WASHINGTON — Washington.--THE HOUSING market is slipping nearly into a free-fall, and for now, relief -- not panic -- ought to rule the day.
The shake-out is now gripping California, the nation's most expensive housing market. In 1989, the median price of an existing home hit $201,000, a six-fold increase over the 1973 median. Yet, since August, homes valued at more than $250,000 have fallen 10 to 25 percent. Some real-estate agents are trying to tap dance through the decline: To cope with plummeting sales, one San Diego agent is offering free Arthur Murray dance lessons with any purchase.
Californians are now facing music the rest of the country has been hearing for about a year: Real-estate values will not perpetually soar. Property owners, through clenched teeth, are lowering their prices or delaying selling altogether.
Meanwhile, the rental market is sagging. Landlords in Boston, one of the nation's tightest markets, have lowered their rents by 5 to 10 percent this year to attract tenants. In New York City, landlords have lowered rents by at least that much, and up to 20 percent in some neighborhoods. For the first time in recent memory, New York landlords and tenants now negotiate rent increases.
So what happened to the nationwide affordable housing ''shortage'' and the ''skyrocketing'' housing costs lamented incessantly by homebuilders, realty agents, governors, mayors and homeless activists? As recently as July, Builder magazine claimed that ''poverty, lagging wages and rising prices are pulverizing dreams of decent housing, let alone homeownership, for millions of families.'' The fabled affordable housing shortage is exactly that -- a fable. That's part of the good news.
Two economists, Gregory Mankiw and David Weil, saw much of this coming. Last year, they published a hotly debated article, ''The Baby Boom, the Baby Bust and the Housing Market,'' predicting that, after allowing for inflation, home prices during the '90s would decline by about 2 percent annually. They seem more like prophets with each passing month.
Thus, like it or not, home-seller frustration is a cause for celebration among buyers: Home-ownership slowly is coming within reach of more Americans. This is the flip side of any housing downturn.
Meanwhile, falling prices and rents predictably have slowed housing construction. Nationwide, new construction for sale or rent now barely exceeds an annual rate of 1 million units and several experts predict that the figure for 1991 may dip to 925,000, the lowest since 1946. That's a far cry from the more than 1.6 million starts we averaged each year from 1983 to 1989.
Despite approval of a $57-billion federal housing authorization bill -- with a large chunk targeted for housing construction and rehabilitation -- clamoring from the housing lobby about the need for more government intervention continues.
But let reality sink in: The decline in housing prices and rents means that for the time being there is a housing surplus. The current housing recession, like the last one in 1981-82, is a market correction. It probably will not last the length of the '90s, nor possibly even past 1991.
This simply is what it means to be in a buyer's market. We now have housing gamblers who face the unhappy prospect of receiving $250,000 for a home that was supposed to bring in $350,000. A seller gets no guarantees of a ''fair'' floor price. Like any speculator, he takes his chances.
A housing recession is often a precursor to a general recession. No doubt about it -- when the market is overbuilt, the day of reckoning comes, and not just in falling prices, but also in falling construction jobs, builder profits, loan collections and consumer spending.
But isn't it wiser to accept a bursting bubble now, than to pursue loose credit and subsidy policies that would perpetually expand the bubble? For in the end, the bubble will burst anyway, with more people sprayed by the economic shrapnel.
With far more federal mortgage exposure in an even more glutted market, the next step could be a depression. Already, the Federal Deposit Insurance Corporation (FDIC) is trying to unload more than $150 billion in defaulted home mortgages it inherited from failed savings and loan associations. Why risk a much worse scenario by pumping up housing production back to earlier levels under the guise of a shortage?
As to buyers and renters of homes and apartments that only months ago seemed untouchable -- savor the blue-light bargains while they last.
Carl Horowitz is a policy analyst specializing in housing and urban affairs at the Heritage Foundation.