeds in Treasury bills, rent an apartment for a couple of years, then buy a cheaper house somewhere else. High house prices are on the endangered list. If you sell now, you know that you've kept your equity intact.

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